Week Ahead: central banks face inflation and labour market tests

What drove markets this week

Fed strong growth is no longer a simple argument for a hike

The Fed left rates unchanged in a 10 to 2 vote, with two policymakers favouring an increase. Kevin Warsh argued that better productivity may allow faster growth without the same pressure on wages and prices.

That judgment is being tested. GDP grew at an annualized 3.4% in the third quarter, while headline PCE inflation reached 3.6% and core inflation stood at 3.1%.

Yet real disposable income fell 0.3% and inflation-adjusted spending was unchanged. Strong aggregate growth is masking weaker household purchasing power.

That split explains the pause

Strong output would be more concerning if hiring were equally firm, but September payroll rose by only 29,000. The Fed is betting that productivity has raised the economy’s speed limit while previous tightening restrains demand beneath the GDP figure.

Source: U.S. Bureau of Economic Analysis

ECB pause depends on energy inflation remaining contained

The ECB held its deposit rate at 2.50% as inflation accelerated to 3.8% from 3.2%. Energy caused much of the increase, while underlying inflation and wages remained comparatively contained.

Waiting is defensible while the shock stays in fuel and transport. Pass-through into services and wages would create a broader problem that weak growth may not contain.

Lagarde’s departure on 7 February 2027 adds uncertainty as the ECB balances inflation against weak activity and higher borrowing costs in countries such as France.

Rate expectations can support the euro when they reflect credible inflation control. Support driven by energy costs and fiscal strain is less durable.

Bank of Japan a weaker yen keeps tightening in play

The BoJ kept its rate at 1.25% in an 8 to 1 vote, with one member preferring 1.50%. Tokyo core inflation eased to 2.6%, but the Bank raised its next-year forecast to 2.6% from 2.4%. That revision matters more than one softer monthly reading.

Another increase could support the yen and reduce imported inflation but would raise domestic financing costs.

USD JPY therefore depends on the Fed as much as the BoJ. Weak US employment would narrow the dollar’s yield advantage; resilient data would preserve it and complicate Japan’s inflation outlook.

UK Budget Fiscal support cannot settle the BoE debate

The Autumn Budget protected households from part of the energy shock, but the OBR cut its 2027 growth forecast to 1.0%, raised its inflation projection to 3.4% and reduced fiscal headroom to 15 billion.

Relief may support demand but cannot remove energy-driven inflation.

The BoE must decide whether another increase is justified when tighter policy would reach mortgages, employment and the government’s interest bill.

Limited fiscal headroom also makes the outlook more sensitive to gilt yields, linking monetary policy to Budget credibility.

Eurozone growth beats expectations, but unemployment remains stuck at 6.5%

Eurozone growth slowed to 0.4% from 0.6%, but the outcome was stronger than the 0.2% expected, suggesting that economic activity is losing some momentum without deteriorating as quickly as markets had anticipated.

The labour market offered a less encouraging signal, with unemployment holding at 6.5% against expectations for a decline to 6.4%.

The combination points to an economy that is still expanding but not generating enough momentum to produce further improvement in employment.

For the ECB, the data provides little reason to rush into another policy move. Stronger-than-expected growth reduces concerns over a sharper slowdown, but stagnant unemployment leaves questions over the strength of domestic demand.

The next test will be whether activity can translate into stronger hiring and income growth, particularly while inflation continues to weigh on household purchasing power.

Source: Eurostat

What drives the market next week

ISM manufacturing and services: is US growth becoming less balanced?

US manufacturing PMI is expected to edge higher to 54.7 from 54.5, while services PMI is forecast to ease to 54.5 from 54.9.

Both readings would remain in expansion territory, but the divergence could indicate that manufacturing is holding up better while the much larger services sector begins losing momentum.

The prices paid, new orders and employment components will provide a clearer picture of what driving activity is. Stronger output and new orders alongside easing input costs would suggest businesses are expanding without facing the same pressure to raise prices or increase hiring.

That would support Kevin Warsh’s argument that productivity can sustain growth without necessarily fueling inflation.

However, if prices paid and new orders strengthen together, the inflation risk becomes harder to dismiss. It would suggest that demand remains firm enough for businesses to pass higher costs on to customers, leaving the Fed with less room to ease its policy stance.

Source: S&P Global

US non-farm payrolls: is labour-market weakness reaching households?

US non-farm payrolls are expected to increase by 40,000 in October, compared with 29,000 in September, while the unemployment rate is forecast to remain at 4.2%. Although the forecast points to a modest improvement, hiring would remain subdued, leaving questions over whether the labour market is stabilizing or continuing to lose momentum.

The details will matter more than the headline

Wage growth will show whether employers are still facing pressure to compete with workers, while average weekly hours could reveal whether businesses are reducing labour costs before making further staffing cuts.

Revisions to previous payroll figures will also help establish whether employment conditions have been weaker than initially reported.

A stronger report, particularly if accompanied by firmer wages and longer working hours, could challenge expectations that the Fed can remain on hold without risking a renewed inflation impulse.

By contrast, another weak reading combined with downward revisions and shorter working hours would suggest that labour-market weakness is beginning to affect household income, potentially weighing on consumption in the months ahead.

Source: U.S. Bureau of Labor Statistics

Eurozone inflation and retail sales a direct test of the ECB pause

Eurozone inflation is expected to remain at 3.8%, while retail sales are forecast to increase by 0.3% month on month, up from 0.1%, but slow to 0.6% annually from 0.8%.

Taken together, the figures will help determine whether the latest inflation increase is occurring alongside resilient demand or is increasingly squeezing household spending.

The composition of inflation will be particularly important. If energy remains the main source of price pressure while services inflation and wage growth stay contained, the ECB may have more reason to maintain its current stance.

But if higher costs begin spreading into services and other domestic prices, the risk of persistent inflation becomes harder to dismiss.

A stronger monthly retail sales reading would offer some evidence that consumers are absorbing higher costs, although weaker annual growth would still point to an uneven recovery.

For the euro, the combination matters: persistent inflation could lift rate expectations, but weak consumption would limit how far markets can price further tightening without raising concerns overgrowth.

Source: Eurostat

Bank of England the first policy test after the Budget

Markets expect the Bank of England to raise Bank Rate by 25 basis points from 3.75%, but the decision comes at a difficult point for the UK economy.

The Budget has attempted to ease pressure on household finances, yet higher energy costs and the prospect of more expensive borrowing leave consumers with limited room to increase spending.

The BoE will need to judge whether fiscal support can cushion demand without adding to inflationary pressure.

If households use additional relief to maintain consumption, it could make the impact of higher interest rates less immediate.

However, if energy costs continue absorbing a larger share of household income, spending could weaken even as inflation remains elevated, that would leave the Bank tightening into a slowing economy.

For sterling, a rate increase may initially provide support, but the guidance will matter more than the move itself.

A commitment to further tightening could lift the currency, although rate increases driven by persistent energy inflation rather than stronger domestic activity may offer less durable support.

Investors will be looking for evidence that the BoE can contain inflation without pushing an already fragile recovery into a deeper slowdown.

Gold – technical outlook

Gold is trading near $3,994, testing a major support zone after an extended decline from the September recovery high around $4,700.

The technical picture remains bearish, with sellers maintaining control through a sequence of lower highs and lower lows.

However, price is approaching an important demand area that could determine whether the decline extends or gives way to a temporary recovery.

Scenarios ahead

Holding above $3,890–3,950 could encourage bargain hunting and a technical rebound towards $4,100, followed by $4,200–4,250.

A sustained break above the descending trendlines would provide stronger evidence of recovery.

However, a decisive break below $3,890 would confirm further weakness, exposing $3,800 and potentially $3,700.

Gold remains bearish below the descending trendlines, but the current support zone is critical. A sustained breakdown would strengthen the downside case, while a successful defence could produce a recovery without necessarily reversing the broader trend.

Source: Trading view

EUR/USD – technical outlook

EUR/USD is trading near 1.1194, approaching an important support area after retreating from its 1.2083 peak.

The decline has gradually shifted the balance in favour of sellers, with a series of lower highs signaling fading bullish momentum.

However, the pair is now approaching a region where horizontal support coincides with the broader rising trendline, making this an important test for the medium-term outlook.

Scenarios ahead

Holding above 1.1080–1.1150 could give buyers an opportunity to regain some ground, with 1.1293 the first resistance to watch, followed by 1.1484.

A sustained move above the latter would provide stronger evidence that the recovery is becoming more than a temporary rebound.

On the downside, a decisive break below 1.1080 and the rising trendline would weaken the broader technical structure. This would expose 1.1000, followed by 1.0745, as the next areas of support.

Source: Trading view

GBP/USD – technical outlook

GBP/USD is trading near 1.3418 after recovering from support around 1.3160. Buyers have managed to regain some ground, but the rebound has yet to change the broader technical picture.

A descending resistance trendline continues to limit upside, with the 1.3680–1.3780 area forming a major supply zone.

Scenarios ahead

Holding above 1.3300–1.3160 would keep the recovery intact and leave room for another attempt towards 1.3563.

A sustained break above this level and the descending trendline would strengthen the bullish case, bringing the 1.3680–1.3780 supply zone into focus.

However, failure around 1.3563 or another rejection from trendline resistance could bring sellers back into the market.

The first downside test would be 1.3300, followed by 1.3161. A decisive break below 1.3161 would undermine the recovery and open the way towards 1.3000.

Source: Trading view