Week ahead: US and UK inflation in the spotlight; RBNZ rate cut?

Highlights:

• US CPI inflation (consumer price index).
• Reserve Bank of New Zealand (RBNZ).
• UK CPI inflation and employment data.

US data

CPI inflation (Wednesday at 12:30 pm GMT) and retail sales (Thursday at 12:30 pm GMT) numbers will be particularly interesting this week for the US, given the dovish rate repricing for the Fed funds target range. As of writing, markets are pricing in 100 basis points of cuts this year, with 40 basis points of easing implied for September.

Headline CPI inflation is expected to remain at +3.0% in July (YoY), matching June’s print (estimate range between a high of +3.1% and a low of +2.9%), while core inflation – removes energy and food price components – is forecast to slow to +3.2% in July (YoY) from +3.3% in June (estimate range between a high of +3.3% and a low of +3.1%). Were a broad downside surprise in the data to unfold this week, we can expect rate cut bets to increase this year and investors to perhaps fully price in 50 basis points of easing for September’s meeting; this would also likely send the US dollar (USD) and US Treasuries southbound. On the contrary, an upside surprise could have investors pare back rate cut bets as it may tempt the US Federal Reserve (Fed) to tread carefully regarding reducing rates, thus underpinning the USD and yields.

The US Dollar Index recently rebounded from daily support at 102.78. However, the move has echoed a lacklustre tone thus far, underscoring the idea that sellers may remain in the driving seat and push toward another layer of daily support at 101.78.

Additional data on the watchlist this week are Producer Price Index (PPI) inflation on Tuesday, industrial production on Thursday, and the preliminary University of Michigan’s consumer sentiment survey released on Friday.

Reserve Bank of New Zealand rate announcement

Traders and economists will pay close attention to the interest rate announcement on Wednesday at 2:00 am GMT. Whether or not the RBNZ pulls the trigger and reduces its Official Cash Rate (OCR) is a close call. 19 out of 31 economists polled by Reuters forecast the central bank to hold its OCR at 5.5% for a ninth consecutive meeting, while 12 economists forecast a 25 basis point rate cut. As of writing, markets are also pricing around an 80% cut probability.

In conjunction with the rate announcement, traders will receive the rate statement and the Monetary Policy Statement. For the latter, downward revisions to the OCR, CPI inflation, and growth projections are likely on the table.

You will recall from the July meeting that the RBNZ kept the OCR unchanged for an eighth straight meeting but shifted from May’s hawkish stance – where it aired the possibility of a rate increase – to one that reflected confidence in the disinflation process. The minutes of the previous meeting communicated that ‘The Committee is confident that inflation will return to within its 1-3 percent target range over the second half of 2024’. Given the latest inflation report, the RBNZ must be feeling more confident.

Heading into the event, investors know that price pressures cooled to +3.3% (YoY) in Q2 24, down from +4.0% in Q1 (sitting just north of the RBNZ’s inflation target range) and has slowed from the +7.3% top in Q2 22. On the jobs front, unemployment is at its highest since Q1 21 at 4.6% (aligned with the RBNZ’s projections), suggesting a cooling jobs market. Regarding economic activity, New Zealand’s economy has experienced two technical recessions since late 2022 (albeit shallow).

Ultimately, another hold decision from the RBNZ this week could underpin the NZD, while a rate cut may weigh on the currency – this would, of course, be emphasised if the central bank’s language suggests more rate cuts down the road this year. The AUD/NZD cross will be a key pair to monitor, with long-term resistance and support currently in play at NS$1.0975 and NS$1.0880, respectively.

UK data

It will also be an eventful week for the UK; the limelight will largely fall on inflation (Wednesday at 6:00 am GMT) and wage figures (Tuesday at 6:00 am GMT).

These data follow the Bank of England’s (BoE) August meeting, which observed the central bank reduce the Bank Rate by 25 basis points to 5.0% for the first time in four years in a close 5-4 vote. However, while markets are pricing in the possibility for another two rate cuts this year (45 basis points of easing currently priced in with November’s meeting fully priced in for a 25 basis point cut), BoE Governor Andrew Bailey (one of those who voted for a rate reduction) highlighted that the recent rate cut does not imply the beginning of a rapid easing cycle. Bailey commented that the central bank wants to keep inflation low and not to ease policy ‘too quickly or by too much’.

Headline CPI inflation is expected to increase to +2.3% in July (YoY) from June’s reading of +2.0% (estimate range between a high of +2.4% and a low of +2.0%). Core inflation for July (YoY), which strips out food, energy, alcohol, and tobacco, is anticipated to remain unchanged at +3.5% (estimate range between a high of +3.5% and a low of +3.3%).

While headline inflation may rise due to base effects, the BoE and investors will closely monitor services inflation, the core print (above), and wage inflation. Services inflation and wage growth remain a thorn in the side of the BoE; services inflation rose +5.7% in June (YoY), matching May’s print and slightly above the +5.6% market estimate. Wage data is expected to show signs of slowing; regular pay and pay that includes bonuses will slow in the three months to June to +5.4% (from +5.7%) and +4.6% (from +5.7%), respectively. Alongside wages, unemployment is expected to rise to +4.5% from April to June 2024, the highest rate since July 2021.

Additional data to be noted this week are preliminary UK Gross Domestic Product (GDP) for Q2 on Thursday and retail sales numbers on Friday.

Ultimately, any marked downside deviation in UK data this week – specifically inflation or wages – could send sterling (GBP) southbound versus G10 peers as investors may begin pencilling in the possibility of a rate reduction at the September meeting.

G10 FX (five-day change):