ALL EYES ON US CPI DATA
US economic data will make headlines on Wednesday, as investors assess the latest inflation and retail sales trends for the world’s largest economy.
The economic calendar picks up at 07:00 GMT with reports on German consumer inflation and fourth quarter GDP. Inflation in Europe’s largest economy is forecast to fall 0.7% in January, resulting in a year-over-year gain of 1.6%. Germany’s economic expansion is also expected to slow to 0.4% in the December quarter, down from 0.8% in Q3.
The Italian and Portuguese governments will also report Q4 GDP numbers throughout the day, leading to the official Eurozone figures at 10:00 GMT. The euro area economy likely expanded 0.6% quarter-on-quarter and 2.7% annually, based on a median forecast.
Shifting gears to North America, the US government will report on CPI inflation and retail sales at 13:30 GMT. Consumer inflation is forecast to slow to an annualized rate of 1.9% in January, down from 2.1% the previous quarter. Meanwhile, retail receipts are expected to climb 0.2%.
The inflation report will be closely watched by market participants looking to make sense of the latest selloff in US stocks. The market’s precipitous drop was triggered by a nonfarm payroll report on 2 February that showed an unexpected surge in average hourly earnings. The sharp rise in earnings was perhaps the clearest signal yet that inflationary pressures were building, which may compel the Federal Reserve to raise interest rates faster than previously expected.
Earlier in the day, Japan reported a much smaller than expected rise in fourth quarter GDP, as the world’s third-largest economy expanded just 0.5% in October-December. Analysts in a median estimate called for a gain of 0.9% Despite the miss, Japan’s economy has been in acceleration mode for eight straight quarters, the longest streak in 28 years.
Europe’s common currency has been regaining momentum this week, as the dollar continues to backtrack against world peers. The EUR/USD exchange rate climbed 0.3% at the start of Wednesday trading to reach 1.2382. Since bottoming at multi-week lows Friday, the EUR/USD has gained roughly 150 pips.
Cable is also finding its footing again after a week of declines through Friday. The GBP/USD rose 0.2% on Wednesday to 1.3915. The bulls appear to be regaining control of the market but will need to clear multiple hurdles to new highs. The first major resistance test is likely found at the psychological 1.4000 level.
Japan’s GDP miss wasn’t enough to spark a rally in the USD/JPY, which extended losses on Wednesday. The pair fell 0.5% to 107.30, its lowest since 2014. The sharp downside exposes the USD/JPY to more losses. The pair is currently testing a key support level; another breakdown would likely lead to a test of the 106.80 region.