FX Update: US CPI jitters as cycle status should take precedence.

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

FX Trading focus: CPI – uncertainty on the release itself as well as the reaction function. USD in technical limbo, but complacency seems high, given treasury yields. RBA Governor Lowe’s future in doubt?  Strong UK jobs data.

Today’s January US CPI release is the talk of the town due to the recent upward revisions of data that have spooked the market on whether it provides further ammunition for even more than the two 25 basis point hikes that are already priced in for the Fed for coming meetings. As well, today’s CPI release will be the first using the new calculation methodology, with impacts far from clear, especially as consumption patterns that affect the weightings (now revised according to one year’s data rather than two years’) might be skewed from heavy shift in patterns from the pandemic “bullwhip” effects. Conspiracy theorists will have us believe that the new methodology is meant to suppress inflation numbers from here. Regardless, we remain on the decelerating inflation path and marginal surprises shouldn’t matter, but may do so, given the tension in this market as complacency feels widespread while US Treasury rates have backed up considerably and we have the risk suggested by some of the most recent data that the economy may be reaccelerating, which would drive a new round of inflation risks in the months ahead. My update on Friday asked what a “no landing” scenario looks like and it certainly doesn’t look like the current heavily inverted yield curve – a growth acceleration with anchored long rates would be a very strange beast.

All of the above does little to inform us what the surprise side of the data is today or how the market will react to it. If the inflation data surprises soft, we may get an explosion higher in sentiment and sharply weaker US dollar, but the market may quickly calm as it recognizes the uncertainties of where we are in the cycle (for example, what to do with if we see a particularly strong US January Retail Sales print tomorrow). Another interesting incoming macro indicator could also come with today’s earnings report from AirBnB after the market close – if they report strong results and a strong outlook, it would be hard to square with an economic slowdown. The travel company Expedia reported strong demand in January relative to 2019 levels. The reaction function is a bit more straightforward with broadly higher than expected CPI data if the release continues to drive a lifting of the entire US yield curve and pushing those Fed rate cuts further over the horizon and the terminal rate higher this year.

Vice Chair Brainard, nominally the most important dovish voice at the Fed is set to leave the Fed after Biden appointed her as Director of the National Economic Council. This isn’t creating much of a furor, as Chair Powell’s voice was always the most important.

Chart: EURGBP
EURGBP has been trying to post a reversal after the episode above 0.8900 failed to find additional momentum, but hasn’t quite sealed the deal, needing perhaps a close below 0.8800 to more fully neutralize the former uptrend, though it already looks rather heavy here. The UK reported very strong jobs numbers this morning, with the ranks of payrolled employees expanding 102k in January versus 15k expected and the January jobless claims far lower at -13k while December claims were revised to -3.2k versus the original +19k reported. The UK economy certainly seems in a less parlous state than feared, with a similar positive shift in the outlook in Europe and the US. Sterling can outperform broadly as long as risk sentiment is able to positively absorb an improving economic outlook without higher yields derailing the situation (i.e., a “no landing” scenario that somehow remains reasonably disinflationary – not sustainable beyond the near term in our view.)