EUR / USD
The headline Euro-Zone CPI inflation rate declined to 8.5% for January from 9.2% and below consensus forecasts of 9.0%. The underlying rate, however, was unchanged at 5.2% and slightly above expectations of 5.1%. The core data maintained expectations that the ECB would maintain a hawkish policy stance.
The dollar failed to gain any traction and the Euro gradually moved higher with a move towards the 1.0900 level and further gains after the US data.
The Federal Reserve increased interest rates by 0.25% at the latest policy meeting which was in line with consensus forecasts and the vote was unanimous.
According to the statement, inflation has eased somewhat, but remains elevated. The committee also anticipates that further increases will be appropriate, although it will take into account the cumulative tightening and policy lags. The dollar posted gains in immediate reaction to the statement, but failed to hold the gains
Chair Powell stated that the Fed had come a long way, but there was more work to do on inflation. In this context, it would be very premature to declare victory.
Powell stated that the disinflationary process has started, but this is only in around 25% of the core PCE. He does expect disinflation pressures will expand, but it’s not being seen yet. Powell suggested that two more rate hikes are potentially needed with a better balance needed in the labour market. He reiterated the high degree of uncertainty and that the Fed is data dependent. If the economy performs as expected there will not be scope for rate cuts this year as he again warned that it would be a major mistake to ease policy too quickly, but the situation could change if inflation declines faster than expected.
Despite Powell’s inflation concerns, markets focussed on disinflation comments and, Fed Funds expectations edged lower with markets continuing to price in rate cuts this year. The Euro posted further gains and touched 1.1000. The dollar lost further ground in Asia with a fresh 10-month high just above 1.1030 before some consolidation ahead of the ECB rate call. Consensus forecasts are for the ECB to increase interest rates by a further 50 basis points to 3.00% with guidance crucial.
The ADP employment data recorded an increase in private-sector payrolls of 106,000 for January and well below consensus forecasts of 180,000, although the December increase was revised higher to 253,000 from the original reading of 235,000. There was a significant decline in transport and construction jobs for the month.
The US ISM manufacturing index declined to 47.4 for January from 48.4 the previous month and below consensus forecasts of 48.0. There was a sharper decline in new orders for the month with production also edging lower. There was another small increase in employment for the month while inventories increased slightly.
There was a further decline in prices for the month, although the rate of decline was slower than the previous month.
The JOLTS data recorded an increase in job openings to 11.0mn for December from a revised 10.44mn previously and well above consensus forecasts of 10.25mn which suggests a tight labour market. The dollar lost further ground after the data and dipped to lows around 129.20 against the Japanese currency.
Treasuries posted gains after Powell’s comments with the 10-year yield sliding to lows below 3.4%. The dollar dipped to lows around 128.60 before a tentative recovery.
The Bank of Japan again warned against policy tightening with the dollar around 128.60 from lows at 128.20.
Sterling continued to drift lower during Wednesday with an underlying lack of confidence in the UK fundamentals. There were also expectations that the Bank of England would adopt dovish guidance at Thursday’s policy meeting. Sterling was unable to move above 1.2350 against the dollar and drifted back towards 1.2300 after the Wall Street open with lows around 1.2270. The Euro posted a strong advance to around 0.8870 on expectations of favourable yield spreads.
Sterling posted gains after the Federal Reserve press conference with gains to highs near 1.2400 as risk appetite also tended to strengthen.
The Bank of England will announce the policy decision on Thursday with consensus forecasts for a further 50 basis-point hike to 4.00%. Guidance and revised forecasts will be very important for Sterling as it traded near 1.2400 on Thursday with the Euro just below 0.8900 and close to 4-month highs.
The Swiss PMI manufacturing index dipped into contraction territory for January with a retreat to 49.3 from 54.1 previously and well below consensus forecasts. The Swiss franc was unable to make further headway and gradually lost ground. The Euro edged higher towards parity while the dollar posted slight net losses with position adjustment ahead of central bank decisions. The dollar dipped below 0.9100 after the Fed press conference and traded near 18-month lows around 0.9070 on Thursday.