There are certainly no shortage of economic data releases this week which have the potential to move and shakes financial markets, with US inflation data taking the top billing. PPI for December showed that wholesale prices eased in December, which gave some comfort to risk-assets which have been fretting recently at seeing yields rise amid reduced rate-cut expectations from the Fed. Next up is the more important CPI data and if this shows a similar, softening trend to the PPI figures this could inject more confidence that the Fed remains on track to deliver rate cuts in 2025.
Across the Pond, UK data this week will also be under scrutiny given the current situation of rising yields (therefore increasing living costs due to rising borrowing costs) and a depreciating Pound. With Rachael Reeves (Chancellor of the Exchequer) firmly in the hot seat regarding the seemingly dire state of affairs for the UK economy, any upside surprises in the CPI (due Wednesday) or a downside miss for the GDP (due Thursday) could further raise anxiety levels for the UK’s economic trajectory for 2025. The Pound has already fallen 2.5% against the USD this month (i.e. the GBPUSD rate), and further downside could be in-store if fiscal and growth concerns are escalated this week when the latest CPI and GDP data comes to light. UK Retail Sales data on Friday this week could also be pivotal for the direction of UK yields and the GBP.
In the currency market, the USD has tailed off from its highs following the soft PPI print, but it remains well supported ahead of the Trump inauguration on January 20th. The Dollar Index (DXY) poked above the 110 level earlier this week before retreating to the 109 handle. However, if CPI produces an upside surprise the USD could well be back on the march higher. During Asian trading hours on Wednesday the DXY was hovering around the 109.20 level. A larger pullback could be on the cards for the USD if CPI undershoots expectations.
Gold is managing to make forward progress despite the USD trading around 2-year highs. Historically, gold and the USD tend to enjoy a negative correlation with each other, though there are exceptions to this, such as when geopolitical and/or inflationary concerns see both moving higher. This is what played out in the aftermath of the stronger US jobs report last Friday – equity markets moved lower while both the USD and gold pushed higher. This is because gold is generally viewed as being a good ‘store of value’ which is why it can perform well when markets are concerned that inflation could be on the rise (due to potential trade wars, pro-growth policies from the Trump administration).
On Wednesday morning, gold was trading around $2674, just below resistance levels at $2685 and further out at $2700. Support levels are at $2655 and $2623. Overall, the stronger USD is a hindrance for the gold price, but it doesn’t preclude the precious metal from moving higher as inflationary hedge. Though any depreciation in the USD could likely be viewed as being beneficial for gold as it would make it less expensive to buy (given that gold is priced in terms of $US).
Aside from the key US and UK data releases, US Q4 earnings season will kick-off this week with big names such as Goldman Sachs and Bank of America (among others) set to report. Also, China’s GDP figures will be in focus when they released on Friday, with much attention on whether the 5% annual growth figure can be achieved. Overall, investors remain highly sensitive to the interest rate outlook, as we await both CPI data this week and of course policy details from the Trump administration when he moves back into the Oval Office next week.
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