A more cautious Fed as indicated by the January policy statement makes data an essential driver for the near-term policy outlook, with the Fed closely monitoring the “implications of recent global and financial market developments”.
On Monday, December PCE inflation and January ISM manufacturing are due. The likely firming in the Fed’s gauge of core inflation (1.4% vs 1.3%) may see a limited impact as disinflationary headwinds anew should keep near-term price pressures subdued. Another weak ISM manufacturing PMI can be expected given poor regional survey performance but given the factory sector’s small share in US economic activity, concern lies more on the non-manufacturing PMI for any signs of spillover and loss of overall economic momentum. A rebound in that index, followed by another solid jobs report on Friday, could provide a welcome lift to risk sentiment and Fed rate expectations.
On the other hand, limited data improvement on top of cautious rhetoric among Fed officials, with speeches back in play this week, should keep USD and rate expectations under pressure.
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