Daily Market Pulse

After a small, corrective dip in the USD since Tuesday’s peaks, there are some tentative signs of a generally firmer USD emerging in trading today. Most major currencies are lower against the USD on the session, with only the SEK and CHF registering a minor (less than 0.1% at writing) gain overall. The JPY is leading losses, dropping despite relatively stable US yields.

Comments from BoJ Deputy Governor Uchida indicated that it was hard to see rates rising “rapidly” after ending negative interest rate policy. It’s a relatively quiet day for calendar risk again in the US—weekly claims, Wholesale Inventories plus Fed Governor Barkin (voter) with two speaking appearances. But markets may be giving the USD a bit of a lift ahead of tomorrow’s annual US CPI revisions. Note China reported lower than expected CPI (-0.8% Y/Y in January) earlier, the weakest clip since 2009.

EUR/USD - EURUSD has lost ground in the past couple of hours alongside the drop in the JPY. The ECB’s Economic Bulletin highlighted stagnant growth in Q4 2023 and progress on inflation but also underscored upside risks to inflation from higher-than-expected wages (among other issues). Expect policymakers to remain cautious on rate cut prospects until there is more clarity on early year wage negotiations—information which may not be fully available before the April policy decision (making June a more likely time for the first ease, in other words).

GBP/USD - Sterling’s yen-driven drift has taken it back which has held an initial test. The January RICS House Price Balance improved to –18 in January, from –30 in December, above forecasts of –22. Sub-components all improved, suggesting higher enquiries from new buyers, firmer prices and a positive outlook on future sales. The data support the idea of a clearer rebound in housing activity in the UK as consumers anticipate BoE easing in the months ahead.

USD/CAD- The CAD is marginally lower on the session against the generally stronger USD. There are few clues for the CAD’s direction from a somewhat mixed risk backdrop (firmer European stock markets, softer US equity futures) and slight gains in crude oil for a fourth day as Middle East tensions remain apparent. Rather, CAD losses are reflecting the general USD tone and trading close to my estimated, short-term fundamental equilibrium.

The summary of the BoC’s most recent policy discussion reaffirmed what the Governor said following the meeting and earlier this week—nothing new in other words. Policymakers feel that rates are high enough to slow the economy and bear down on inflation but there is a high degree of concern that impact of shelter costs and high wage growth will keep inflation elevated.

This is all very familiar stuff but the uncertainty about when rates might be able to come down is looking less like a stalling tactic to curb excess rate cut bets than genuine concern that sticky prices could persist.