How fast inflation is falling has been a big theme recently and will be keenly watched in various countries this week including the UK, Canada, New Zealand and Japan. Of course, this comes on the back of last week’s focus on the US CPI data which undershot expectations on nearly all measures. This had a major impact on the dollar, which had its worst week in eight months, with the DXY index falling 2.2% over the past five sessions.

The disinflation narrative is growing with long dollar positioning evaporating. But the greenback is oversold on various technical measures so it will be interesting to see how much of a pullback we see after the recent six straight days of losses until Friday’s positive session. This week’s main US data release is retail sales which may hint that consumer spending remains healthy.

The pound has had an incredible run this year with sterling up over 8% versus the dollar and hitting highs through 1.30 which were last seen in April 2022. Wednesday’s CPI report will be the last main data release before the Bank of England meeting at the start of August and should determine if GBP can consolidate these impressive gains. The size of the MPC hike is likely to be determined by how far inflation will fall. The headline rate is forecast to decline sharply due to base effects, but attention will be on the core print and services which is the most significant number for policymakers.

Japan CPI will be another key report as speculation is growing about a possible tweak in policy by the Bank of Japan, potentially at its upcoming meeting at the end of this month. Friday’s data could be important in helping policymakers make up their minds if they should lift or remove the upper limit on the 10-year JGB yield. Headline and core CPI appear to have plateaued in Japan but the so-called “core core” rate continues to climb. An upside surprise could fuel speculation of a July policy move further boosting the yen, which has fallen sharply since bumping up against 145 in USD/JPY.

Major risk events of the week

17 July 2023, Monday

–China Data: Q2 GDP will come in at the lower end of the 5.8%-8.0% y/y range. Industrial production is likely to weaken further from the 3.5% growth rate shown in May. Retail sales – which had benefitted from base effects and re-opening pent-up demand – is seen falling from 12.7% to around 3%. There will also probably be little sign of any boost from fixed asset investment.

18 July 2023, Tuesday

–US Retail Sales: The market median is for a print of 0.5% after 0.3% in May. Rebounding auto sales should support activity as well as higher gasoline sales. But analysts say weakness in the housing market may affect durable goods sales. Student loan debt and tighter financial conditions might also impact in the coming months. The break of 100.82 in the DXY is key. Next downside targets include a major Fib level of the 2021/22 rally at 98.97 and the 200-week SMA at 98.24.

19 July 2023, Wednesday

-UK CPI: Consensus forecasts headline inflation falling to 8.3%, four-tenths lower than the May print. Base effects support a sharp decline as the spike in fuel prices drop out of the 12-month calculation. The core is expected to hold above 7%. Any upside surprise may bolster another 50bp rate hike at the August BoE meeting. Cable made fresh cycle highs at 1.3142 last week but is overbought. Pullbacks to 1.29/1.30 should be well supported.

21 July 2023, Friday

–UK Retail Sales: Discretionary spending has held up relatively well, especially in recent months with the good weather. But high prices are seen hurting sales going forward. Households’ finances are still under pressure from high inflation and higher interest rates. This is forecast to see sales either stall or decline.