THINK Ahead: The calm before the CPI
The desk anticipates that upcoming U.S. CPI data will reinforce market expectations of a prolonged Federal Reserve pause, driven by anticipated month-on-month declines in headline inflation due to falling gasoline prices. Per the full note source, while softer inflation metrics in Poland reduce the likelihood of immediate rate hikes from the National Bank of Poland (NBP), the Czech economy shows signs of resilience, suggesting a stable outlook. The potential for a Fed pause aligns with lower borrowing costs, positioning traders for continued dollar weakness, especially leading into the significant CPI print on July 14.
What the desk is arguing
The desk believes that U.S. inflation data will bolster the case for a sustained pause by the Federal Reserve, reflecting market sentiment around a sluggish rate hike trajectory. As detailed in the piece source, this comes after a muted jobs report and the expected CPI release indicating a month-on-month drop due to plummeting gasoline prices, which could further diminish the Fed's appetite for rate increases.
Supporting this view, the upcoming ISM Services PMI release and fresh trade balance data are unlikely to disrupt the prevailing narrative, with forecasts suggesting that services remain robust, aligning with moderate GDP growth. Additionally, data on existing home sales is expected to confirm the housing market's struggles due to affordability issues exacerbated by high mortgage rates.
Where it sits in our coverage
Our consensus target for USD/EUR is currently 1.075, with a range of 1.04 to 1.12. Notable projections include: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
Given the desk's position is set towards the higher spectrum of expected outcomes, it reflects a viewpoint that aligns with jpmorgan's more optimistic outlook, contrasting with the bearish stance from bofa.
How other firms see it
Several firms echo the desk's sentiment regarding a possible Fed pause, with jpmorgan and goldman anticipating stable rates ahead. Conversely, bofa and rbc present a divergent outlook, suggesting the possibility of continued tightening dependent on economic indicators.
Positions in USD/EUR closely mirror sentiments tied to the Fed's monetary policy trajectory, specifically the CPI influences on Fed actions, making these dynamics critical for traders ahead of the CPI print.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Anticipation of CPI data supporting Fed pause.
- 02Poland maintains rates despite lower inflation; Czech economy shows resilience.
- 03Market positioning leans towards dollar weakness ahead of key data.
Market implications
Traders should focus on the USD/EUR reaction to the upcoming CPI data for further insights into Fed policy direction. Levels around 1.075 serve as key thresholds, especially leading into the CPI print on July 14, which could sway sentiment significantly.
Risks to this view
A stronger-than-expected CPI release that showcases rising inflation could force the Fed to reconsider its pause, potentially leading to shifts in the current dollar positioning. Conversely, continued signs of inflationary pressures in Poland could cause the NBP to rethink its cautious stance on rate cuts.
Articles THINK Ahead: The calm before the CPI 10:45 Czech Republic Poland Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download US data is unlikely to derail expectations of a prolonged Fed pause ahead of next week's CPI release. Meanwhile, Poland's central bank is set to remain on hold despite softer inflation, while Czech growth indicators continue to show resilience James Knightley , Adam Antoniak and David Havrlant A quiet week ahead looks unlikely to challenge the case for an extended Fed pause THINK Ahead in developed markets United States (James Knightley) It is a quiet week for US data, sandwiched between a softer-than-expected US jobs report and a June CPI release scheduled for 14 July, which should show prices at the headline level falling month-on-month due to the plunge in gasoline prices. This may push the market further in the direction of anticipating a long pause from the Federal Reserve rather than an interest rate increase this year.
ISM Services PMI (Mon): The focus will be on business surveys, with the ISM services index set to soften a touch but remain consistent with GDP growth of a little above 2%. Meanwhile, the trade balance is set to deteriorate markedly based on the advanced goods figures already released. The US will also release existing home sales data.
Given the lack of affordability caused by elevated prices and high mortgage rates, we expect sales to remain range-bound at weak levels. THINK Ahead in Central and Eastern Europe Poland (Adam Antoniak) NBP Rates (Wed): With headline inflation returning to target in June, the prospect of any further rate hikes in Poland is now off the table. Markets have started to speculate that the National Bank of Poland could eventually resume the rate cuts that were put on hold following the outbreak of the war in the Middle East.
We believe, however, that the NBP will maintain its wait-and-see approach for the time being. A substantial part of the recent disinflation reflects the fading fuel price shock and a surprisingly sharp decline in food prices. At the same time, core inflation remains above 3%, suggesting that underlying price pressures have not fully dissipated.
The June macroeconomic projection is likely to bring a downward revision to the GDP growth path and may indicate that inflation could undershoot the target over the medium term. While the next move in interest rates is more likely to be a cut than a hike, we do not expect it to come anytime soon. Czech Republic (David Havrlant) Retail Sales/CPI Final (Tue/Fri): Retail sales likely returned to a punchy annual growth in May, driven by solid nominal and real wage growth.
June’s annual headline inflation is expected to have eased on the back of tangibly weaker fuel prices, but also a marginally softer core inflation. The unemployment rate was likely driven slightly lower in June, reflecting seasonal employment gains in construction and the upcoming tourist season. We assume that May’s industrial output growth has strengthened, confirming the firm ground below the Czech industrial base, despite some headwinds linked to the Hormuz crisis.
Sources & References
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