Market jitters keep volatility faint and dollar remains glued on back foot
The US 10-year yield deflated to 1.927% today keeping the reserve currency bid, with the dollar index near the lower end of its recent range at 95.40, which provided US stock futures with freshly welcomed buoyancy for a test of the latest peaks following their deep corrections from all-time highs.
Nonetheless, market sentiment is still looking light awaiting additional volatility from the upcoming US inflation event.
The US economy remains robust with healthy consumption feeding economic growth. Full employment is expected to be on the horizon and average hourly earnings have improved, nourishing wage growth. The latter makes things tricky for the Fed as it doesn’t want extra factors in their economic blueprint to boost inflation when they are trying to put a cap on it.
Thus, investors’ focus remains centred around Thursday’s US CPI data, which will reveal whether historic levels of inflation persisted in January. The CPI rate is forecasted to rise to 7.3% from 2020’s ending rate of 7.0% y/y. The headline monthly figure excluding food and energy is expected to tick lower to 0.5% from December 2021 of 0.6%.
How could markets digest the data
One narrative is that inflation globally has been boosted by the energy crisis. Oil has extended its rally that began at the start of December 2021 throughout January with WTI oil futures recording a $93.15 per barrel peak, which may tip the scale towards a US CPI result that is rather elevated or stronger.
The question is how much will a high inflation figure underpin the dollar? Clearly, should inflation prove to remain hot, the domino effect of this is a vigilant Fed with a home run March hike.
However, is this already somewhat priced in? Looking back, the hawkish stance reiterated in the last FOMC meeting gave the dollar some legs after the Fed confirmed its move to post-pandemic policy, without lift-off in rates.
Moreover, less government spending as the road to normalization unfolds in 2022 has a lot of analysts expecting the pace of the US economy will begin to hamper especially if the Omicron variant disappears into the mist.
Furthermore, across the globe, it is apparent that some central banks are ahead of others on the interest rate theme as their recoveries move at different paces. What is key lately, is that central banks like the Reserve Bank of Australia (RBA) and the ECB last week, which were adamant that interest rates would likely rise in 2023 have now sent more hawkish tones to markets that unexpected higher levels of inflation may entail earlier action, and this may in a way offset some of the greenbacks expected boost in tomorrow’s US CPI release.
One thing is for sure, the Fed is likely to do as much as possible to avoid inflation lingering into the year.
Forex arena looks firm against soft dollar
Today euros weakness faded as it held above the $1.1400 handle crawling higher to $1.1440 as markets ignored President Lagarde’s attempts to offset heightened ECB tightening expectations. A frail dollar may have played a part, also aiding the pound and the antipodean currencies. The pound touched $1.3585, while the aussie creeped up to $0.7180 and the kiwi $0.6690.
Gold is around $1,825/oz and WTI oil futures are holding a recent drop above the $89.00 per barrel mark, as investors questioned tensions in the East and the resumption of Iran nuclear talks.
FOMC Member Bowman is due to talk at 15:30 GMT, while US crude oil inventories will also be released at that time.
Bank of Canada’s Governor Macklem is then scheduled for 17:00 GMT, at which some minor movements in markets could surface as simultaneously, FOMC Member Mester is speaking about the economic outlook and monetary policy at an online event hosted by the European Economic and Financial Centre.
The US 10-year Treasury auction is scheduled to follow at 18:00 GMT.
