The United States Dollar looks to be holding most of yesterday’s whopper gains and is trading in mixed territory this morning.
Overview
Equities look to rebound this morning as well, and treasury curves are steepening once again. Yesterday’s trading session saw the biggest gains for USD in nearly two months and placed the Bloomberg Dollar Spot Index at its strongest since mid-November, when interest rate cut bets really picked up steam not just in the US but across the world.
In unpacking yesterday’s CPI release, FX markets took it as an opportunity to further correct the same overzealous moves that decimated the Dollar’s strength at the end of last year. While a 3.1% inflation reading still is substantially above the Federal Reserve’s target, it is still a decline from last month’s 3.4% figure and doesn’t necessarily need to be cause for alarm across all markets. The Fed itself has held steady that it sees three interest rate cuts this year. As of mid-December, markets believed in as many as six. Overnight swaps now indicate that traders believe the Fed will cut rates slightly less than four times this year – a marked decline from the beginning of this year, but nonetheless a change that simply brings an overzealous market closer to in line with the central bank itself.
The busy data calendar continues into the second half of this week, as UK CPI came out below expectations this morning, and the second revision of Eurozone Q4 GDP showed, again, that the region just barely avoided a technical recession last year. Tomorrow sees UK GDP, arguably the most important indicator remaining this week.
What to Watch Today…
GBP ⇓
Pound Sterling continues yesterday’s slide against USD this morning and has now weakened more than a percent this week. UK inflation declined a surprising amount last month, shrinking 0.6% in January and posting an annual figure of 4.0%, below all market expectations. As the question continuing to plague Bank of England policymakers is whether or not the economy can withstand a prolonged high interest rate, this is welcome news. Tomorrow’s GDP reading promises to bring further volatility to GBP as the nation teeters on the brink of a technical recession.
JPY ⇑
The Japanese Yen rebounded this morning after sliding more than a percent in yesterday’s trading session after currency officials warned they are ready to take action to curb ‘rapid moves.’ This all brings with it a strong sense of deja vu, as Japanese officials have made many such warnings over the last two years and actually intervened in the market three times in 2022. Nonetheless, JPY remains just shy of its weakest point since mid-November as the Bank of Japan continues to play its coy on the subject of possibly ending the world’s last negative interest rate policy.
