The highlight of this week will be the US CPI report which is expected to direct the size of the rate hike by the Fed on March 22. This comes after Chair Powell turned hawkish last week in his semi-annual testimony by implying that rate moves could go back up to 50bp increments if needed and a higher eventual peak could follow. In stark contrast to his previous remarks at the February FOMC press conference, he also noted that there was now little sign of disinflation.

This will be put to the test on Tuesday when we get the latest inflation figures. An easing headline number is forecast due to falling energy prices, but a stickier core rate is now the key figure for markets after upward revisions to December 2022 and the momentum shown in January. The dollar will quickly go bid if prices remain elevated. Gold would fall in this scenario as the chance of a 50bp rate hike gets priced back in. Much may also depend on any bank stress contagion after the spectacular collapse of Silicon Valley Bank, the “tech industry’s banker” and the 16^th biggest bank in the US. At the moment, risks appear to be isolated and idiosyncratic. But this can easily change quickly.

Markets have baked in a 50bp rate hike at Thursday’s ECB meeting after recent stronger than expected core inflation. Key will be hints on the size of rate rises going forward. Updated ECB staff projections are expected to show lower inflation forecasts for 2024 and 2025. New growth estimates will be important too to see if the ECB sticks to its previous view that the economy will return to pre-pandemic growth rates already in the second half of this year. If so, markets may price in the risk of more rate hikes which potentially overshoot and tip the economy potentially into recession.

The battle between the hawks and the doves may well intensify further as the ECB takes rates into restrictive territory. So, President Lagarde may have a tough job unifying the bank and selling that message to markets. That means we can expect volatility and ECB officials trying to finesse the message immediately after the meeting.

Major risk events of the week

14 March 2023, Tuesday:

-UK Jobs: Unemployment is forecast to rise one-tenth to 3.8% while average weekly earnings will see a slight slowdown to 6.6% from 6.7%.  Last month’s release saw robust employment growth, but vacancies and hours worked fell. GBP/USD has bounced from the January low at 1.1841. Cable is also back above its 200-day SMA at 1.1898 which acts as strong near-term support.

–US CPI: The market median expects the headline monthly figure to fall one-tenth to 0.4%. After the uptick seen in January, attention will be on the core services, ex-shelter component. Analysts say that a delayed slowdown in inflation risks the Fed continuing with rate hikes through the summer.

15 March 2023, Wednesday:

-China Data: Economists forecast retail sales grew by around 5% last month. Industrial production is likely to increase by a more modest 2% due to soft external demand. Along with the investment data, a picture of first quarter economic growth is expected to indicate a stable recovery to kick off the year after lockdowns.

–UK Budget: Economists reckon the OBR will present Chancellor Hunt with a little more headroom in the near term (eg. a freeze on energy bills in April) but a little less in the medium term. That means more lasting increases to spending like public sector pay rises will be tough to announce. That is because targets would be missed, or cutbacks would be needed elsewhere. GBP/USD is hanging thee above 1.20 at present. But this has been more to do with the banking issues in the US.

-US Retail Sales: Analysts forecast sales rose 0.2% after the 3% surge in January. Big increases were broad based bank then, but those results may have been skewed by seasonal adjustments and warmer weather. The US consumer is a key driver of the economy so this data will be important to see if there is a snapback in the data.

16 March 2023, Thursday:

-ECB Meeting: A 50bp rate hike has basically been pre-announced so the outlook beyond this meeting will be key. Money markets fully discounted a terminal rate of 4% by September on Thursday which is 150bp higher from the current deposit rate. This has pulled back recently as US bank contagion issues have spread. EUR/USD finished last week by rebounding off its 100-day SMA at 1.0533 and the February lows. Initial upside resistance is the 50-day SMA at 1.0720.