Markets ignore CPI uptick, Mideast tensions could fuel haven and oil-related FX

Markets ignore CPI uptick, Mideast tensions could fuel haven and oil-related FX

Forex 6 minutes to read
Charu Chanana

Chief Investment Strategist

Summary:  Markets shrugged off the uptick in US inflation beyond the initial knee-jerk reactions that were later reversed. Focus quickly turned to risks of escalation in the Mideast conflict with US and UK launching airstrikes. Oil up 2% could fuel upside risks in NOK and CAD. Safe haven like JPY and Gold also on watch going into the weekend, while AUD could be temporarily lifted by China rate cut bets.


USD: Downside in focus as Fed pivot bets accelerate

US December CPI reaffirmed that the last leg of disinflation is proving bumpy as headline inflation rose and core did not cool as expected. Both headline and core rose 0.3% MoM (vs. 0.1% and 0.3% respectively earlier) while the headline YoY rose 3.4% from 3.1% in November and 3.2% expected. Core was at 3.9% YoY from 4.0% previously, but higher than the 3.8% expected. Core goods prices were flat after being in decline for the last six months. Core services inflation eased a notch, but shelter inflation, which the market has been waiting to come down, rose by 0.4% MoM, remaining elevated at 6.2% YoY but lower than 6.5% last month. Services less rent rose 0.6% MoM and 3.5% YoY.

However, the reaction function of the markets was very different from what one would expect. Ideally such an uptick would question whether a March rate cut is really likely and could instil some fear on whether the Fed meeting at the end of this month would signal willingness to cut rates. But none of that happened. Instead, March rate cut bets have jumped. This could mean two things:

  1. Markets have moved away from worrying about inflation – Disinflation relief reigns even as December CPI has highlighted that the last mile of getting to the 2% inflation target could be bumpy and Red Sea disruption risk fuelling some price pressures amid shipping delays and risks of escalation. But one month of higher inflation doesn’t disrupt the path of disinflation, and the Fed really focuses on core PCE and not CPI.
  2. Markets have moved away from worrying about interest rates – With QT cycle being over, liquidity will be the key tool for the Fed rather than interest rates.

The dollar index bumped higher on the inflation release, but reversed later and closed Thursday’s session nearly unchanged. Downside pressure on the dollar could remain intact as markets continue to expect rate cuts, and PPI due today or retail sales next week could mean little. However, watch for any escalation risks in the Mideast tensions as discussed below, as that could fuel haven buying which may support the dollar. DXY index is testing 102, which has held up on several tests over the last two weeks. A break below could bring focus on 76.4% fibo retracement levels at 101.42 and December lows of 100.62.

DXY Index. Source: Bloomberg, Saxo

NOK, CAD, AUD: Yemen strikes boost commodity-related currencies

Oil prices nudged higher on reports of US and UK airstrikes against Houthi rebels in Yemen. This comes after Iran also raised stakes as its Navy captured an oil tanker off the coast of Oman, and raises risks of an escalation in Mideast tensions especially going into the weekend. This could keep focus on commodity-related currencies. EURNOK is particularly exposed with December lows of 11.18 in focus.

AUDUSD has also pushed above 0.67 and could remain supported as energy prices see upside risks on geopolitical concerns. Expectations of a rate cut from China next week also adds a layer of support for AUD into the next week, but a break of 21DMA at 0.6754 will be needed for upward bias to return. Aussie data over the last week has shown demand concerns, with November CPI and imports both coming in below expectations. If Q4 CPI out on 31 January also shows a similar pattern, that could fuel a reassessment of RBA rate cuts, which is currently priced to be less dovish than other major central banks this year.

Gold, JPY: Yen waiting for bonds to continue the rally, geopolitics on watch

Bonds also shrugged off the US inflation report and yields were lower on the day. That helped yen to recover after an initial run higher in USDJPY to 146+ levels. USDJPY tested a break below 145 in the Asian session today but could not sustain, as Treasuries pared some of the overnight gains. As bonds are likely to continue to rally this year, it appears that market participants used the decline in bonds following the CPI as an excuse to add exposure. If Treasury yields maintain this downside bias, there could be reasons for yen to rally. However, paring of BOJ pivot bets following the earthquake in Japan has pushed yen lower in recent weeks. Any moves in USDJPY to 146+ levels is likely to continue to attract sellers. EURJPY could also be key with ECB’s Lagarde declaring a victory over inflation, and seemingly waiting for a green light from Powell to start cutting rates. EURJPY shorts could also gather with any moves above 160.

With near-term focus on geopolitical escalation risks, yen and gold could see safe-haven buying. Gold has been range-bound lately, but 50DMA at $2,015 is serving as a solid support.

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.