USD was back on fire yesterday after inflation numbers gave a reality check to the markets on the US disinflation story. As a consequence treasuries sold off, with 2 and 10-year yields hitting the highest level since the Fed’s ‘pivot’ back in December. EURUSD traded through December lows (prior support), with the pair now trading at the lowest levels since November 2023. GBPUSD gave up the gains from earlier in the day following the better-than-expected job numbers. Another number that’s concerning from yesterday's numbers was real average weekly earnings, which fell back into negative territory in January at a time when credit card debt per US household remains near record highs.
Yesterday afternoon's USD gains pushed USDJPY above 150, causing Japanese officials to comment that they are watching FX moves with a sense of urgency – adding to speculation that the Bank of Japan could intervene in currency markets soon. If so then this would add to JPY gains. GBPJPY is currently trading at 9-year highs.
* Daily move - against G10 rates at 7:30am, 14.02.24
** Indicative rates - interbank rates at 7:30am, 14.02.24
UK inflation surprised to the downside this morning, erasing the gains GBP made yesterday following the better-than-expected wage numbers. The monthly drop in inflation was more than double what was expected, causing the year-on-year number to drop to 4% (Expected to rise to 4.1%). Core inflation was lower at 5.1%, and services inflation only rose by 6.5%. Money markets added to rate cut bets, with the amount of rate cuts expected this year at 75bps from 65bps yesterday. General positioning in markets has been long, on the basis that the BoE priced to do less rate cuts this year - however, following on from today’s numbers we are likely to see profit taking, and thus see a weaker GBP in the short-term.
The combination of recent US job numbers, Fed speak, and yesterdays US inflation numbers has sparked interest in our USD sellers again who seem more optimistic about the outlook for GBPUSD heading lower, and it seems hard to disagree with this notion at the moment. The December lows are being seen as the first target to aim, for which we nearly hit earlier this month. For EURUSD the lows of October are being seen as the next target. The next big number from the US will be the core PCE inflation number on 29th February.
Just EU GDP numbers to focus on this morning, expected to come in flat, and unless we see growth come in higher it would seem the ECB remain the front runners to cut interest rates first, which will likely weigh on the EUR.
The combination of higher US inflation and lower UK inflation has contributed to money markets shaking up their expectations for interest rate cut calls this year. In general, recent data is causing markets to ease the number of rate cuts from the BoE and Fed, however data over the last 24 hours has caused markets to narrow the difference between UK and US interest rates for the end of this year, causing GBPUSD to decline. Core PCE inflation is out on the 29th February, and until then rate differentials will likely favour downside on GBPUSD with a likely test of the December lows.
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