FX Update: Fed expectations rip higher on US CPI, Bullard FX Update: Fed expectations rip higher on US CPI, Bullard FX Update: Fed expectations rip higher on US CPI, Bullard

FX Update: Fed expectations rip higher on US CPI, Bullard

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The latest US CPI data proved far hotter than expected once again, taking Fed rate hike expectations higher still. The US dollar actually shrugged this development off initially before rallying on a significant further boost to potential Fed tightening after a hawkish broadside from FOMC voter Bullard. Elsewhere, the Bank of Japan just doubled down on its yield-curve-control policy and the Riksbank threw the krona under the bus with a dovish meeting.


FX Trading Focus: USD firming underwhelms, given massive further shift in Fed expectations, BoJ doubles down on YCC, Riksbank throws SEK under the bus.

US dollar snaps back after whiplash-inducing sell-off post-CPI release. The January US CPI release came in hotter than expected, at 0.6% month-on-month for both the headline and ex-food-and-energy measures vs. +0.4%/+0.5% expected, respectively and at +7.5% / +6.0% year-on-year versus +7.3%/+5.9% expected, respectively. Both of the year-on-year numbers were the highest for the cycle and the highest in forty years and took Fed expectations higher still. Somewhat curiously, the USD kneejerk higher on the data release was quickly erased and the greenback actually sold off to new local lows before later rallying on a hawkish broadside from St. Louis Fed President and FOMC voter James Bullard. And even then, the USD strength looks underwhelming, as discussed in the EURUSD chart below.

As noted, Bullard was out speaking yesterday in an interview with Bloomberg yesterday and said that he would like to see 100 basis points of Fed tightening “before July 1” which implicitly means that, if the hikes were to take place at regularly scheduled meetings, one of the three meetings between now and then would need to see a 50-basis point move. He would also like to see QT (balance sheet reduction) beginning in the second quarter and even brought up the idea of an emergency move between meetings. “There was a time when the committee would have reacted to something like this to having a meeting right now and doing 25 basis points right now...I think we should be nimble and considering that kind of thing.” The Fed hasn’t done an emergency hike at a non-scheduled regularly meeting since 1994, as far as I can tell.

The combination of the CPI and Bullard’s comments took the March FOMC meeting expectation to +46 basis points, i.e., very strong consensus that the Fed will hike fifty basis points (or an emergency move of 25 bps plus another 25 bps at that meeting) and the anticipated rate through the December FOMC meeting is some 30 bps higher at above 178 bps than where it closed Wednesday.

Bank of Japan set to enforce its yield-curve-control policy – before the US CPI release yesterday, the Bank of Japan announced that it would buy “unlimited” amounts of 10-year JGB’s in operations on Monday, obviously to enforce its 25 basis point yield cap on 10-year Japanese sovereign debt after the yield on that debt had reached as high as 23 basis points yesterday. The JPY was sharply weaker on the news, but USDJPY avoided new highs above the previous 116.35 mark as it came back broadly bid – especially in the crosses yesterday - on energy prices and risk sentiment cratering.  This is an interesting move from the BoJ if it maintains this policy, as any further rise in global bond yields from here, particularly longer yields, will theoretically have to absorbed by further weakening of the already very weak Japanese yen.

Riksbank dovish, SEK rushes lower – the Riksbank failed to make any shift in line with the recent ECB meeting, as it expressed the view that monetary policy needed to stay loose “for inflation to be close to the target in the medium term.” As well, the Riksbank promised to continue with enough QE to keep the bank’s balance sheet unchanged through this calendar year before allowing holdings to “decrease gradually.” The rate lift-off time frame was only pulled forward to the second half of 2024 from the prior forecast of Q4 of 2024. All in all, a very dovish mix despite Governor Ingves providing the decisive vote in overruling dissenting voices on the QE decision, so the Riksbank did an effective job of throwing the SEK under the bus.

Chart: EURUSD
Yesterday’s developments were perhaps both confusing and revealing. Initially, the hot US January CPI release failed to boost the US dollar, which actually dropped to a new low in places (new high in EURUSD) despite additional Fed tightening being priced into the forward curve in the wake of the release. Later, the USD came roaring back only after Bullard unleashed his hawkish broadside that unsettled the market, which is now forced to price in the risk of even an emergency Fed hike before the regularly scheduled March meeting. All in all, the revealing bit is that we wake up this morning with the Fed priced to hike a full 6-7 times through the December meeting this year, with risk sentiment on the defensive and the EURUSD is only about 30-40 pips below the Wednesday close. This suggests that the path to a stronger US dollar is a very difficult one (a full-on market crash?) and increases the conviction in the downside potential. The ultimate test for that notion would be if the Fed does indeed deliver an emergency hike in coming days and yet EURUSD fails to fall much further or even shows resilience and bounces back to current levels or higher.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Yesterday’s action didn’t do much to alter recent trends, though note the Swedish krona biting hard to the downside…

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Watching how USD pairs shaped up in the wake of the churning back and forth yesterday, and as we watch the nature of the consolidation after the huge EURUSD rally off the lows.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1030 – Russia Central Bank Key Rate Announcement (expected to hike 100 bps to 9.50%)
  • 1500 – US Feb. Preliminary University of Michigan Sentiment
Disclaimer

The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.