EUR / USD
ECB vice President de Guindos stated that rate increases beyond March will depend on the data. Fellow council member Centeno commented that smaller rate hikes by the central bank would require medium-term inflation nearing 2.0%, although the rhetoric had little overall impact.
The Euro resisted further selling pressure after the European open and gradually edged higher, although overall ranges were relatively narrow.
Fed Governor Bowman stated that the central bank was not seeing as much moderation in inflation as it would like and that the labour market is still very strong. She added that there is a lot of data between now and the next Fed meeting, but she expects that the bank will continue to increase rates. Although the rhetoric was hawkish, the Euro resisted renewed selling and strengthened to highs around 1.0725 against the dollar as European currencies regained ground against the US currency.
The latest US inflation data release on Tuesday will be very important for all asset classes. Consensus expectations are for a decline in the headline rate to 6.2% from 6.5% with the underlying rate retreating to 5.5% from 5.7%. Stronger than expected data would reinforce concerns over the inflation outlook and increase pressure for a more restrictive Fed policy while there will be notable relief if the data is weaker than expected.
The situation will be complicated by benchmark revisions and changes to component weightings for this release with volatile trading inevitable.
Caution prevailed in Asia on Tuesday with the Euro holding firm around 1.0740 as the dollar struggled to gain further support ahead of the inflation data.
The yen was subjected to further selling after Monday’s European open. Following last week’s announcement of Ueda’s nomination as Bank of Japan Governor, the yen spiked stronger n expectations of a more hawkish monetary policy. The yen reversed gains as these expectations gradually reversed and there were further sharp yen losses on Monday amid expectations that Ueda would maintain a dovish policy stance.
Reports of renewed buying of global assets by Japanese fund managers also undermined the Japanese currency and it posted sharp losses into the New York open..
Although the Fed rhetoric was relatively hawkish, Treasuries managed to resist further selling. The yen still remained firmly on the defensive with the dollar posted sharp gains to highs just above 132.90 while the yen posted heavy losses on the crosses. Fed comments will be watched closely following the US inflation data.
Japanese GDP increased 0.2% for the fourth quarter of 2022 compared with consensus forecasts of 0.5%, but there was a stronger reading for the inflation deflator.
Ueda was officially nominated as the next Bank of Japan Governor with any policy hints watched very closely in the short term.
The yen overall regained ground and the dollar dipped back below the 132.00 level against the Japanese currency as the yen regained some ground on the crosses.
In reported comments on Monday, Bank of England MPC member Haskel stated that the central bank should be really, really careful over the risk of high inflation becoming embedded in the economy and the data would need to be watched very closely in the coming months given high levels of uncertainty.
Hawkish rhetoric provided an element of Sterling support, although Haskel was also hawkish in last week’s testimony to the Treasury Select Committee.
Sterling also drew support from a stronger tone surrounding risk appetite and fresh gains in equities, especially as markets had been expecting a more defensive tone ahead of Tuesday’s US inflation data. Sterling posted highs just below 1.2150 against the dollar with the Euro edging lower to 0.8835.
The UK labour-market data reported an unchanged unemployment rate and a larger monthly increase in employment. The increase in headline average earnings slowed to 5.9% from 6.5% and below consensus forecasts of 6.2%, but underlying earnings accelerated to 6.7% from 6.5%. Sterling was boosted by the underlying data with a move above 1.2150 against the dollar amid expectations that the Bank of England would have to maintain a more hawkish policy stance.
Swiss consumer prices increased 0.6% for January, above consensus forecasts of 0.4% with the year-on-year rate strengthening to 3.3% from 2.8% and well above expectations of 2.9%. The data is liable to increase National Bank concerns over inflation with increased expectations of a further rate hike at the March policy meeting.
Total Swiss sight deposits declined to CHF525.6bn in the latest week from CHF528.1bn the previous week which suggests that the National Bank is still happy to withdraw liquidity. The Swiss franc gained further limited support and the Euro settling just above 0.9850 while the dollar retreated to 0.9180 on Tuesday.