Investors eye Fed Chair Powell's speech ahead of US inflation figures

Although China has pivoted away from its strict zero-COVID policy, investors are still concerned that the unprecedented flow of Chinese travellers may lead to another infection surge due to the massive flow of tourists. In addition, the protracted war between Russia and Ukraine has sparked concerns about a deeper downturn in the global economy, as a result of the prolonged conflict. As a result, risk sentiment has weakened, as evident in the softer tone surrounding equity markets.

The eurozone stock markets closed higher on Monday, trading near an eight-month high, amid growing optimism that the new year will only see a shallow recession in the Eurozone, overturning earlier fears that it would suffer a severe slowdown.

There is, however, a possibility that stock markets in Europe will open in the negative zone on Tuesday due to the hawkish comments made by Fed officials, which have slowed risk sentiment in advance of the highly anticipated speech by Jerome Powell, chairman of the Federal Reserve. The U.S. central bank, Raphael Bostic and Mary Daly said last night that they expected to raise (interest) rates to above 5% and hold them there for a period of time to control inflation, which is still elevated.

A speech by Isabel Schnabel from the European Central Bank will precede Fed Chairman Powell's panel discussion at Riksbank's International Symposium on Central Bank Independence, determining immediate EUR/USD movements. A rise in rate hikes by the Fed chair will likely result in further declines of the major currency pair if Powell favours aggressive rate hikes. However, USD bulls are hesitant to place aggressive bets ahead of Fed Chair Jerome Powell's speech, which will be analyzed for clues as to the pace of rate hikes during the next meeting. It is expected that this will play a major role in driving USD demand in the near future.

While the EUR/USD pair remains focused on the latest US consumer inflation figures, scheduled for release on Thursday, it remains imperative to pay close attention to those figures as they will determine the next leg of a directional move. Nevertheless, the fundamental backdrop suggests that the path of least resistance for the USD is to the downside. This, in turn, supports the prospect of an extension of the recent appreciation move for the major.

As for the UK retail industry, according to figures released earlier Tuesday by the British Retail Consortium and KPMG, retail sales rose 6.5% in December from a year prior, a positive sign. Sales in December appear to have grown well, mainly due to the increased cost of goods and masking the fact that the number of goods that people are purchasing is significantly lower than it was a year ago. Several other economic data will be released on Tuesday, including French and Spanish industrial production numbers for November, as well as Spanish consumer confidence for November.