The Euroland provisional November consumer price inflation figures released last week record a sharp fall in the headline and core CPI (Consumer Price Inflation) measures. The larger-than-expected fall in inflation intensified speculation that the ECB (European Central Bank) might ready itself for a cut in interest rates in the early stages of 2024, especially given the poor performance from the economic activity data released recently.

There are also increasing signs of a loosening in the labour markets across the continent, which should further reduce any domestically-generated inflation, bringing down the inflation rate further. The weakness of economic activity might be lessening somewhat, but it would still appear that Euroland output is at best bumping along the bottom. However, the ECB is likely to be reluctant to reduce interest rates while there remains both geopolitical and global macroeconomic threats that could renew the upside impetus into inflation.

Conflicts in Eastern Europe and a worsening of relations between the West and the Middle East could yet prompt a renewed jump in energy prices, lifting production costs across the supply chain. It’s not unreasonable to expect the ECB to cut interest rates in H1, but there’ll have to be additional confirmation of the drop in price inflation pressures, in my view.

In the US, the Federal Reserve has entered its blackout period ahead of the 13 December decision. Prior to that, the signs from inflation and some areas of personal spending suggested that activity was slowing, but it has not all been bad news from the US. Despite the increasing confidence that the markets have regarding a rate cut from the Fed in H1 2024, I don’t believe the Fed itself is there yet.

The likes of Chair Powell and the other members of the Federal Open Market Committee will want to witness a further sustained fall in inflation pressures, a reduction in labour supply constraints and a definitive slowing in activity, in my opinion. It is too soon to even say that the Fed has stopped hiking, in my view, especially after the surprisingly robust Q3 GDP Gross Domestic Product) figures.

The first big test is the US employment report for December. Will this show a further decline in employment demand, and what about the average earnings and unemployment data? The last assessment the Fed gave of the labour market was that it was still tight, so a further improvement in labour supply is required in order to bring down inflation pressures across a broader range of influences. Meanwhile, the markets might get their first taste of disappointment in terms of interest rate cut expectations if the figures do outperform, and that could reverse some of the USD negative sentiment, if only temporarily.

As for the GBP, there really isn’t much in terms of macroeconomic data to move markets this week. The pound has benefited as the prospect of interest rate cuts has been talked down by a variety of Bank of England members. With the Bank of England soon to be in its blackout period, there has been no indication that monetary policy will be loosened particularly quickly, despite increasing signs of labour market weakness, weak retail sales, sluggish industrial production and a very frosty housing market. So the GBP may hold up against the likes of the USD and EUR, where it made significant gains last week, but additional upside could be far harder to come by.

The rest of the central banking world is also gearing up for a busy period. Last week saw no change in the policy rates from the Reserve Bank of New Zealand, the Bank of Thailand or the Bank of Korea. The cumulative effect of previous monetary tightening, and the signs of reducing global inflationary pressures prompted the decisions to leave policy on hold.

This week sees the Reserve Bank of Australia, the Bank of Canada, the National Bank of Poland and the Reserve Bank of India all make monetary policy announcements. Again, the expectation is that policy will be left on hold for all these central banks, with little evidence released since the previous meetings to argue that additional tightening is necessary.

The question for most of these central banks is when will interest rates come down (in Poland’s case we could add the word again) and how much they are likely to fall in 2024. FX markets remain relatively quiet as the USD is under general pressure, but can the likes of the AUD, CAD, PLN and INR benefit into the end of the year?