German IFO Disappoints; Focus Turns to Inflation Reports
GBP
During the morning trading session, GBP/USD is currently at 1.2689 (interbank), and GBP/EUR has seen a slight increase, trading at 1.1624 (interbank).
The pound reached a three-month high against the euro this month due to a sharp drop in euro zone inflation. This has led to speculation that the Bank of England (BoE) will take a more gradual approach to rate cuts compared to the European Central Bank.
The Pound has been supported by the BoE's hawkish stance, which suggests that monetary policy may need to remain restrictive for an extended period, as key indicators of UK inflation remain elevated. Additionally, the flash UK PMIs released on Friday indicated some growth momentum at the end of the year, potentially preventing a recession in the fourth quarter.
Current UK inflation is running at more than double the Bank of England's 2% target. Wednesday's data is expected to confirm that price pressures in the UK remain higher compared to other major economies.
The direction of the Pound will be influenced by whether the BoE responds to current inflation trends or takes a longer-term view that economic weaknesses will suppress wages and prices. MPC member Ben Broadbent is scheduled to speak later today.
Events Today (GMT):
10:30 - Speech by BoE MPC Member Ben Broadbent
EUR
EUR/USD has retraced from last week's high of 1.1010 and is currently trading at 1.0914 (interbank).
The European Central Bank (ECB) kept interest rates unchanged last week, as widely anticipated. President Christine Lagarde pushed back against market expectations of a rate cut as early as March, although her efforts had limited success.
Money markets are now pricing in a 50% chance of a 25-basis-point rate cut in March, which would reduce the ECB's rate on bank deposits from 4.0% to 2.5% by the end of the next year.
In today's session, the German Ifo survey for December fell to 86.4, lower than the consensus forecast of 87.8 and the lowest reading in three months.
Germany's economy contracted by 0.1% in Q3 compared to the previous quarter, and recent business activity data suggests a weak Q4. Factors such as high energy costs, weak global orders, and higher interest rates have contributed to Germany's economic challenges.
ECB members Philip Lane and Isabel Schnabel are scheduled to speak later in the session.
Events Today (GMT):
09:00 - German Ifo Business Climate Index (Dec) - Actual: 86.4 vs. Forecast: 87.8
13:30 - Speech by ECB's Isabel Schnabel
15:00 - Speech by ECB's Philip Lane
USD
The U.S. Dollar Index, which measures the U.S. dollar against a basket of currencies, has rebounded from multi-month lows of 101.77 and is currently trading near 102.45.
As expected, the Federal Reserve kept the federal-funds rate at 5.25-5.50%. The Fed's dovish stance triggered a rally in U.S. equities and exerted downward pressure on the Greenback. Money markets now indicate a nearly 75.0% chance of at least a 25-basis-point rate cut in March 2024, up from about 64.5% before the latest policy decision.
The stronger U.S. Services PMI on Friday has provided some support to the Greenback. However, its upside potential is limited due to expectations of three Fed rate cuts next year.
Investors will receive the final inflation update of the year with Friday's release of the personal consumption expenditures report, the Fed's primary inflation gauge. The forecast suggests that the PCE price index will remain flat for the second consecutive month in November, while the core measure, which excludes food and energy costs, is expected to rise by 0.2%.
Additionally, data on consumer confidence, initial jobless claims, durable goods orders, and housing sector updates, including reports on new and existing home sales, will be released this week.
No major data releases
CAD
USD/CAD has halted its three-day losing streak and is currently trading at 1.3370 (interbank) in today's session.
The Canadian Dollar received a boost against the US Dollar following hawkish comments made by Bank of Canada Governor Tiff Macklem on Friday. Speaking at the Canadian Club Toronto, he mentioned that once the BoC is confident that the economy is clearly on a path back to price stability, they will consider whether and when to lower the policy interest rate. Governor Macklem clarified that it is still too early to contemplate interest rate cuts, emphasizing that they don't necessarily have to wait until inflation returns all the way to the 2% target to consider easing policy, but it should be clearly headed in that direction.
Canada will release its latest inflation reading on Tuesday morning when it publishes its consumer price index for November. Expectations for headline inflation are for the data to decrease to under 3.0% in the twelve months to November, down from 3.1% in October, primarily due to slowing food and gasoline prices.
Canada will also release its retail sales figures for October on Thursday, followed by gross domestic product figures for October on Friday. The preliminary estimate for real GDP released last month suggested the economy grew by 0.2% in October, following a 0.1% increase in September.
Events Today (GMT):
13:30 - New Housing Price Index (Nov) - Forecast: 0.1%