Week Ahead – German Elections and US PCE Inflation on Investors’ Radar

Economic

Summary:

Germany goes to the polls, but far-right AfD unlikely to form government.German CPI data might be bigger driver for the Euro.US inflation also in the spotlight as PCE report awaited.CPI releases in Australia and Japan, Canadian GDP also on tap.

Will German elections change the outlook much?

When Germany’s chancellor, Olaf Scholz, called a snap general election back in December, there was hope that a new government would inject much life into the flagging economy. With the February 23 election day almost here, it’s unclear how consequential Sunday’s vote will be, if at all.

Looking at the latest polls, the conservative CDU/CSU bloc is likely to be the biggest party in the Bundestag. But they will need the support of at least one other party to be able to form a majority government. This is where incumbent Chancellor Scholz’s SPD party comes in. Although the two are not natural partners, a grand coalition may be necessary to keep the far-right AfD out of power.

However, this may be difficult to do if the AfD or far-left parties like The Left get more votes than expected, shrinking the main parties’ shares even more than what the polls currently indicate. The Greens and the FDP have already lost significant votes so any coalition that doesn’t include both the CDU/CSU and SPD may not be very stable.

And with all the main parties having ruled out an alliance with the AfD, Scholz and CDU/CSU leader Friedrich Merz will have no choice but to find enough common ground to steer the country for the next four years. One area where the two parties might struggle, but which is the most crucial for the markets, is the debate about whether to relax Germany’s strict debt brake rule. The German government is obliged constitutionally to keep the structural deficit of the budget at no more than 0.35% of GDP.

Loosening this rule could go a long way in boosting spending to lift the economy out of the doldrums. But the CDU/CSU isn’t too keen on tweaking it and is likely to attach conditions to any agreement to raise the borrowing limit.

Nevertheless, if on Monday morning the election results point to a CDU/CSU and SPD coalition, the euro could enjoy a modest rally, and if in the coming days the party leaders decide to prioritize reforming the debt brake, there could be further gains for the single currency.

However, if the AfD comes a close second, the euro could face some selling pressure as the government may require the party’s votes to pass some legislation even if it’s not included in the new coalition, allowing it to push through some of its far-right agenda.

Data to also matter for the Euro

In the event that the German elections don’t bring about much of a political shift in Europe’s largest economy, traders may turn their attention to the incoming data. The Ifo survey is out on Monday and will shed some light on German business sentiment in February, while on Friday, the preliminary CPI numbers are due to be published.

Week Ahead – German Elections and US PCE Inflation on Investors’ Radar_1

Eurozone inflation has been creeping higher since October so a further uptick in Germany’s prints could cast doubt on expectations of three more 25-bps rate cuts by the ECB this year.

As for the euro area, the final CPI estimates for January are out on Monday. Investors will also be keeping an eye on the minutes of the ECB’s January meeting due on Thursday. Any worries among policymakers about inflation not coming back down to 2% quickly enough could provide some upside to the euro, although on the whole, it’s unlikely that either the German CPI or ECB minutes will significantly move the needle for rate cut bets.

PCE inflation may keep rate cut optimism alive

Over in the United States, sticky inflation has been an even bigger problem for the Federal Reserve. The headline rate of CPI inched up to 3.0% in January, dashing hopes for two rate cuts in 2025. But the market reaction wasn’t as negative as one would have expected, partly because investors predicted that the PCE measure of inflation, which the Fed attaches more importance to, would not be as hot as the CPI readings.

According to the Cleveland Fed’s Nowcast model, the core PCE price index eased to 2.7% in January from 2.8%, and headline PCE edged down to 2.5%. If those estimates turn out to be correct when the actual numbers are released on Friday and there are no upside surprises in the month-on-month figures, expectations for two 25-bps rate reductions could continue to recover, weighing on the US dollar.

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The PCE report will also include the latest stats on personal income and consumption, while earlier in the week, there’s a slew of other releases. The Conference Board’s closely watched consumer confidence gauge is out on Tuesday, to be followed by new home sales on Wednesday. There’s a barrage of indicators on Thursday, including durable goods orders and pending home sales for January, as well as the second estimate of Q4 GDP growth.

Geopolitical risks could support the Dollar

With risk appetite remaining resilient in the face of elevated geopolitical uncertainty following President Trump’s exchange of insults with Ukraine’s President Zelensky, any signs of weakness in the US economy could again encourage investors to ratchet up their rate cut bets even if the inflation numbers don’t back it.

But the US dollar, which is trading near two-month lows against a basket of currencies, still stands a chance of rebounding if the geopolitical headlines worsen. Specifically, a further deterioration in the relations between Trump and Zelensky and vis-à-vis with the EU, or new tariff announcements, could redirect some flows back to the dollar.

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Yen and Aussie eye CPI data, loonie awaits Canadian GDP

Elsewhere, it’s also all about inflation. Australia will publish its monthly CPI figures on Wednesday, which are likely to be scrutinized following the RBA’s hawkish rate cut. Although inflation in Australia fell to just 2.4% in the fourth quarter, which is well within the RBA’s 2-3% target band, the monthly pace has been accelerating lately, edging up to 2.5% in December and supporting the need for caution.

Should the January readings show a further simmering in inflation, the Australian dollar could stretch its latest rebound against the greenback, as investors further scale back their rate cut expectations for the RBA.

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One central bank that’s likely to welcome strong inflation data is the Bank of Japan, as it aims to normalize monetary policy after years of stimulus. CPI measures both nationally and in the Tokyo region have been trending higher in the past three months, while the economy has been going from strength to strength. Still, investors are at the moment fully pricing in just one 25-bps rate hike for the rest of 2025 and see less than a 50% probability for a second increase.

The producer price index for services is out on Tuesday and the Tokyo CPI estimates for February will follow on Friday. Should they continue to point to a buildup of inflationary pressures, the odds for a second hike could go up, lifting the yen.

Finally, Canadian GDP figures for the fourth quarter will be watched on Friday, amid some uncertainty about the pace of further easing by the Bank of Canada. If it wasn’t for the threat of US tariffs hanging over the Canadian economy, the BoC would likely have switched to a more neutral stance by now. Nonetheless, any positive surprises in GDP growth could see the probability of the BoC keeping rates on hold at the next meeting in March increase from the current 70%, giving the loonie a leg up.

Source:XM

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Owen Li

Economic

Chinese artificial intelligence (AI) sensation DeepSeek plans to release key codes and data to the public starting next week, an unusual step to share more of its core technology than rivals such as OpenAI have done.

The 20-month-old start-up, which surprised Silicon Valley with the sophistication of its AI models last month, plans to make its code repositories available to all developers and researchers. That allows anyone to download and build on or improve the code behind the well-regarded R1 or other platforms, it said in a post on X.

With the move, DeepSeek is pushing harder on an open-source approach to AI development that’s won more advocates since its models outperformed OpenAI and Meta Platforms Inc competitors in benchmark tests. Companies such as Meta already make their models available to the public, allowing users to customise the platform for their own applications. OpenAI began as partially open source, though it has since retreated from that mission. But DeepSeek says it intends to go further by publicising the underlying code, the data used to create it, and the way it develops and manages that code.

It also potentially escalates a race between the US and China to develop ever-more advanced AI models. By making its coding secrets freely available, DeepSeek is helping to ensure wider adoption of its technology, which is already spurring concerns about security among governments from the US to Australia.

“We are a tiny team exploring AGI. Starting next week, we will be open-sourcing 5 repos, sharing our small but sincere progress with full transparency,” DeepSeek announced on its X handle on Friday.

A code and data repository is a digital storage space, where the data and resources needed for training, running, and evaluating AI models are organised and managed. The Hangzhou-based start-up said its technology had been fully tested, deployed and documented.

DeepSeek’s surprising progress has forced larger, more established rivals like Baidu Inc to adopt the open-source framework. But global competitors like OpenAI and Anthropic still keep their AI models, repositories and data proprietary.

Investors in the biggest US AI start-ups like Anthropic PBC and xAI have ploughed tens of billions of dollars into the industry in the hope of a big payday. DeepSeek, which emerged out of a quantitative hedge fund run by founder Liang Wenfeng, has so far not revealed outside backing, and could face less pressure to build a revenue model.

“No ivory towers — just pure garage-energy and community-driven innovation,” the start-up posted on X.

Source: Theedgemarkets

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ING

Economic

The mood among Czech consumers slid in February, mostly due to worries about future economic developments, perhaps invigorated by recent geopolitical turmoil. Confidence in industry remains subdued despite a trend improvement since February last year. Spenders can still drive the rebound, but industry’s underperformance is a threat.

Construction rules them all

The Czech business confidence indicator picked up by 0.5 points to 98.0 in February. Meanwhile, the consumer confidence indicator shed 0.5 points to 96.6 in the same month. Confidence in the economy among businesses increased in trade (+3.7 points), construction (+3.0 points), and slightly in industry (+0.3 points), while confidence in the service sector remained unchanged at 100.5 in February. Business confidence has reached its highest level since April 2023. The February increase was mainly driven by more positive assessments of the current and expected economic situation in business and enhanced demand in construction.

The share of consumers expecting the overall economic situation to deteriorate over the next year increased for the third consecutive month. However, the share of households expecting a deterioration in their financial situations in the coming year remained stagnant in February.

Meanwhile, the number of households assessing their current financial situation as worse than in it was in the previous 12 months fell slightly from the previous reading. The proportion of consumers who believe that now isn't the time to proceed with large purchases was almost unaffected.

Mood Among Czech Consumers Slides as Industry Tanks_2

Overall, consumer aren't doing too badly right now – but are afraid of what's at stake in the future. Current geopolitical turmoil could be one factor driving scepticism about the outlook, although we think that the consumers can still support the Czech economic recovery over the year's first half. However, should things continue not to improve in European manufacturing, spenders might start to keep their wallets closed for precautionary reasons.

Confidence in construction is booming, reflecting the strength of the property market that will drive property prices and possibly imputed rents.

Industry still suffocates

The index in the service sector remains marginally better than its long-term average and is not accelerating, which might provide some hope for a continued disinflationary process in the segment. That said, the index has mostly hovered below its long-term average since the onset of the pandemic – and so a prominent drop in service prices isn't a sure thing.

The mood in industry continues to fly well below its long-term average, shaking like jelly here and there. This isn't good news, and we're curious as to whether the European Commission’s 'Compass' initiative or the election in Germany will be able to provide some solid ground for the European industrial base.

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Justin

Cryptocurrency

In the wake of US President Donald Trump’s unexpected executive order – which hinted at establishing a US sovereign fund and incorporating bitcoin into the national strategic reserve – it is crucial to pause and weigh the trade-offs involved. While accumulating bitcoin might seem like an obvious strategy, a more ambitious – and ultimately more effective – plan calls for overhauling the nation’s financial architecture to unlock the potential of open networks.

The US occupies a unique position in global finance by issuing the world’s reserve currency – a status often referred to as the ‘exorbitant privilege’. But it’s more than a label economists use: it fundamentally reflects the global trust in US governance, economic resilience and the enduring safety of the dollar as a store of value.

The biggest risk posed by a bitcoin reserve

Proponents of a US bitcoin reserve argue that bitcoin’s status as ‘digital gold’ – decentralised and without a single point of failure – positions it as a neutral global asset, detached from any one nation’s monetary policy. But would accumulating bitcoin truly secure US financial leadership?

Unlikely. Strategic reserves are meant to ensure stability and provide immediate access during a crisis. Countries store dollars or oil because they need them to repay debts, settle cross-border obligations and keep essential systems running when supply chains falter. For all its promise, bitcoin doesn’t meet these near-term needs.

But there’s a bigger risk. If the US began amassing bitcoin on a large scale, it might be seen as a hedge against the dollar itself – raising alarms and giving rivals like China or Russia an opening to claim that the US no longer trusts its own currency.

Bitcoin’s long-term trajectory could be bright. It could grow into a universal settlement layer for nations wary of each other’s financial rails. But that transition is still unfolding. Today, the more critical step is building the infrastructure to let bitcoin and other cryptocurrencies evolve from speculative assets into a key component of global finance. Acquiring a large stash now will drive gains for early adopters and fuel speculation, but it offers minimal strategic advantage.

Raising the stakes with a dollar platform strategy

A far more powerful move than simply buying bitcoin is to shape its integration into the US financial system. Think of the early internet: the biggest winners weren’t those who just hoarded domain names; they were the ones who built on top of open protocols, becoming the backbone of a new digital economy.

Becoming a global bitcoin hub

Rather than treating bitcoin solely as an asset, recognise it as an open, permissionless network for money movement. Even countries that shun the dollar might end up using bitcoin’s neutral ledger. By building robust bitcoin infrastructure – including secure custody solutions, regulated exchanges and efficient on- and off-ramps – the US can attract significant economic activity and innovation. This is an opportunity to export US regulatory and compliance frameworks, technological expertise and financial best practices as the global financial stack evolves.

Bitcoin might be the first cryptocurrency to capture financial institutions’ attention, but it won’t be the last. As decentralised finance evolves, the true opportunity lies in becoming the digital capital of that emerging ecosystem.

Driving adoption of dollar-pegged stablecoins

Dollar-pegged stablecoins extend the reach of the dollar by modernising cross-border payments and making it easier for people worldwide to hold, send and spend in dollars. Their widespread adoption hinges on proper regulation – ensuring transparency, robust backing and consumer protections. Managed effectively, stablecoins can reinforce dollar dominance by effectively turning the dollar into the digital currency of choice for innovative financial services built on open networks.

While dollarisation may be unwelcome and even hinder the use of dollar-pegged stablecoin in some regions, that’s exactly where bitcoin can thrive – as a bridge between competing financial systems in a multipolar world.

Empowering US innovation and experimentation

The US didn’t scale the internet on its own – it laid the groundwork that allowed private innovation to flourish. Tech giants emerged by building on top of open protocols within a supportive regulatory environment. Today, a similar strategy could enable US startups and established financial institutions to develop innovative cryptocurrency and stablecoin-based financial services, thereby broadening the dollar’s influence rather than limiting it.

A balanced approach – combining robust government oversight with market-driven innovation – will keep the US ahead of top-down alternatives like central bank digital currencies, especially those from authoritarian regimes that are fundamentally incompatible with open networks.

A bold, strategic leap

This more complex strategy could secure the dollar’s dominance for decades. Instead of stockpiling bitcoin – a move that might undermine confidence – the US could integrate it into its financial system, allowing the government to shape the emerging ecosystem by setting standards and guiding innovation.

The upside is a more transparent financial system in which the US continues to leverage its most powerful asset: the dollar. Similar to how tech leaders open-source critical components to establish industry norms while monetising other areas, the US can expand its dollar platform and ensure seamless interoperability with bitcoin and stablecoins.

While any bold, transformative strategy carries inherent risks, resisting change only accelerates obsolescence. With its extensive expertise in platform competition, the current administration is uniquely positioned to take this bet.

Source:Christian Catalini

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Owen Li

Commodity

Oil prices dipped in midday trading on Friday but were still on track to record a large weekly gain on concerns of tightening supply and a weaker dollar.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.50 per cent lower at $76.10 a barrel at 12.04pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 0.52 per cent at $72.10 a barrel.

This week, worries about crude oil supply intensified when a drone strike – which Moscow blamed on Ukraine – hit a Caspian Pipeline Consortium (CPC) pumping station in Russia's Krasnodar region.

Moscow said that oil shipments through the pipeline, Kazakhstan's main export route, had dropped by 30-40 per cent. landlocked Kazakhstan depends on the pipeline for more than 80 per cent of its oil exports and lacks alternative transportation options.

The Central Asian country has achieved record-high oil production levels despite damage to its export route, Reuters reported on Thursday, citing industry sources. The country’s oil and gas condensate production reached about 2.12 million barrels per day (bpd) on February 19, the sources said.

Oil markets have been volatile in recent weeks as investors weigh the prospects of a global trade war and a possible end to the Russia-Ukraine conflict, which could lead to the lifting of sanctions on Moscow’s energy industry.

This week, Washington and Moscow began talks aimed at ending the war that began with Russia's full-scale invasion of Ukraine in February 2022.

“While we anticipate the prospect of a peace agreement between Russia-Ukraine to have sizeable ramifications for natural gas, any associated easing in sanctions on Russia is not likely to comprise considerable increases in aggregate Russian crude oil flows,” MUFG said in a research note on Thursday.

Russia's crude oil production is limited by its Opec+ target of 9 million bpd, rather than by current sanctions, which affect the destination of its exports but not the overall volume, the Japanese lender said.

Despite US pressure to reduce prices, Opec+ is considering delaying planned monthly production increases set to begin in April, according to a Bloomberg report from Tuesday.

The group has held back 5.86 million bpd of supply from the market as part of a series of output curbs since 2022. It plans to gradually restore a total of 2.2 million bpd through monthly increases by late 2026.

Oil prices were also supported this week by a weaker dollar, lowering the cost of oil for investors.

After reaching its lowest point of the year, dipping below 106.4 on Thursday, the US Dollar Index, which tracks the greenback's value against a group of major currencies, was up by 0.10 per cent at 106.48 at 11.57am UAE time.

The dollar weakened after Mr Trump hinted at a potential trade deal with China, easing market uncertainty surrounding tariffs.

On Wednesday, the US President said he expected Chinese President Xi Jinping to visit the US, though he did not provide a timeline for the visit.

Mr Trump told reporters on Air Force One that a new trade deal between the US and China is “possible”.

Source: THENATIONALNEWS

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ING

Economic

The PMI indicates stabilising economic activity, but declining new orders and hiring reveal a weak short-term outlook despite stock market optimism on Europe.

After a decent start to 2024, last year ended on a weak note as the eurozone economy fell back into an all-too-familiar stagnation. The start to 2025 shows signs of stabilisation, with the composite PMI for the eurozone at 50.2 in February, unchanged from last month. This suggests continued muddling through around 0%. That's not great, but there's at least no sign of activity deteriorating further. The weakness was concentrated in France as Germany and the rest of the eurozone showed expanding output.

Manufacturing has shown some signs of bottoming out, with the manufacturing output PMI increasing from 47.1 to 48.7. This still indicates contraction, but the pace of the decline is slowing. Services are still showing growth, but this is despite weakening new business. Consumer confidence crept up a bit in February but remained solidly below the long-term average. The downbeat consumer is causing household consumption to remain muted amid global uncertainty, which holds back services activity.

With orders still declining, businesses indicating that they are reducing workforces and possibly disruptive tariffs on the table, the outlook remains very uncertain for the coming months. Stock markets have become more upbeat about Europe recently, but improving sentiment is difficult to justify looking at the short-term outlook.

Even though the European Central Bank seems convinced that inflation is under control, cost pressures do continue to creep up for businesses. In February, the PMI again flagged rising input costs that are being priced through to the consumer to some extent. Then again, it's a stretch to expect a marked flare up of medium-term inflation in the current weak demand environment. We expect the ECB to continue to lower rates for the time being.

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Cohen

Economic

The Bank of Korea (BOK) will cut its key interest rate by 25 basis points on Tuesday, offering support to an economy which barely grew last quarter, according to economists polled by Reuters who expected a further 50 points of easing this year.

After unexpectedly holding its policy rate steady last month, South Korea's central bank signaled it needed to wait for domestic political turmoil, which weighed on the currency, to stabilize before easing further.

With the won rebounding around 2.5% against the U.S. dollar this year and inflation at 2.2% in January, not far from the BOK's medium-term target of 2%, the central bank now has room to cut rates to support a weak economy.

All but one of the 36 economists polled February 14-20 expected the BOK to cut its base rate by 25 basis points to 2.75% on Tuesday.

"We believe the BOK is going to cut by 25 basis points. They will be acknowledging that the economy will face a greater negative output gap, which justifies the BOK's move to address growth," said Stephen Lee, chief economist at Meritz Securities.

"As long as FX volatility remains subdued, I think there is a chance for the BOK to implement additional rate cuts this year."

The central bank, in its last policy statement, projected economic growth to be slower this year than the previously estimated 1.9% due to weaker exports, deteriorating consumer sentiment, and ongoing political turmoil, which is expected to remain a drag on growth this year.

Asia's fourth-largest economy, which heavily depends on semiconductor exports - particularly to the U.S. - faces significant risks from U.S. President Donald Trump's tariff threats against major trading partners, which could hit South Korean shipments.

That increases pressure on the BOK to cut policy rates to stave off a potential recession.

A strong majority of economists, 32 of 35, predicted a quarter-point rate cut to 2.50% in Q2, with most also forecasting another cut in Q3, bringing the rate 75 bps lower than currently, to 2.25%.

That was despite the U.S. Federal Reserve projected to make fewer or no cuts in coming months. A separate Reuters poll showed economists divided on the timing of the next Fed rate cut, with most expecting it by mid-year and some seeing it later or not at all.

Median forecasts showed Korean rates would remain unchanged at 2.25% in Q4 2025, a view unchanged from the January poll.

"Our view is the Fed will only cut once this year, in June... the U.S. (Fed) is pausing because they're getting closer to the neutral, but (BOK) still has some room to cut in order to get to the neutral," said Bum Ki Son, North Asia economist at Barclays.