FX Update: US CPI circus and FOMC to shape USD into 2023.

Today's Saxo Market Call podcast.
Today's Market Quick Take from the Saxo Strategy Team

FX Trading focus: US CPI circus – is this the “final round” for now?

We noted in today’s Saxo Market Call podcast that the US CPI releases of recent months have generated a far greater impact in US equity markets than in US treasury yields and the US dollar – last month’s USDJPY reaction to the soft October CPI data one important exception. There are also signs afoot that the market is gearing up for another volatile day, with both risk sentiment and the VIX rising yesterday – from which we would infer that the market is leaning to “protect itself” from another soft data print, and meaning that the greater surprise side might be a yawn-inducing in-line report, much less the most uncomfortable scenario for market positioning and expectations: a hotter than expected core month-on-month print.

There are is much to consider over today’s US CPI release, but let’s start with a word of caution: a single month’s CPI data offers very little information value on how inflation will shape up in the New Year, so be wary of the knee-jerk reaction, also as we have an FOMC meeting up tomorrow, one that might have Fed Chair Powell seeing his role as pushing back against excessive easing of financial conditions if we do get a soft CPI print that triggers an attempted repeat of the October CPI print reaction (see November 10 on your USDJPY and equity market charts).

As I have noted in my most recent update, the Fed is likely set to deliver a new set of dot plot Fed Funds projections tomorrow that are well above what the market is pricing. Then again, the market knows that, so incoming data probably carries more weight than Fed guidance unless the Fed really wants to weigh in heavily with surprisingly pointed rhetoric and forecasts tomorrow. Finally, two more points: One, as noted in today’s podcast, we have enormous myopic energy and speculative capital on these individual CPI releases, where the day of the release absorbed nearly all that energy and no further directional move results in the ensuing days. Any reaction move today has more chance of a bit of directional follow-through if it is counter-intuitive (for example if equity market sells off and Two: many speculative shops have likely closed their books on the year, not wanting to commit to P/L risk until the speculative pastures of the 2023 calendar year roll into view.

Chart: USDJPY
USDJPY was the most sensitive of the major currencies to the soft October CPI release last month and is likely to repeat that feat this month on any significant surprises in either direction on today’s release. The pivotal 137.50+ area that was support on the way down is now serving as resistance. It is difficult to conjure up significantly lower US long yields, the most important coincident indicator for USDJPY, without the front-end of the US yield curve also falling (inversion very profound for current US treasury yield levels). And to get short US yields significantly lower, it would take some extremely bad US data to realistically set Fed expectations lower for the coming 12 months. Such a reset would take considerable time, so USDJPY downside may prove more difficult for the medium term unless the above logic is faulty (quite possible!). The upside path back to the 142.25 pivot high from mid-November, on the other hand, is easier to imagine if we get hotter-than-expected US CPI data today, even if it would take some time to establish that US inflation and the economy are running hot enough to trigger a new threat at the cycle highs in US long yields, which is likely the required scenario for USDJPY to vault through the 142.25-145.00 resistance zone and threaten back toward 150.00.