All eyes are on the core PCE deflator, due on Thursday. The question in the market is straightforward – how can an economy which has seen employment increase by 1.9% in the last year, and the labour force by only 0.3%, possibly hope to get inflation lower unless the economy somehow hits an invisible brick wall? We and the market expect a 0.4% monthly increase in core PCE, taking the annual rate to 2.8% from 2.9% and keeping the 3m/3m annualised rate at 2.2%. For now, the obvious concerns notwithstanding, the inflation data still allows the Fed to think about cutting rates in mid-year.

Whether the Fed or the ECB cuts first, or fastest, will determine where EUR/USD goes this year, but if they are both moving in the same direction, the pair won’t go very far in either direction. However, if it were to become clear in the months ahead that the Fed’s next move will be a hike, while the ECB’s will be to cut rates, then the FX market reaction will be substantial. 

‘A return to parity’ would be a clickbait title but would demand a painful revision to our forecasts! What are the odds of that? Not more than 25%, perhaps, but definitely more than 10% and that’s why I’ll be nervous ahead of Thursday’s release, and all the upcoming inflation data.