Written by Steven Dooley and Shier Lee Lim
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EUR/USD at six-week lows after ECB
The euro fell versus most currencies overnight after the European Central Bank’s policy meeting suggested the ECB was nearing a move to cut European interest rates.
The ECB kept interest rates on hold – with the main refinancing rate at 4.50% – but commentary from the ECB president Christine Lagarde warned that economic risks were now “tilted to the downside”.
Financial markets now see two 25-basis point cuts priced in by mid-year.
The EUR/USD fell 0.5% to six-week lows.
The euro was lower in other markets with the NZD/EUR nearing six-week highs and the EUR/SGD nearing six-week lows.
PCE key for Fed
Otherwise, the US dollar was stronger again overnight after a better-than-expected December-quarter GDP number. The USD index gained 0.2%. However, the USD index continues to find resistance at both the six-week highs and the 200-day moving average.
Tonight’s US inflation report – personal consumption and expenditure (PCE) – is critical for expectations around the Federal Reserve’s next move – and market sentiment more generally.
The PPI’s pertinent components and variations in item weightings allowed us to estimate another mild print of 0.154% m-o-m for monthly core PCE inflation in December, despite a 0.3% m-o-m increase in the core CPI.
The 3-month and 6-month annualized core PCE inflation would continue to decrease to 1.45% (from 2.16% in November) and 1.83% (from 1.87% in November), respectively, if our projection comes to pass.
Core PCE inflation most likely refrained from dramatically returning due to weakness in rent inflation and non-auto core goods prices. Nevertheless, we anticipate that supercore component inflation will increase to 0.255% m-o-m in December from 0.124% in November.
Japan inflation due
Before US inflation, Japan January 2024 Tokyo CPI is due.
We project 1.7% year-over-year inflation in the Tokyo Ku-area core CPI (all items minus fresh food) in January 2024, down from 2.1% in December 2023.
With the exception of fresh food and energy, we predict that the BOJ’s interpretation of core-core CPI inflation will be 3.1% year over year, down 0.4 percentage points from 3.5% in December.
Tokyo core CPI inflation looks likely to have slowed in January, caused in part by the MIC’s version of the core-core CPI (all categories minus food (excluding alcoholic drinks) and energy), core foods (food excluding fresh food, and energy).
While the USD/JPY has recently weakened, the short-term USD/JPY support range of 145.97–146.97 would need to be broken to validate this trend reversal.
Euro down after ECB
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 22 – 27 January
All times AEDT
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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.
