Mixed trading again yesterday ahead of today's inflation numbers. JPY was the biggest loser of the day after wage numbers showed a sharp slowdown that is being interpreted as a factor that could limit the Bank of Japan’s ability to raise interest rates. On that topic, money markets trimmed rate cut expectations by the ECB and BoE this year, with now the Fed being seen as the central bank that will execute the most amount of rate cuts this year. Governor Bailey raised his concerns that investor exuberance is one of the biggest risks to financial stability this year, i.e. people could take more risks assuming that market conditions are calming and interest rates are set to fall.
* Daily move - against G10 rates at 7:30am, 11.01.24
** Indicative rates - interbank rates at 7:30am, 11.01.24
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So all eyes today on the screens at 1.30pm for the much awaited US inflation numbers. Markets have been very quiet this week, and we will need to see a largely deviating number to see USD pairs break their respective trading range for the medium term. We will likely see short term volatility as the numbers come out. USD buyers would do well placing limit orders on the desk to take advantage, should the inflation data suggest prices are coming down quicker than expected. Worth noting GBPUSD is still trading near five-month highs.
Headline inflation is expected to have climbed marginally by 0.1% in December, but the more important core number is expected to show that month on month was unchanged. Markets continue to price more rate cuts by the Fed this year than both the ECB and BoE, and we will need to see core inflation coming in higher than expected to see markets ease these expectations, and thus cause USD to gain.
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