Week of 23 february

An active week, both in terms of data and geopolitics, saw UK inflation fall and a record US trade deficit despite tariffs. Crude prices were on track for a 6% weekly gain, with Brent breaking above $70/bbl amid signs the US could launch a military strike on Iran as soon as the weekend.

The week ahead has a quiet economic calendar, with European CPI and US PPI the highlights, while markets are likely to focus on geopolitical developments amid tensions over Iran.

Week in Review

Trading volumes were reduced despite a busy economic calendar, with the US away for the holiday on Monday and many Asian markets closed for the Lunar New Year through most of the week. FOMC minutes showed a growing divide among members ahead of the change in leadership, with several members supporting a two-sided outlook, potentially indicating rate hikes if inflation remains above target. Notable dove Stephen Miran, recently appointed by Trump, said on Friday that he saw less reason to cut rates now. The odds of a June rate cut fell from 70% to 60% following the remarks.

The pound dipped after the unemployment rate rose to 5.2%, a five-year high, before inflation fell to 3.0%, a two-year low. After the data, the market priced in two rate cuts this year, with a more than 90% chance of easing at the March BOE meeting. The potential for lower rates contributed to the FTSE 100 rising above 10,700 for a record high, aided by rising oil prices.

Japan's Q4 GDP disappointed, growing at 0.1% instead of the 0.5% anticipated, reducing the chances of a near-term BOJ rate hike. This was compounded on Friday with cooler inflation, as the core rate unexpectedly fell back to target.

In geopolitics, the market reacted to shifting views on US-Iran negotiations, initially showing optimism early in the week as talks got underway. On Wednesday, however, after Iran briefly closed the Strait of Hormuz, markets took a more risk-averse stance, sending gold higher as reports emerged of a growing US military buildup in the region. In Europe, rumours circulated that ECB President Christine Lagarde would step down before the end of her term to take up a job at the WEF. Her term ends in October of 2027. On Friday, she clarified that her "baseline" was to finish the term, but she also acknowledged interest in the WEF.

Biggest Market Movers

• Risk aversion, combined with the hawkish tone of Fed speakers through the second half of the week, left the dollar higher.
• The yen was among the worst-performing major currencies, as data suggested the BOJ might not hike in the near term.
• The FTSE 100 hit a record high as the odds of the BOE easing rose and commodity stocks elevated the index.
• Gold prices fell below $4,900 at the start of the week amid low demand but climbed back to $5,050 by Friday amid Middle East concerns.

Top Events in the Week Ahead

Markets could have another slow start to the week, as China and Japan are on holiday on Monday. With a notably light economic calendar, the theme next week could be geopolitics, as reports suggest the US could conduct a limited military operation in Iran to force a nuclear deal. Trump said he wanted the situation resolved in "two weeks", but that echoed the last time Washington launched airstrikes against Iran's nuclear infrastructure days before Trump's deadline had run out.

European Inflation Holding the Line

Traders might have to wait until Friday for the biggest data release of the week: Flash February CPI readings from France and Germany. The two largest countries in the Eurozone would likely give a pretty good idea of what to expect for the shared economy's CPI figure, and both are anticipated to be in line with the January reading, keeping inflation in the "good place" range that has allowed the ECB to maintain policy unchanged. Meanwhile, EURUSD is trying to maintain support at the golden pocket near 1.1750, with a breakdown opening the door to 1.1700.

US Inflation Won't Come Down

The FOMC minutes showed rising division among hawks and doves, and even ultra dove Miran suggested that rates could stay elevated if inflation doesn't come down. Traders will be looking closely at the US Jan PPI figures, which also come out on Friday. Monthly producer prices are expected to slow to 0.3% from 0.5% a month earlier. USDJPY might head towards 157.66 if bulls maintain support at 155.00.

Australia Inflation Cooling

After consumer prices rose much more than anticipated last quarter, the RBA was forced to raise rates. Monthly Australian CPI figures are released on Wednesday and are still treated as second-tier compared to quarterly data. However, they could signal a market trend, as the RBA Trimmed Mean CPI is expected to fall back to 3.1% from 3.3%, raising expectations that the RBA will hold off on its next rate hike for a little longer. Just above the 0.70 handle, if the release confirms this view, AUDUSD could head towards 0.6900. On the upside, resistance sits at 0.7150.

Other Events & Earnings

Monday has the Ifo Business Climate from Germany. China Lona prime rate fixings come out on Tuesday. Wednesday sees German GfK consumer confidence. For Thursday, the Eurozone economic sentiment is expected. Friday includes Japan's retail sales data and Canada's Q4 GDP numbers.

Corporate earnings season is heading towards its unofficial close this week, with notable names such as Nvidia, Home Depot, Ferguson, Diageo, Rolls-Royce, WPP, Lowe's, Stellantis, International Consolidated Airlines, Intuit, Dell and Berkshire Hathaway updating investors.