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Trading in Asia and during the morning session in Europe was one long-drawn countdown to US inflation data released this afternoon. Over the previous days we often had to mention that there wasn’t really much of hard news to guide trading, but this obviously changed this afternoon. US January inflation data brought a substantial upward surprise, suggesting that the easiest part in the inflation deceleration might have passed. US headline inflation accelerated from 0.2% M/M to 0.3% (0.2% was expected), slowing the Y/Y measure from 3.4% to 3.1% (vs 2.9% hoped for). From a monetary policy point of view the development in core inflation (0.4% M/M and 3.9% Y/Y from 0.3% and 3.9% vs 3.7% expected) probably should be given even more weight. This underlying dynamic won’t give the Fed the comfort it is looking for that inflation will sustainably return to target fast enough to cut rates anytime soon. In this respect the reacceleration of services inflation (0.7% M/M from 0.4% in December) is worth mentioning. In logical reaction, markets further push back the expected timing of a first Fed rate cut. The probability of a first rate cut in May is scaled down from 70% yesterday to about 40% now. A ‘meagre’ first 25 bps step for June is just left intact. Further out US yields are decisively jumping beyond the YTD peak/resistance levels, adding between 11 bps (2 & 5-y) and 6.0 bps (30-y). German yields only follow the US at a long distance, rising between 6 bps (2-y) and 0.5 bps (30-y). The return of the higher for longer narrative also caused a blow to the perfect soft landing scenario that equity investors were embracing. The EuroStoxx50 was already in correction modus in the run-up to the US CPI release and currently cedes about 1.5%. US indices open up 2.0% lower (Nasdaq). Sentiment turning risk-off and the Fed having plenty of time to wait as the US economy shows much more resilient than the likes of the EMU, proves to be a perfect world for the dollar. DXY breaks above the 104/104.50 area. EUR/USD struggles not the give away the 1.0724/12 area, probably in vain.

This morning. UK labour market data also surprised to the strong side of expectations. The unemployment rate declined from 3.9% to 3.8%. The UK economy continues to add jobs (48k estimated in January) and wage growth slowed less than expected in December (ex bonus 6.2% Y/Y VS 6.0% expected). Resilient UK labour data allow UK yields to trade more or less in lockstep with the US. Cable post the US CPI (more than) reversed intraday gains (currently 1.26). Still, the UK currency outperforms a wounded single currency. EUR/GBP is testing the 0.85 big figure, with the 0.8492 2023 low now at risk of being pierced.

News & Views

The Swiss franc underperforms G10 peers today. EUR/CHF rises to the strongest level since mid-December at 0.948. That’s up from yesterday’s close of 0.943. CHF has been losing ground steadily since end of January amid rising expectations the central bank may cut rates sooner than the likes of the ECB and Fed. Today’s January inflation data reinforced the idea. Headline prices rose by 0.2% m/m only to be up 1.3% in yearly terms. The latter is a further deceleration from the 1.7% in December. It also comes as a surprise, defying expectations for a status quo amid increased regulated prices for electricity and a VAT increase. These were also some of the arguments why the SNB expected inflation to average around 1.8% in the first quarter this year. The January reading sets the stage for another downward revision in the next forecasts. Core inflation fell by 0.3% m/m, bring the y/y reading to 1.2%. It’s the slowest pace since January 2022. While it’s unsure the SNB will effectively start cutting in March already, markets did add to the probability of that happening. The scenario is given a +/- 70% probability compared to 40% just yesterday. A cut in June – the SNB meets quarterly – is in any case more than fully discounted.

The EU yesterday adopted a law to set aside windfall profits made on the frozen Russian central bank assets. Some 300bn euros of Russian central bank assets were blocked following the invasion of Ukraine. Two thirds of that are in the EU with the majority of that held in Belgium’s Euroclear. The law is a first concrete step in funneling Russian money to finance Ukraine’s post-war reconstruction and is estimated to generate about 15bn euros over the next four years. While the likes of the US called for confiscating the assets outright (not just the profits), EU officials consider such a move as legally too risky.

The Consumer Price Index (CPI) rose 0.3% month-on-month (m/m) in January, ahead of the consensus forecast calling for a more modest gain of 0.2%. CPI rose 3.1% year-over-year, down from 3.4% in December.

• Energy prices fell 0.9% m/m, largely driven by a pullback in prices at the pump (-3.3% m/m). Meanwhile, food prices (+0.4%) jumped by their largest monthly gain since January 2023. On a year-over-year basis, foods prices are up 2.6%.

Excluding food & energy, core prices rose 0.4% m/m – also coming in a tick stronger than the consensus forecast. The twelve-month change held steady 3.9%, while the three-month annualized rate of change jumped to 4.0% – the highest reading since June.

Prices for core services rose 0.7% m/m – a sharp acceleration from the month prior. Shelter costs rose 0.6% m/m, as rent of primary residence (+0.4% m/m) matched last month's gain while owners' equivalent rent rose by 0.6% m/m (from 0.4% the month prior). Non-housing services also sharply accelerated, rising 0.8% m/m – the strongest monthly gain since April 2022 – pushing the three-month annualized rate of change up to 6.4% (from 4.4% in December).

Core good prices fell 0.3% m/m, led by a steep decline in used vehicle prices (-3.4% m/m). Apparel (-0.7% m/m), medical goods (-0.6% m/m) and households furnishings (-0.1% m/m) also recorded monthly declines in January.

Key Implications

Progress on the inflation front stalled in January, as a sharp acceleration in core services more than offset a further decline in goods prices. As a result, both the three (4.0%) and six (3.6%) month annualized rates of change on core inflation turned meaningfully higher on the month.

Last Friday the Bureau of Labor Statistics released revised CPI figures for 2023, which incorporated updated seasonal adjustment factors. The revisions showed very little change to the monthly pattern on CPI, however, there were notable changes to category weights. For example, the weight on core goods was reduced by 2.5 percentage points relative to December 2022 (and now sits at 18.9%), in favor of a higher weight on core services – two-thirds of which was allocated to shelter. This means we're likely to see even more stickiness on core CPI over the coming months and potentially lead to a wider gap between it and core PCE inflation.

Recent communication by the Federal Reserve indicates a dichotomy of both patience and a willingness to cut interest rates despite the ongoing strength in economic fundamentals. This morning's numbers underscore the importance of patience, with market participants now pricing for just 100 basis-points of cuts this year. We have long said the last leg lower on inflation will be the hardest, and with the consumer showing few signs of slowing, and the labor market still tight by historical standards, progress on the inflation could slow to a crawl over the coming months. At this point, a May cut seems very unlikely.

Daily Pivots: (S1) 0.8732; (P) 0.8752; (R1) 0.8778; More....

USD/CHF's rally accelerates to as high as 0.8867 so far, and intraday bias stays on the upside. Next target is 100% projection of 0.8332 to 0.8727 from 0.8550 at 0.8954. Firm break there will pave the way to 161.8% projection at 0.9189. On the downside, below 0.8754 minor support will turn intraday bias neutral first. But retreat should be contained above 0.8550 support to bring another rally.

In the bigger picture, sustained trading above 55 D EMA (now at 0.8687) will solidify the case of medium term bottoming at 0.8332, just ahead of 0.8317 long term fibonacci support, on bullish convergence condition in W MACD. Further rise should be seen to 0.9243 resistance, even as a correction to the larger down trend from 1.0146 (2022 high).

Daily Pivots: (S1) 1.2604; (P) 1.2630; (R1) 1.2653; More...

Despite spiking higher to 1.2691, GBP/USD quickly retreated. Intraday bias stays neutral for the moment. On the upside, firm break of 1.2691 resistance will affirm the case that correction from 1.2826 has completed at 1.2517, after drawing support from 1.2499. Intraday bias will be back on the upside for retesting 1.2826. Nevertheless, decisive break of 1.2499 will argue that whole rise from 1.2036 has completed and turn near term outlook bearish.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern to up trend from 1.0351 (2022 low). Rise from 1.2036 is seen as the second leg, would could be still in progress. But upside should be limited by 1.3141 to bring the third leg of the pattern. Meanwhile, break of 1.2499 support will argue that the third leg has already started for 38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075 again.

Daily Pivots: (S1) 1.0750; (P) 1.0778; (R1) 1.0800; More...

EUR/USD's fall from 1.1138 resumed by breaking 1.0722 support today. More importantly, current development argues that whole rise from 1.0477 has already finished. Intraday bias is back on the downside for 1.0447. On the upside, break of 1.0804 resistance is needed to signal short term bottoming. Otherwise, outlook will remain bearish in case of recovery.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Rise from 1.0447 is seen as the second leg. While further rally could cannot be ruled out, upside should be limited by 1.1274 to bring the third leg of the pattern. Meanwhile, sustained break of 1.0722 support will argue that the third leg has already started for 1.0447 and possibly below.

Dollar rises significantly in early US session supported by the latest consumer inflation data, which also triggers a marked in DOW futures, dropping by over -300 points. Concurrently, 10-year Treasury yield is soaring near 4.3% mark. Most critically, the inflation data revealed that core CPI remained unchanged at 3.9% in January. This stagnation in core CPI—previously at 4% just three months ago and 4.3% six months back—sparked debates on whether disinflationary trends are stalling. This development would likely delaying any immediate Fed rate cut. Now, the May timeline for initiating rate reductions appears increasingly doubtful.

Meanwhile, Sterling, currently as a distant second best performer after Dollar, was supported by robust UK employment data. Although the data revealed gradual easing of wage pressures, they are not decelerating as quickly as BoE had hoped. Additionally, the decline in the unemployment rate underscores a persistently tight labor market, likely to sustain wage inflation. Attention is now keenly directed towards wage settlements expected by April, with some financial analysts adjusting their forecasts for BoE's initial rate cut from May to later in the summer. However, Pound's robustness will still be tested by the forthcoming UK CPI tomorrow and Thursday's GDP data.

Conversely, Swiss Franc found itself at the bottom of today's currency performance, affected by Switzerland's lower-than-expected January CPI data and a significant slowdown in core CPI. These developments have fueled speculation among investors that SNB might advance its timeline for the initial rate cut, moving from September to a possible June action. The next set of CPI data due in early March could critically influence the SNB's decision-making process in its March 21 meeting. A further surprise on the downside could prompt SNB to take preemptive action in March, potentially marking it as the first G10 central bank to commence easing in the current economic cycle.

Elsewhere, New Zealand Dollar and Australian Dollar trailed behind, with the former particularly impacted by RBNZ's survey indicating a further easing of inflation expectations. Canadian Dollar, however, secured its position as the third strongest performer of the day, while Euro is mixed.

In Europe, at the time of writing, FTSE is down -0.41%. DAX is down -0.92%. CAC is down -0.79%. UK 10-year yield is up 0.076 at 4.134. Germany 10-year yield is up 0.040 at 2.406. Earlier in Asia, Nikkei rose sharply by 2.89% to new 34-year high. Japan 10-year JGB yield rose 0.0052 to 0.730. Singapore Strait Times rose 0.11%.

US CPI slows to 3.1% yoy in Jan, but core CPI unchanged at 3.9% yoy

US CPI rises 0.3% mom in January, above expectation of 0.2% mom. CPI core (all items less food and energy) rise 0.4% mom, above expectation of 0.3% mom. Index for shelter rose 0.6% mom, contributing over two thirds of the monthly all item increase. Food index rose 0.4% mom while energy index fell -0.9% mom.

For the 12-month period, CPI slowed from 3.4% yoy to 3.1% yoy, above expectation of 2.9% yoy. CPI core was unchanged at 3.9% yoy, above expectation of 3.8% yoy. Energy index fell -4.6% yoy while food index rose 2.6% yoy.

German ZEW sentiment rises to 19.9, anticipating rate cuts

German ZEW Economic Sentiment rose from 15.2 to 19.9 in February, above expectation of 17.5. Current Situation Index, however, fell from -77.3 to -79.0, below expectation of -81.7.

Eurozone ZEW Economic Sentiment rose from 22.7 to 25.0, above expectation of 20.1. Current Situation Index increased 5.9 to -53.4.

ZEW President Achim Wambach said: "The German economy is in a bad place. The assessment of the current economic situation by the respondents has deteriorated to the lowest level since June 2020. In contrast, economic expectations for Germany have improved again."

"Accordingly, more than two-thirds of the respondents expect the ECB to make interest rate cuts over the next six months in light of falling inflation rates. Almost three-quarters of respondents expect imminent interest rate cuts by the American central bank."

UK unemployment rate falls to 3.8%, wages growth slows but beat expectations

UK payrolled employment rose 48k or 0.2% mom in January. Over the 12-month period, payrolled employment grew 413k or 1.4% yoy. Median month pay rose 6.4% yoy, ticked up from December's 6.3% yoy. Claimant count rose 14.1k, below expectation of 15.2k.

In the three months to December, employment rate rose 0.2% (quarterly change) to 75.0%. Unemployment rate fell -0.2% to 3.8%. Inactivity rate was unchanged at 21.9%. Average earnings including bonus rose 5.8% yoy, down from prior month's 6.7% yoy, but above expectation of 5.7% yoy. Average earnings excluding bonus rose 6.2% yoy, down from prior 6.7% yoy, above expectation of 6.0% yoy.

Swiss CPI down to 1.3% yoy in Jan, below expectation 1.6% yoy

Swiss CPI rose 0.2% mom in January, well below expectation of 0.6% mom. Core CPI (excluding fresh and seasonal products, energy and fuel), fell -0.3% mom. Domestic products prices rose 0.6% mom. Imported products prices fell -1.3% mom.

Annually, CPI slowed sharply from 1.7% yoy to 1.3% yoy, below expectation of 1.6% yoy. Core CPI slowed from 1.5% yoy to 1.2% yoy. Domestic products prices growth slowed from 2.3% yoy to 2.0% yoy. Imported products prices fell deeper, down from -0.2% yoy to -0.9% yoy.

RBA's Kohler points to slightly faster than expected inflation decline

Marion Kohler, RBA's Head of Economic Analysis, noted in a speech that inflation is "still high" but acknowledged a welcome trend: it's decreasing "at a slightly faster rate" than what RBA had forecasted three months prior.

Looking ahead, RBA's expectation is for inflation to settle back into its 2-3% target range by 2025 and reach the midpoint by the following year. However, Kohler underscored the "substantial uncertainty" surrounding these long-term predictions.

A notable aspect of Australia's inflation dynamics, as Kohler pointed out, is the "divergence in the path of core goods and services price inflation."

The primary driver behind the recent dip in inflation rates is the decrease in goods price inflation, whereas services price inflation remains "high and broadly based." This sector's inflation is predicted to "only gradually" diminish as a more equitable demand-supply relationship is established and domestic cost pressures begin to ease.

Kohler also touched on labor costs, particularly significant in the labor-intensive services sector, as a crucial factor influencing the pricing strategies of businesses. RBA believes wage growth is "around its peak" and anticipates a gradual reduction in line with improvements in the labor market. Signs of "easing wage pressures" are already evident in specific industries, notably within business services.

Australia NAB business conditions down to 6, price pressures easing

Australia NAB Business Confidence improved slightly form 0 to 1 in January. Despite this marginal improvement, Business Conditions dropped from 8 to 6, with notable decreases in trading conditions from 11 to 8, profitability conditions from 7 to 5, and employment conditions also falling from 7 to 5.

In terms of cost pressures, labour cost growth remained steady at 2.0% in quarterly equivalent terms, while purchase cost growth saw a slight increase to 1.8% from 1.7%. Product price growth experienced a pickup, moving to 1.2% in quarterly terms from 0.9%, reflecting a broader trend of easing price pressures. Specifically, retail price growth rose to 0.9% from 0.5%, and the growth rate for recreation & personal services prices increased to 1.2% from 0.9%.

NAB Chief Economist Alan Oster commented on the findings, stating, " Capacity utilisation remains high, despite the slowing in growth over the second half of 2023, and price pressures are easing, with hopes they settle well below where they are now."

Australian Westpac consumer sentiment hits 20-Month high, but still pessimistic

Australia Westpac Consumer Sentiment Index surged by 6.2% mom to 86 in February, marking the highest level since June 2022. This increase also represents the largest monthly gain since April of the previous year, which conincided with a period when RBA temporarily halted its tightening cycle.

According to Westpac, the surge in consumer sentiment was notably propelled by improved sentiment towards major purchases, which climbed 11.3% to 86.8, and more optimistic outlook for the economy over the next year, rising 8.8% to 88.9—the highest since May 2022. Additionally, five-year economic outlook rose 4.4% to 93.

The cooling inflation and more favorable perspective on interest rates are believed to be the primary factors behind this uplift. However, despite the recent gains, consumer mood remains in the pessimistic territory.

A notable "sharp turnaround" in sentiment was observed following RBA's decision in February to maintain the cash rate steady, with sentiment dropping from 94.1 to just 80 post-meeting. While the decision to keep rates unchanged aligned with general expectations, the decline in sentiment suggests consumers were anticipating a "clearer indication" that interest rates might begin to decrease.

Looking forward, Westpac anticipates the RBA will maintain the current interest rate in March, contingent on inflation continuing to align with expectations.

RBNZ survey reveals easing inflation expectationss

According to RBNZ's latest Survey of Expectations, one-year inflation expectation fell by 38 basis points from 3.60% to 3.22%, marking its lowest point since September 2021. The survey also indicates a growing consensus, with more than half of respondents expecting that CPI inflation will fall back to RBNZ's target range of 1-3% by the end of 2024

Furthermore, the survey pointed to a decrease in inflation expectations over the longer term, with two-year-ahead predictions dropping from 2.76% to 2.50%, and expectations for five and ten years ahead also seeing decline to 2.25% (from 2.43%) and 2.16% (from 2.28%), respectively.

In terms of interest rates, survey participants anticipate OCR to average at 5.46% by the end of March, with projected decrease to 4.74% by the end of the year. The OCR currently stands at 5.50%.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0750; (P) 1.0778; (R1) 1.0800; More...

EUR/USD's fall from 1.1138 resumed by breaking 1.0722 support today. More importantly, current development argues that whole rise from 1.0477 has already finished. Intraday bias is back on the downside for 1.0447. On the upside, break of 1.0804 resistance is needed to signal short term bottoming. Otherwise, outlook will remain bearish in case of recovery.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Rise from 1.0447 is seen as the second leg. While further rally could cannot be ruled out, upside should be limited by 1.1274 to bring the third leg of the pattern. Meanwhile, sustained break of 1.0722 support will argue that the third leg has already started for 1.0447 and possibly below.

Economic Indicators Update

Daily Pivots: (S1) 149.03; (P) 149.25; (R1) 149.58; More...

USD/JPY's rally resumed after brief consolidations and intraday bias is back on the upside. Further rally should now be seen to retest 151.89/93 key resistance zone. Decisive break there will confirm larger up trend resumption of 155.50 projection level next. On the downside, below 149.24 minor support will turn bias neutral and bring consolidations, before staging another rally.

In the bigger picture, fall from 151.89 is seen as a correction to the rally from 127.20, which might have completed at 140.25 already. Firm break of 151.89/93 resistance zone will confirm up trend resumption, and next target will be 61.8% projection of 127.20 to 151.89 from 140.25 at 155.50. This will now remain the favored case as long as 140.25 support holds.

US CPI rises 0.3% mom in January, above expectation of 0.2% mom. CPI core (all items less food and energy) rise 0.4% mom, above expectation of 0.3% mom. Index for shelter rose 0.6% mom, contributing over two thirds of the monthly all item increase. Food index rose 0.4% mom while energy index fell -0.9% mom.

For the 12-month period, CPI slowed from 3.4% yoy to 3.1% yoy, above expectation of 2.9% yoy. CPI core was unchanged at 3.9% yoy, above expectation of 3.8% yoy. Energy index fell -4.6% yoy while food index rose 2.6% yoy.

Full US CPI release here.

The New Zealand dollar has declined after New Zealand inflation expectations decelerated in the fourth quarter. In the European session, NZD/USD is trading at 0.6114, down 0.25%. The New Zealand dollar declined by 0.40% after the inflation expectations release but has pared these losses.

New Zealand inflation expectations ease to 2.5%

Inflation expectations are a key component of inflation trends, as entrenched expectations can result in higher inflation. On Tuesday, New Zealand inflation expectations fell to 2.5% in Q4, its lowest level in over two years and down from 2.76% in the third quarter.

The release should be an encouraging sign for the Reserve Bank of New Zealand, which has made the battle of inflation its top priority. Inflation is currently running at a 4.7% clip, well above the upper band of the one to three per cent target range. The RBNZ is concerned that inflationary pressures remain sticky and has signaled that it could raise interest rates.

The markets had priced in a rate cut the second half of the year, but “RBNZ speak” has pushed back against these expectations and a stronger-than-expected employment report last week have dampened these expectations. Investors have responded by pricing in a rate hike at 45% at the February 28th meeting and an 80% likelihood at the May meeting. Today’s inflation expectations release could ease pressure on the RBNZ to raise rates, and instead continue the pause in rates which has lasted since May.

In the US, the Federal Reserve has been pushing back against market expectations for a rate cut, and a March cut is now unlikely. On Monday, Richmond Fed President Thomas Barkin reiterated his concerns about lowering interest rates too soon, saying that there was a real risk of inflation moving higher.

NZD/USD Technical

• NZD/USD is testing support at 0.6116. Below, there is support at 0.6072
• 0.6193 and 0.6237 are the next resistance lines

Fundamental Outlook

Today, Tuesday, February 13th, at 8:30 am New York time, the Bureau of Labor Statistics (BLS) releases US inflation data related to the Consumer Price Index (CPI). This high-impact data could generate significant changes in the perception of the Federal Reserve's (Fed) monetary policy, likely triggering extreme volatility around the US dollar (USD).

Market Expectations

Expectations surrounding the upcoming report are clear: overall inflation in the United States is expected to increase at an annual rate of 2.9% in January, a slight deceleration compared to the 3.4% rise recorded in December. At the same time, the core CPI inflation rate, which excludes food and energy prices, is projected to decrease to 3.7% from 3.9% the previous month. On a monthly basis, a 0.2% increase is expected for the overall CPI and a 0.3% increase for the core CPI.

Adjustment of Previous Monthly Figures

The BLS also reported that it revised downward the December monthly increase in the CPI to 0.2% from 0.3%. On the other hand, the November CPI was revised upward to 0.2% from 0.1%, while October's growth remained unchanged at 0.1%. These revisions, according to the BLS, reflect new seasonal adjustment factors.

Factors That Could Affect the Figures

Richmond Federal Reserve Bank President Thomas Barkin warned on Monday that US companies accustomed to raising prices in recent years could continue to fuel inflation. Among other factors that could influence the inflation report, the 6% increase in oil prices due to concerns about a possible supply shock from the crisis in the Red Sea stands out.

Market Impact

Following solid labour market data in January, markets have adjusted their expectations regarding a possible change in Fed policy. Currently, at FBS, we estimate that the Fed will only make 3 or 4 rate cuts starting in the summer, considering bank officials' statements, leaving room for unexpectedly high CPI data to be released.

This implies that a higher outcome than analysts' estimates will trigger an aggressive rise in the USD, suggesting that the Fed will comfortably remain with higher rates. On the other hand, lower-than-expected data will lead to USD selling, as it implies that the Fed may adjust to anticipate the cut to May or June, thereby affecting US Treasury bond yields and consequently the US dollar.

EURUSD

Trading below the weekly opening at 1.0777, just above what is considered buying zones with the Point of Control (POC) located at 1.0778, a rebound towards yesterday's high volume node at 1.0792 is expected. This is very close to the resistance at 1.0805, a breakthrough which will extend the ascent towards the daily bullish average range at 1.0822, especially with lower-than-expected figures indicating the extension of the current bullish correction.

However, this publication often generates volatile movements in both directions before the pair renews its technical downtrend sequence. This will be possible if quotes fail to break the local resistance at 1.0805 and resume selling towards 1.0741, 1.0723, and the bearish average range at 1.0714 near last week's buying zone between 1.0696 and 1.0688. This could happen with a more volatile reaction to unexpectedly higher-than-expected data.