USD and treasury yields gained across the board following Fed Waller's comments in the afternoon being deemed cautious, when compared to his comments in December 2023. Waller stated that the Fed can cut interest rates this year, absent a rebound in inflation, with emphasis that the pace of cuts should be carefully calibrated and not rushed. Both GBPUSD and EURUSD hit prior support levels before rebounding marginally. The probability of a March rate cut by the Fed eased from 72% to 60%.
* Daily move - against G10 rates at 7:30am, 17.01.24
** Indicative rates - interbank rates at 7:30am, 17.01.24
UK inflation surprised to the upside this morning, causing markets to ease the amount of rate cuts expected by the BoE this year from 130bps to 115bps. GBP is up across the board with CPI coming in at 4%, core CPI at 5.1%, and services CPI at 6.4%. However some analysts have already called this number a blip, and they still expect inflation to ease to 2%. However in the short term expect GBP to be well supported on this CPI number, with the only threat that could stem gains being markets going into a risk-off environment.
Another day and another round of ECB members who continue to push against market pricing on the amount of interest rate cuts, with ECB Knot suggesting “markets are getting ahead of themselves” and Lagarde stating “too optimistic markets don’t help ECB inflation”. However, Lagarde did concede stating that the Bank will cut interest rates by the summer, which is largely inline with market probability's of a rate cut at 90% for April.
US retail sales in focus this afternoon with a steady resilience expected in sales. For USD to continue to gain, and for markets to perhaps ease further, for the possibility of a March rate cut, we would need to see a higher retail sales number.
A surprise uptick in inflation has caused GBP to gain, with the amount of rate cuts expected by the BoE being eased. However, this uptick is being perceived by some analysts as a blip with the upside surprise being attributed to an unexpected large rise in airfare prices, and the path to the BoE target of 2% still on course for spring. Thus markets still expect the BoE to cut interest rates by 0.25% in May – market probability is at 68%.
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