Fed rhetoric may dilute CPI impact this week

USD: CPI and Fed speeches in focus this week for the dollar

The US dollar has pretty much started trading this week at the same level as it began last week with three mini bouts of strength fading as tough Fed rhetoric failed to move the US dollar in the same way as the rates market. The impact of rhetoric from the Fed was clear with the 2-year UST note yield up 12bps last week as it became clearer that the strong jobs data would give Fed officials enough justification to push back on starting rate cuts at least until May and possibly until June. There were no fewer than 13 separate occasions when Fed officials spoke last week and those comments in general helped reduce the prospect of an early rate cut. This week there will be 9 separate events in which Fed officials can relay their views to the markets – Fed Governors Waller and Barr and Fed President Daly are the three speakers this week who didn’t speak last week and may therefore garner the greatest attention. But in general the tone of the comments are unlikely to differ from last week unless there is incoming news that could change the thinking of the Fed. We do get the CPI report tomorrow for January and that will be key. The consensus is for another notable drop in the annual rate of headline inflation from 3.4% to 2.9% and for the core to drop from 3.9% to 3.7%. So more good news is anticipated and given the tone of the Fed rhetoric an upside surprise may garner a bigger rates reaction than a downside surprise. Momentum in the rates market is to the upside for now and a higher than expected CPI print would give credence to the Fed’s cautious rhetoric.

The limited FX impact from the US rates move is telling but clear to see – the move in US front-end yields has been matched elsewhere and once again we have had a clear synchronised shift in yields, diluting the FX impact. The 2-year yield in Germany for example gained 15bps last week as ECB rate cut expectations were pushed back as well. ECB Governing Council member Fabio Panetta did state over the weekend that the time for monetary easing was “fast approaching” which suggests there is potentially greater division within the ECB and there is greater potential for the ECB to commence sooner than implied by market pricing – ie: in April. EUR/USD has shown little impact given Panetta is a known dove. We still see greater downside scope in EUR/USD over the short-term. Chief Economist Philip Lane did repeat last week that more data was required to confirm the price trend although he did not repeat June as being the timeframe for having enough information.

SPECULAITVE MARKET REMAINS CLOSE TO FLAT ON US DOLLAR

Source: Bloomberg, Macrobond & MUFG GMR

GBP: An important week of UK economic data releases

The US dollar’s upward momentum at the start of this year remains in place with the dollar index recording its fourth consecutive weeks of gains last week (just). However, the US dollar’s performance against other G10 currencies last week was mixed highlighting that it has struggled to extend gains after the blowout nonfarm payrolls report at the start of this month. Over the past week, the US dollar has strengthened against the low yielding G10 currencies of the Swiss franc (-0.9% vs. USD) and yen (-0.6%). In contrast, the US dollar has weakened against the New Zealand dollar (+1.4% vs. USD) and the Scandi currencies of the Norwegian krone (+0.6%) and Swedish krona (+0.4%). In our latest FX Weekly report released on Friday (click here) we looked in to what have been the main drivers of the US dollar’s mixed performance last week.

The other major currencies of the euro and pound were little changed last week against the US dollar. After falling to a low of 1.2519 on 5^th February just after the release of the blowout nonfarm payrolls report, cable has since climbed back above the 1.2600-level after it found support from the 200-day moving average that comes in 1.2565. It leaves the pound as the second best performing G10 currency so far this year after the US dollar.

The pound has benefitted from the hawkish repricing of BoE policy expectations. The implied yield on the December 2024 three-month SONIA futures contract has increased by around 82bps since the low point at the end of this year as market participants have moved to scale back BoE rate cut expectations. As a result, the amount of rate cuts priced in for this year has more than halved leaving around 71bps of cuts priced in by year end. The expected timing of the BoE’s first rate cut has also been pushed back until June when there are 16bps priced.                  

Recent communication from the BoE, ECB and Fed has indicated that the BoE is further away from cutting rates than the other major central banks. At their last policy meeting the BoE’s dropped their guidance for further rate hikes but gave no signal that a rate cut was imminent (click here). BoE Governor Bailey will provide a further update on the outlook for monetary policy when he speaks later today (18:00). The week ahead could prove to be an important stress test of the recent hawkish repricing of BoE policy expectations with the release of the latest UK labour market report on Tuesday, UK CPI for January report on Wednesday and Q4 GDP report on Thursday.

The BoE has emphasized recently that headline inflation is expected to fall back to target in Q2 before picking back up again the 2H of this year. Core and service measures of inflation would have to fall more quickly than expected at the start to this year alongside a further slowdown in wage growth to bring forward market expectations for earlier and deeper BoE rate cuts by the end of this year. Leading indicators have been signalling that growth appears to be picking up at the start of this year after the UK economy may have fallen into a mild technical recession at the end of last year. At the current juncture, we continue to look for further pound outperformance in the near-term and are maintaining our short EUR/GBP trade idea. 

EUR/GBP VS. SHORT-TERM YIELD SPREAD 

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
SZ	09:00	Total Sight Deposits CHF	Feb-09	--	481.2b	!!
EC	09:45	ECB's Lane Speaks				!!!
EC	15:50	ECB's Cipollone Speaks				!!
US	16:00	NY Fed 1-Yr Inflation Expectations	Jan	--	3.0%	!!
UK	18.00	BoE Governor Bailey speaks				!!!
US	19:00	Monthly Budget Statement	Jan	-$21.0b	-$129.4b	!!
AU	21:55	RBA's Kohler-Remarks				!!

 

Source: Bloomberg