Five fundamentals for the week: US inflation set to trigger fireworks, ECB, BoC may surprise

• Critical US inflation data is set to rock markets, especially if core CPI remains stubbornly high.
• Minutes from the Federal Reserve's decision and producer prices are also of high interest.
• The ECB and the BoC will likely tilt to the dovish side, with the latter potentially surprising with a cut.

How hot is the US economy? After Nonfarm Payrolls (NFP) showed the labor market is on fire, the arguably more important Consumer Price Index (CPI) data carries even more weight, which divides the week between before and after. And there's more.

Here is a preview of the five fundamental events to watch out for this week.

1) US Consumer Price Index (CPI)

Wednesday, 12:30 GMT. Is US inflation re-accelerating? The Federal Reserve (Fed) and investors know that the last mile in the fight against inflation is the longest one, and that services-sector inflation remains sticky. It is salary-dependent, and wages do not fall that fast. 

The Fed said it needs to feel confident that inflation continues falling, and it is focused on core CPI, which excludes volatile energy and food prices. In the past two months, it exceeded estimates with rises of 0.4%, contrary to 0.3% expected. 

Underlying inflation creeps up.

Core CPI MoM. Source: FXStreet.

Once again, the economic calendar points to a 0.3% increase for March. Investors would only be calm with 0.2%, but would accept a minor slowdown to 0.3%, which would push core CPI YoY from 3.8% to 3.7%. 

In case core CPI MoM beats again with 0.4%, Gold and stocks would suffer, while the US Dollar would rise. Conversely, a 0.3% level or lower would weigh on the Greenback and boost risk assets. 

Tension will likely be high ahead of the publication, and it will be followed with an explosion of volatility afterward. The bigger the surprise, the stronger the trend. 

2) Bank of Canada decision

Wednesday, 13:45. Policymakers at Ottawa do not usually get a lot of attention – but if they slash rates, the tremors will be felt worldwide. The Canadian economy has been showing some signs of weakness, with decelerating inflation and also some cracks in the labor market.

Canadian core CPI is down to 2.1% YoY
 

Canadian core CPI YoY. Source: FXStreet

This BoC decision consists of new forecasts and a press conference from Governor Tiff Macklem. That implies a higher chance for a policy change – despite the fact that the Canadian economy is highly correlated with the US one.

If the bank leaves rates unchanged at 5% as expected, I think officials would signal a wider door to a cut next time. That would hurt the Canadian Dollar but keep the impact limited. 

If the BoC surprises with a cut, I expect other currencies to also struggle, with investors speculating about rate cuts in the UK and the Eurozone. 

3) FOMC Meeting Minutes

Wednesday, 18:00. Markets will have limited time to cool down after the CPI report before digesting the minutes from the latest Federal Reserve decision. While it is officially only a documentation of deliberations held three weeks prior, the bank changes the emphasis in the minutes to convey a message. It is revised until the last moment. 

The Fed decision was perceived as dovish by forecasting higher growth, employment and inflation – without signaling fewer rate cuts this year. Moreover, Fed Chair Jerome Powell signaled an upcoming reduction in the bank's Quantitative Tightening program. The Fed will shortly withdraw less money from markets.

Since then, several hawkish members have come out, signaling fewer rate cuts, while the labor market has surprised to the upside. I expect the minutes to lean to the hawkish side, boosting the US Dollar and weighing on risk assets, at least in the short term.

4) European Central Bank decision

Thursday: decision at 12:15 GMT, press conference 30 minutes afterward. Sluggish – that is a word many use to describe anemic growth and also inflation in the Eurozone. To continue the comparison with other areas, core CPI is at 2.9% in the Eurozone, in between Canada and the US. 

The European Central Bank targets headline inflation, and that has dropped to 2.4% in March, below expectations. 

Eurozone HICP. Source: FXStreet

Thursday, 12:30 GMT. Every inflation figure matters for markets and the Federal Reserve. Similar to consumer prices, also producer prices have edged up at the beginning of 2024, with core PPI YoY hitting 2% in both January and February. 

The Frankfurt-based institution is set to leave rates unchanged now, but it could signal a cut is coming in June, when it publishes new forecasts. That would weigh on the Euro, and also drag the Pound lower. 

I expect the moves to be short-lived. Everybody knows Europe lags behind. Ongoing reactions to US inflation data will likely take over once ECB President Christine Lagarde concludes her press conference. 

5) US Producer Price Index

Thursday, 12:30 GMT. Every inflation figure matters for markets and the Federal Reserve. Similar to consumer prices, also producer prices have edged up at the beginning of 2024, with Core PPI YoY hitting 2% in both January and February. 

Another rise is on the cards now, to 2.3% in March. Perhaps the elevated expectations open the door for a small downside surprise that would provide some relief to markets. 

The PPI report is due after the CPI one, and if both go in the same direction, it will have a greater effect on the market mood. 

Closing thoughts

Inflation is left, right and center for markets, and this week is one of the most important ones. I suggest trading with care, especially around the major releases, which can trigger temporary breaks of technical levels.