Written by Convera’s Market Insights team
Dollar surges as US inflation comes in hot
George Vessey – Lead FX Strategist
Markets were rattled after the highly anticipated US inflation report yesterday triggered a knee-jerk hawkish repricing in Federal Reserve (Fed) policy expectations. Equities dropped sharply whilst yields surged to 2-month highs and the US dollar jumped to a fresh 3-month high against a basket of currencies.
US headline inflation rose 0.3% m/m in January versus the 0.2% consensus, whilst core rose 0.4% m/m versus the 0.3% consensus. This means the annual rate of headline inflation fell from 3.4% to 3.1% in January, a smaller than expected drop, and core remains at 3.9%. Shelter was the single largest contributor to January inflation. In a clearer picture of the underlying inflationary pressures, the 3-month annualised core CPI rate is now running at 4%, its highest since last June. Yet another inflation report surprising to the upside further challenges market expectations that the Fed will begin cutting interest rates in May. Indeed, money markets are no longer pricing in four 25 basis point cuts this year. We continue to expect the Fed to cut later this year, but without a cooling of the labour market and economy, inflation progress is likely to stall, easing the pressure on the Fed to cut rates too soon. As ever, policymakers remain data-dependent, as do financial markets, so one poor jobs report or weaker inflation print could reignite cutting bets and damage the dollar.
For now, though, the Treasury sell-off saw yields surge, especially on the front end, sparking significant demand for the US dollar, which dragged GBP/USD back under $1.26 and EUR/USD towards $1.07, whilst USD/JPY sprung north of the ¥150 figure.
Pound slides as UK inflation holds at 4%
George Vessey – Lead FX Strategist
The pound rose to its strongest against the euro in almost six months and to a 9-year high against the Japanese yen after stronger-than-expected British wage growth yesterday prompted investors to scale back bets on spring rate cuts from the Bank of England (BoE). The UK inflation report this morning has tempered sterling demand though, coming in a touch lower than expectations.
The monthly number for UK inflation came in at minus 0.6%, double the expected drop, meaning the annual rate of change in January remained at 4%. Core inflation was also lower than expected, coming in at 5.1%, while a measure of price gains in services, a key consideration for the BoE, edged up to 6.5%, rather than the 6.8% forecast. Overall, these numbers are a big relief for policymakers, especially in light of the US CPI figures yesterday. The FTSE 100 is set to spike higher and outperform much of Europe at the open, but the pound has weakened across the board. Sterling had climbed higher against most peers yesterday following the UK jobs report which showed wage growth slowed by less than forecast and the unemployment rate unexpectedly dropped to 3.8% versus the 4% expected. However, the softer inflation numbers will likely help pave the way for more rate cuts by the BoE, diminishing the pound’s yield advantage.
GBP/USD is trading back in the $1.25 region and has retested its 200-day moving average. Should this key support give way, we’re eying the 100-day moving average, located at $1.2498, as the next downside target in the short-term.
Euro wounded despite pockets of optimism
George Vessey – Lead FX Strategist
The US inflation report dominated headlines yesterday and caused gyrations across financial markets, sending EUR/USD back towards $1.07 after failing to break above its 100-day moving average just shy of $1.08. Flying under the radar was the German ZEW index, which increased for the seventh consecutive month.
The ZEW index measures financial analysts’ assessment and expectations of economic and financial developments. Although the current assessment component weakened to -81.7, the lowest level since June 2020, the expectations for Germany have improved once again in a sign that Europe’s largest economy may have already reached a low point. However, recovery prospects face significant headwinds and will likely limit the euro’s recovery, especially against higher-yielding peers like the pound and US dollar. More than two-thirds of the respondents of the ZEW expect the European Central Bank (ECB) to make interest rate cuts over the next six months in light of falling inflation rates. However, although investors have recently scaled back their expectations of early cuts by the ECB, cumulative easing for 2024 is expected to exceed that of the Fed or BoE, which is weighing on the euro.
Today, the second estimate of fourth quarter Eurozone GDP as well as industrial production will be in the spotlight and could drive some euro volatility ahead of tomorrow’s eagerly anticipated US retail sales and industrial production data.
Dollar dominates after US inflation
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 12-16
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
