The United States Dollar’s winning streak has been decidedly snapped this morning and the Buck is trading weaker across the G10 board
Overview
US CPI was released earlier today – though largely close to expectations, the monthly and annualized core readings (excluding food and energy) both undershot expectations a touch. Overall, inflation grew 0.4% last month and 2.9% over the last year. This is still more than last month, but not so much above expectations that it would substantially change expectations for the Federal Reserve’s easing cycle.
Markets appear, at the moment, to be paying more attention to the core figures below expectations, pushing USD down about a third of a percent against most majors. This is prompting a shift in bets on the Fed toward a second interest rate cut this year. As of yesterday, traders were confident the Federal Reserve would only cut interest rates once, but odds on overnight swaps are now fairly evenly split on the chances of a second cut. A first 25 basis point cut is now penciled in for July instead of October, but it’s likely that any further shift forward would require substantially more progress on disinflation in the first few months of the Trump administration that begins next week. Fed officials are also concerned with the potential for renewed inflation from Trump’s proposed trade policies, but recent reporting has pushed back on the initial scale of such policies. It remains to be seen for a few more days just how far and how fast the new administration will move on tariffs. The Fed, in our view, is still far more likely than not to hold interest rates steady until the impact of these policies can be parsed out, so we don’t see cuts coming down the pipe until at least a few months into this year.
There is still more to come today and this week on the data calendar. The Fed’s Beige Book is due out this afternoon, and markets will receive commentary from several central bank officials that could shed more light on the Fed’s reading of this morning’s CPI release. Barkin, Kashkari, Williams, and Goolsbee are all set to make speeches through the day and will no doubt receive questions on both inflation and the Fed’s outlook. Still to come tomorrow is retail sales and import prices for November.
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What to Watch This Week…
- UK GDP, Thursday
- US Retail Sales, Thursday 8:30AM
- Monex USA Online is always open
GBP ⇑
Pound Sterling has managed to break out of its recent rut this morning following the release of both UK and US CPI, gaining nearly two thirds of a percent back against USD after facing substantial losses through the last few trading sessions. Both regions saw rather benign figures, but the UK’s print came in softer than the US’ showing prices grew 0.3% last month. On a yearly basis, prices grew 2.5% – both below the US’s figure and below market expectations. Given the UK’s rather fragile economic and budgetary state at the moment, traders are cheering these figures especially in conjunction with the US’ undershoot in inflation. UK GDP is due out tomorrow as well.
JPY ⇑
Japanese Yen is the biggest winner on the G10 board this morning, as the beleaguered currency is gaining more than a percent of ground back against USD overnight and into today. US CPI added an exclamation point onto an already busy session for the Yen following commentary from Bank of Japan Governor Kazuo Ueda. Ueda emphasized his deputy Governor Himino’s comments on the potential for an interest rate hike at the BoJ’s meeting later this month, and signaled that the central bank is very conscious of the global ‘flash crash’ that occurred in August when the BoJ surprised markets with an outsized hike. Currently odds of a 25 basis point hike on January 24th are at 70%, up from 60% yesterday..
