Outlook for the Week of October 14-18

Key points to watch out for:

• The ECB is expected to implement its first rate cut in a row on Thursday
• CPI in Canada, China, Japan, New Zealand, and the U.K. will be released
• China GDP and US retail sales on investors’ radar

Is the ECB Rate Cut a Reality?

After the RBNZ cut interest rates by 50 basis points last Wednesday, attention shifted to the ECB. Although Chair Lagarde and her colleagues initially did not support a rate cut for October, their stance began to shift following disappointing PMI data and headline inflation falling below 2%, prompting market participants to raise their bets on such a move. Currently, investors are nearly certain of a quarter-point cut at the October 17 meeting, with another expected in December.

However, a quarter-point cut alone is unlikely to significantly impact the euro, and should it do so, attention will quickly shift to President Lagarde’s press conference. This meeting does not include updated macroeconomic projections, though Lagarde will likely face questions about how economic and inflation estimates have changed since the September meeting. Recently, Lagarde expressed confidence that inflation will return to its target path, reaffirming expectations of further easing in both October and December.

Therefore, if a 25 basis point cut is made, with Lagarde keeping the door open for another cut in December, the euro may continue its recent slide. After the strong September US jobs report, the EUR/USD fell below the 1.1000 level, completing a double top formation. A dovish ECB decision could push the decline further toward the August 8 low of 1.0880. That said, a rate cut at this meeting may have less impact than the market anticipates.

A Reuters report from two weeks ago indicated that policymakers favoring lower rates (doves) will push for a cut, though they may face resistance from more conservative members (hawks). Some sources suggested a compromise where rates would remain unchanged in October but could be cut by December if data did not improve. Adding to the uncertainty were comments from ECB Vice President De Guindos, who noted that it is too early to declare victory over inflation.

Preliminary data showed that inflation fell to 1.8% in September. If confirmed in Thursday’s final readings, this would align with the ECB’s forecasts, though the recent spike in oil prices due to tensions in the Middle East poses an upward risk to inflation estimates. Therefore, if policymakers decide to wait until December, the EUR/USD could rally strongly as investors may be caught off guard. A return above 1.1025 could reflect the revision in market sentiment and encourage more buyers to enter.

UK CPI and the Pound’s Trajectory

The pound has consolidated over the past week, halting the sell-off that was triggered by Bank of England Governor Bailey’s statements suggesting that the Bank may need to adopt a more hawkish stance on interest rate cuts if data continues to indicate rising inflation.

With this in mind, pound traders are likely to pay considerable attention to this week’s data releases, particularly the CPI figures for Wednesday, October 16, as they assess how the Bank of England may proceed. According to the UK’s Overnight Index Swaps (OIS), investors assign about a 75% chance of a 25 basis point cut on November 7, with the likelihood of another cut in December standing at around 60%.

The September Purchasing Managers’ Indices (PMI) showed that price pressures in the private sector fell to their lowest level in 42 months, pointing to a decline in both headline and core CPI, especially the former, as the year-on-year change in oil prices further entered negative territory. A continued cooling of inflation could prompt traders to increase their bets on a rate cut by the Bank of England, potentially driving the pound into a downtrend.

This week will also see the release of the August employment report and September retail sales on Tuesday, October 15, and Friday, October 18, respectively. Investors will be watching to see the extent to which wage growth moderated during the period and whether consumer spending remained resilient last month.

U.S. Data and Corporate Earnings

On the other side of the Atlantic, both the Fed’s statements and the data agenda will slow down, which could keep dollar traders on the sidelines. On Thursday, October 17, retail sales for September will be released. Although equally relevant will be manufacturing indicators from the New York Fed on Monday, October 14, and from the Philadelphia Fed on Thursday, October 17. On the same Thursday, September industrial production is released, and on Friday, October 18, building permits and housing starts could draw attention.

With investors increasingly nervous about the likelihood that the Federal Reserve will ease monetary policy at a slower pace than currently expected, a stronger-than-expected retail sales report may not be received very positively by the markets, as it should further reduce bets of a rate cut. Analysts believe a month-on-month increase of 0.3% in September, following last month’s 0.1%.

Canadian and New Zealand CPI and Rate Cuts

North of the border, inflation figures in Canada on Tuesday, October 15, will be vital to the Bank of Canada’s policy decision scheduled for October 23. Investors have priced in about a one-third chance that the Bank of Canada will cut rates by 50 basis points, while a 25 basis point cut is fully expected. Therefore, any news in the September CPI data could influence policymakers’ decisions.

The Canadian dollar has seen a considerable decline against the US dollar this month, so traders may react more strongly to a higher-than-expected figure given the oversold conditions.

Elsewhere, inflation-related data will also be released in New Zealand. CPI figures for the third quarter will be released on Wednesday, October 16, and could indicate the magnitude of the Reserve Bank of New Zealand’s next rate cut. Policymakers cut borrowing costs by nearly 50 basis points at their October meeting, and a further reduction is expected in November.

However, with a long gap between the November and February RBNZ meetings, investors may begin to expect a cut of more than 75 basis points if third-quarter statistics reveal a larger-than-expected drop in inflation, which is projected to fall within the Bank’s target range of 1% to 3%.

Yen May Not Take Japanese CPI Into Account

In Japan, the question regarding interest rates is more about a rise than a fall. Although the CPI data on Friday, October 18 is unlikely to change the near-term price outlook, some traders will keep an eye on machinery orders due Wednesday, October 16, and trade figures on Thursday, October 17, for signs that Japan’s economy is maintaining positive momentum, which is crucial for inflation to remain above the Bank of Japan’s 2% target on a sustainable basis.

Therefore, it is unlikely that the yen will see a sizable reaction, and a major driver for the safe-haven currency will likely be increased risk sentiment, influenced by economic data from China.

Will China’s GDP After Stimulus Have an Impact?

China will release Q3 GDP figures next Friday, October 18, with growth expected to have slowed slightly from 4.7% to 4.6% year-on-year. On the same day, industrial production is released along with September retail sales. In light of Beijing’s recent stimulus measures, a disappointing GDP figure is unlikely to cause significant concern in the markets.

Conclusion

This week’s market movements will be influenced by the ECB’s rate decision, U.K. CPI, and U.S. retail sales. Additionally, inflation data from Canada and New Zealand will be critical in shaping expectations for upcoming rate cuts. China’s GDP figures will be another key point to watch for global markets.