Written by Steven Dooley and Shier Lee Lim
USD surges with March now “off the table”
The US dollar surged to three-month highs overnight after a hotter-than-expected January inflation report ended most hopes for a March rate cut from the US Federal Reserve.
Headline annualised CPI was reported at 3.1% — above expectations for 2.9%. Core annualised CPI was 3.9% versus 3.7% expected. Worryingly, short-term US inflation measures have seen an ongoing shift higher since mid-2023.
The USD index gained 0.7% overnight and reached the highest level since 14 November.
The Swiss franc saw the largest losses with the USD/CHF up 1.3%.
The Aussie was also hit hard with the AUD/USD down 1.2% as it fell to three-month lows.
The USD/JPY gained 1.0% while the EUR/USD fell 0.6%. The GBP/USD was better, down only 0.3%. After the inflation report, the probability for a March rate cut fell from 16% to 8.5% (source: CME Fedwatch)
NZD reverses lower after inflation expectation drop
The NZ dollar was one of the hardest hit overnight after earlier Q1 inflation expectations dropped to 3.22% from 3.60% in Q4 — the lowest since September 2021.
According to the RBNZ’s expectations poll, two-year inflation dropped from 2.76% to 2.50%. The inflation forecasts for the next five and ten years fell to 2.16% and 2.25%, respectively.
The outcomes support the RBNZ’s attempts to contain inflation and perhaps suggest that another rate rise is not required, despite what the market is pricing.
On Monday, RBNZ Governor Adrian Orr stated before a parliamentary committee that the board intended to lower the current 4.7% inflation rate to about 2%.
The NZD/USD has seen a swift reversal after last week’s strength with the pair down 1.1% and now near three-month lows.
GBP steady ahead of UK CPI
The British pound held up well overnight supported by a better result from last night’s unemployment result (at 3.8% in January versus 4.0% forecast) and stronger wages growth (at 5.8% versus 5.6% expected)
Tonight, UK inflation is due. January is probably going to have higher inflation for the following reasons: In January 2024, home energy costs should have increased as opposed to falling monthly a year earlier. Transportation services and car gasoline prices may not have decreased as much as they did in January of the previous year.
As a result, CPI inflation looks likely to rise from 4% to 4.3% and services inflation will increase from 6.4% to 6.7%. Core looks to increase slightly, from 5.1% to 5.2%.
In the meantime, the annual rate of mortgage interest payments is declining as a result of smaller increases in January compared to December, and the RPI inflation rate remains unchanged at 5.2%. While the GBP has held up well in the face of USD strength, momentum is waning, and critical support is seen on GBP/USD around the 1.2510 -1.2526 retracement / moving average zone.
Greenback surges after US CPI
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Calendar: 12 – 17 February
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