European Session:
In the European session, the main highlight will be the BOE and ECB monetary policy decisions. The Bank of England (BoE) is widely expected to cut the bank rate by 25 bps, taking it to 3.75%, from 4.00% earlier.
There is strong consensus that the vote split would be 5-4 in favor of a rate cut, with Governor Bailey joining the dovish camp this time. The focus will be on vote splits or potential surprises in forward guidance. No press conference in this meeting.
BOE
The European Central Bank (ECB) is expected to keep the policy rate unchanged at 2.00%. In this meeting we will get updated economic projections where growth and inflation forecasts are expected to improve. The central bank is unlikely to deviate from its recent advance guidance, which has been a data-dependent approach with meeting-by-meeting decisions and no predetermined rate path.
American session:
In the US session, we get the latest US CPI report. Headline CPI Y/Y is expected at 3.1% vs 3.0% prior, while the M/M measurement is seen at 0.3% vs 0.3% prior. Core CPI Y/Y is expected at 3.0% vs 3.0% previously, while the M/M figure is seen at 0.3% vs 0.2% previously.
US Core CPI YTD
There is some sort of consensus that problems related to the October shutdown could lead to a choppy market reaction to this report similar to the recent NFP report. I think the market’s focus is more likely to be on how the data is going to impact the Fed’s hawkish stance.
The recent 4.6% unemployment rate outpaced the Fed’s projected year-end rate of 4.5%. Given the Fed’s focus on the labor market, in my opinion, this is already a strong signal of a rate cut sooner than expected. On the other hand, inflation has consistently been below the Fed’s expectations. For 2025, they expect core PCE to be 3.0%.
Therefore, I expect the market to take a more accommodative stance if today’s CPI meets expectations or, even better, surprises to the downside. In fact, the market may think that the soft data is likely to have a positive impact on hawkish Fed members and make it easier to vote for a rate cut earlier than expected. On the other hand, an upside surprise may not change much in the big picture, but may impact sentiment in the short term.
