Head of FX Strategy
Summary: The terminal Fed funds rate reached a new cycle high above 5.25% yesterday in the wake of stronger than expected CPI data and fresh Fed jawboning, with the USD chopping all over the place before finding new strength overnight, possibly on concerns that the Chinese recovery story has been over-played. This morning, sterling hit an air pocket on soft CPI data that will likely give the Bank of England the green flag to soft-pedal further rate increases.
Today's Saxo Market Call podcast
Today's Market Quick Take from the Saxo Strategy Team
FX Trading focus: Fed expectations at cycle high, soft UK CPI data points spoils GBP comeback attempt.
The US January CPI print saw headline and core inflation running hotter than expected for the year-on-year measures, while the month-on-month data was in-line with expectations at 0.5% at the headline and +0.4% for the core. Doubters pointed to the “core services ex shelter” measure (the one the Fed has highlighted as driving the most concern on its part) only registering a +0.3% rise month-on-month (though that in turn was pulled down by a steep -0.7% decline in the very choppy Medical Services data series). All in all, after a very choppy reception to the data, the market decided it wasn’t that much the wiser and the greenback was relatively unchanged late yesterday, outside of USDJPY pulling above resistance and 133.00. Some late jawboning by various Fed officials helped as well as the CPI data to take the terminal Fed rate to a cycle high of 5.26%, but with a muted advance in the longer end of the US yield curve, the inversion of the US yield curve reached a new record low for the cycle of -87 bps for the 2-10 part of the curve.
An entirely different driver materialized in the Asian session to drive the US dollar higher, which was negative action in a confluence if indicators that are all proxies for the China reopening story (copper, AUD, Hong Kong equities). Not entirely sure of the cause-and-effect of this development, but a Bloomberg article out overnight does reveal that at least some of the credit impulse that Chinese officialdom is mobilizing to boost consumption is instead finding its way into paying off higher-yielding mortgages or is even being uses to speculate in equities. The sense, if this story is broadly true and the behaviour widespread, is that the Chinese recovery story will need to prove itself from here.
Chart: GBPUSD
Today’s soft UK CPI release more than erased the impact of yesterday’s firm labour market data, as the negative 0.4% miss on core CPI YoY at 5.8% YoY (vs. 6.2% expected and 6.3% in December) will more likely keep the Bank of England happy with its complacent inflation forecast and rate guidance (seeking to avoid further tightening as long as inflation continues to drop). UK 2-year yields are coming in 15 basis points lower today after this data release while the US 2-year yield closed at a local high yesterday on the US’ own CPI data yesterday. This has engineered a steep sell-off after the zany pump in GBPUSD yesterday that conveniently touched the very technical 61.8% retracement level of the prior sell-off near 1.2270 before the subsequent 200 pip plunge. Next levels of interest to the downside include the pivot low near of 1.1961 and the 200-day moving average coming in slightly below, but the most important level is the 1.1842 pivot low. Elsewhere, the BBC is out with a story suggesting a Boris Johnson political comeback attempt, in a bid to “save” the Conservative party after its polling hit record lows last year.
Table: FX Board of G10 and CNH trend evolution and strength.
Still weak trending indicators for most of G10 as the recent action in many cases is moving against the prior direction (GBP selling off after sharp rally, for example). Most noteworthy in relative strength terms is the weakness in the precious metals as higher yields are biting there, together with a softening in the copper price, which has correlated very closely with the CNH direction for months on the post-Zero Covid recovery narrative. AUD certainly jolted overnight, but it has been trending higher in many places in prior days.
Table: FX Board Trend Scoreboard for individual pairs.
The EURSEK and USDSEK backups are a real disappointment for those looking for an extension in SEK strength, watering down the potential for something interesting unfolding there. Note EURGBP so far trying to reject the attempt to establish a new downtrend with today’s action, while GBPUSD affirmed the still young downtrend yesterday after the squeeze higher.
Upcoming Economic Calendar Highlights
A new fragmented world order can render some of today's infrastructure obselete, but it also calls for massive new investments across the globe, which requires a new set of strategic and tactical investment strategies.
Steen Jakobsen,
Chief Investment Officer
As globalisation turns to fragmentation, China seems set on playing a role in the global economy, while simultaneously working towards proofing its own economic situation from external shocks and crises.
Redmond Wong,
Market Strategist
The recent bank runs and ensuing challenges are reminicent of something we've seen before. Will it end like the S&L crises of 1986 and 1995?
Chris Dembik,
Head of Macroeconomic Research
Equity markets need to recalibrate to another - fragmented - global world. What's your view on equities in this market - are they going up or down?
Peter Garnry,
Head of Equity Strategy
With every development comes new opportunites, some of which could be in India. Have you considered the country as a part of your diversification strategy?
Charu Chanana,
Market Strategist
A collar is an option strategy that allows some protection while maintaining some upside potential. What investment would you like to use a collar strategy for?
Hans Oudshoorn,
Trainer Academy
There are arguments to be made for many commodities to have upside. Which are you paying the most attention to this quarter?
Ole S. Hansen,
Head of Commodity Strategy
In a very challenging macro environment, which currencies do you think will come out on top?
John J. Hardy,
Head of FX Strategy
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/en-gb/legal/disclaimer/saxo-disclaimer)
