USD: 13 February is shaping up to be a big day for markets
Yesterday's release of above-expected UK inflation has demonstrated how financial markets can react to a sticky inflation scenario. Understandably it saw investors rein in their expectations of Bank of England easing. Looking at the UK Sonia short-term interest rate curve, it was the March 2025 contract that spiked the most (+27bp) closely followed by the December 2024 contract. The UK sovereign bond curve rose by roughly 20/21bp and marginally bear flattened. The benchmark FTSE 100 equity index was off 1.5%, with the interest-rate sensitive real estate sector off 3.5%. And sterling was modestly firmer - typically bearish flattening is positive for G10 currencies.
We mention all this because investors will be wary that the US could suffer something similar this quarter - or at least will want inflation event risks to pass before deploying their capital further this year. The gifts that keep on giving - the speeches of the Fed's Christopher Waller - tell us that 13 February is going to be a big day for financial markets. Not only is it the release of the US January CPI figure but also of the annual 2023 benchmark inflation revisions. Christopher Waller made a point of highlighting these revisions in a recent speech. Investors will probably want to wait for this release before, for example, looking to rebuild short dollar and long risk positions.
Back to the short term, today sees slightly more settled market conditions, and on the US calendar are housing starts and initial claims - probably not market movers. Speaking on the economic outlook today is the Fed's Raphael Bostic - a centrist. In terms of price action, dollar bulls will probably be rather disappointed that DXY is not trading closer to 104 than 103 - given higher US rates and the strong US retail sales data released yesterday. We are bearish on the dollar this year, but as we discussed in our recent FX Talking, patience is required. That can probably mean DXY does trade in a 103-104 range in the near term and potentially even into further event risks this month of the US quarterly refunding announcement (29 January) and the FOMC meeting (31 January)
EUR: December ECB minutes the highlight today
As above, we thought EUR/USD should be trading closer to 1.08 than 1.09 on yesterday's set of data and market developments. Probably worth mentioning is that developments in the Middle East have not yet been hitting the euro since energy markets (both crude oil and natural gas) remain subdued.
For today, the highlight will be the release of the European Central Bank minutes at 13:30 CET and President Christine Lagarde speaking on a panel at 16:15 CET. Her message yesterday was a little mixed. Like other ECB members, she presented a view that aggressive market pricing of the ECB easing cycle was self-defeating - i.e. if the market softened financial conditions too much the ECB would not cut rates. But then she said the ECB would cut rates in the summer. We doubt the ECB minutes will shed too much light on this dilemma and please see Carsten Brzeski's preview for next week's ECB meeting here.
EUR/USD may well trade in a tight 1.0880-1.0950 range today, but given the above event risks, we see no reason to change our current forecast of 1.08 for the end of 1Q.
GBP: BoE repricing gives sterling a lift
Investors took about 20bp out of the 2024 Bank of England easing cycle yesterday. That move supported sterling across the board and especially against a cross rate we highlighted yesterday, GBP/CHF - more on the Swiss franc below. We have been mentioning it in some of our publications recently, but it looks like we will probably have to cut our EUR/GBP forecasts soon. Our current forecasts of a move up to 0.88 later this quarter and 0.90 later this year look too aggressive.
The inflation data also helped GBP/USD hold support at 1.2600 yesterday and 1.26-1.28 looks a likely near-term range until the broader dollar trend resolves itself.
CHF: SNB gets involved
EUR/CHF is moving higher. This is in contrast to a typical move one might see during periods of geopolitical stress. What is driving EUR/CHF now, however, and what drove it sharply lower late last year is rate differentials between the eurozone and Switzerland. These differentials had a sharp move in favour of EUR/CHF yesterday after the Swiss National Bank President Thomas Jordan said that strength in the Swiss franc was having a material impact on the Swiss inflation outlook - i.e. depressing it. This can be seen with the sharp rise in the real trade-weighted Swiss franc. In effect, while the ECB might be pushing back against easing expectations, the SNB is pushing in favour of those easing expectations given the franc is too strong.
We think EUR/CHF can trade back up to the 0.96 area over the next three months as ECB easing expectations are further reined in. We would also expect another dose of the same dovish commentary from SNB's Jordan when he speaks at 11;30 CET today in Davos.