We’ve had the big central bank meetings so this week brings with it the latest CPI data from the eurozone and focus on the Fed’s favoured inflation measure. In light of continued data dependence by policymakers, a picture of strong underlying price pressures won’t be good news. That is because they are still also dealing with financial stability issues and developments in the banking sector will continue to set the tone for markets in the near term.

Until last month, the main drivers of markets had been energy prices and central bank monetary policy. But this has now been superseded by credit conditions and lending standards. The health of company and bank balance sheets are the focus for investors with rumours were swirling around Deutsche Bank late last week causing markets to turn risk-off. This means safe havens have been in favour like the yen and gold while risky assets have been shunned, though we note stocks have held up well recently.

The prospects of a US hard landing have increased as higher borrowing costs and reduced access to credit will depress economic activity. It will also help inflation move lower and more quickly than it otherwise would have done. This does mean US rate cuts could come quicker too, and markets have priced the first one in July already with around 1% of policy easing now forecast by the end of the year. This is a huge turn-around from just weeks ago when some investors were eyeing a peak US rate of 6%!

For the USD, volatility is expected to continue with the buck only getting some love if the crisis turns much darker. Investors will then turn to safety rapidly and hunt for dollars. In the meantime, worries have shifted over to the European banking sector after the Credit Suisse deal fuelled a steadier improvement in investor sentiment in Europe. That had seen those currencies outperform until last Friday. Much will depend on the news flow this week around the two sectors either side of the Atlantic and whether that can carry on and the greenback slides further.

Major risk events of the week

27 March 2023, Monday:

-German IFO Survey: This important German business survey increased for a fourth straight month in February. It added to signs that Europe’s largest economy is recovering. Falling inflation and lower energy prices should help into the summer. But banking sector turmoil could also impact sentiment.

28 March 2023, Tuesday:

-US Consumer Confidence: Consensus sees a small drop in the index. Strong job growth is helping to keep the mood upbeat. But worries about still high inflation and rising borrowing costs may drag, along with confidence in the banking sector.

29 March 2023, Wednesday:

-Australia CPI: Analysts expect an unwinding of the holiday-induced surge in travel costs, plus some lower food prices. This should partly offset higher fuel prices and bring inflation back below 7%. If it does, it will support the RBA’s recent hints that rates are close to a peak, with one more 25bp hike looking most likely. AUD/USD looks like it has broken down from a bear flag. Bears will target the March low at 0.6563.

31 March 2023, Friday:

–Eurozone CPI: Headline inflation eased to 8.6% in January from 9.2% a month earlier. This likely confirms that price growth is now past its peak. But underlying price pressures show no signs of easing with the core accelerating. Analysts say that what was initially an energy cost-driven surge is now broadening out to impact all sectors. EUR/USD tapped the 50-day SMA at 1.0727 late last week. This needs to hold, otherwise prices will head back to the recent range around 1.07.

–US Core PCE Deflator: Consensus expects the Fed’s favoured inflation gauge to tick two-tenths lower to 0.4%. The FOMC is monitoring services inflation which is forecast to remain elevated. But it is expected to slow in time due to the banking turmoil which is tightening financial conditions.