After a week of wait-and-see behavior from FX markets holding their breath for US inflation readings this morning, the numbers delivered in a big way, and the United States Dollar is rallying substantially stronger against all major currencies.
Overview
The Consumer Price Index rose 0.3% in the month of January, more than the 0.2% gain expected. The biggest surprise comes from the annualized core (excluding food and energy prices) figure, rising 3.9% versus 3.7% expected.
Such an upward surprise is both contrary to market expectations and what the Federal Reserve is looking to see. Though many economists in the last few weeks have begun to think the Fed may be keeping policy too restrictive, this morning’s release showed evidence to the contrary. Though there isn’t necessarily a risk of any further interest rate hikes from the Fed, this will definitely impact the timeline for cutting rates. It’s important to note that the Fed’s inflation target is still 2%, and the closest we’ve come to reaching that milestone was back in June. Some government officials, namely Treasury Secretary Janet Yellen, were just about ready to declare victory over inflation as some shorter-term readings returned to target, but this morning is making it clear that such optimism is a bit unfounded.
Though this release may be unwelcome for the Fed, it isn’t exactly a surprise – leading indicators like wage growth and CEO confidence (which can correlate with profit margins) have been pointing upward for some time now. We’ve seen since January 1st of this year quite a shift in expectations for the Fed’s timeline moving through the year, and today is a continuation of that trend. The Fed’s own dot plot projected 3 25-basis-point cuts this year, and now market expectations are very close to agreement. With several speakers from the central bank on the docket through this week and Fed minutes due out next week, we may see further and more vocal hawkish pushback from voting members as inflation rears its ugly head once again.
What to Watch Today…
- UK CPI, Wednesday
- Eurozone GDP, Wednesday
- UK GDP, Thursday
- Monex USA Online is always open.
GBP ⇓
The Pound Sterling is the smallest loser of the morning but is still down roughly a quarter percent against the USD this morning. The UK released labor data this morning, showing wages grew at their slowest pace in more than a year while the unemployment rate fell again. This drop in wage growth was not as big as market projections, though, and did little to impact market bets on when the Bank of England will cut interest rates. This is all contingent on the remaining data due out for the UK this week, which will show if the region managed to avoid a recession last year.
USD ⇑
Swiss Franc is swooning against USD this morning, dropping more than a percent as Swiss inflation slowed to 1.3% annually in January. Switzerland’s core reading also slowed to 1.2% year-over-year. These figures are in direct contrast to what we just saw come out of the US this morning, and it appears the Swiss National Bank may be priming for an interest rate cut as soon as March. The SNB only meets once a quarter, so it has much less room for ‘error’ than its peers, and such a shift in pricing expectations is proving to have a huge impact on CHF.
