Eurozone CPI and BOJ Forecasts Next

A soft German inflation reading added to ECB rate cut speculation and weighed on the euro Tuesday. The Canadian dollar was the top performer while the Swiss franc lagged. The highlight of the hours ahead is the update to BOJ inflation forecasts.

It's all about inflation (or the lack thereof) as German HICP numbers made a mockery or the ECB claim that “there is no risk of deflation”. Prices fell 0.3% in the month compared to a 0.1% decline expected, knocking the euro a half-cent lower.

The first estimate on Eurozone inflation is due on Wednesday and the market will now be priced for something below the 0.8% y/y expected.

The yen will be the focus of the hours ahead with the Bank of Japan releasing updated inflation forecasts between 0330 GMT and 0530 GMT. A cut in the projections would be the first step toward fresh easing but the risks are two sided.

There is some chatter the BOJ could actually hike 2014 projections but that's a low probability after soft Tokyo CPI numbers last week. The main focus will be forecasts for 2015 and 2016, the current 2015 estimate is 1.9% and there is no forecast for 2016. If it's less than 1.9%, that raises the possibility of a hike and will push USD/JPY higher.

Those data points are only part of the picture in the day ahead with the ADP employment report and FOMC also on the docket. Tread carefully and keep a close eye on the news.