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Boston Fed Collins is the first to officially indicate that she leans to another downshift in the Fed’s tightening pace at the February 1^st policy meeting: from +50 bps in December to +25 bps. In an interview with The New York Times, the non-voting Fed governor doesn’t rule out the possibility of a more aggressive step, though it’s not her preferred scenario. “Adjusting slowly gives more time to assess the incoming data before we make each decision, as we get close to where we’re going to hold. Smaller changes give us more flexibility.” In the policy rate peak debate, Collins joins the majority view of lifting it to 5-5.25%. US money markets over the past couple of sessions clearly shifted towards a +25 bps rate hike in February (75% probability vs 25% +50 bps) while simultaneously lowering expectations on the policy rate peak to 4.75%-5%. Last Friday’s weak non-manufacturing ISM triggered this strong repositioning going into today’s US December CPI inflation release. Markets expect a sixth consecutive moderation in headline inflation, from 7.1% Y/Y to 6.5% Y/Y (compared to a 9.1% Y/Y peak in June) with monthly dynamics even pointing to a decline (-0.1% M/M). The underlying core CPI gauge is still expected to rise by 0.3% M/M, but the Y/Y-dynamic is forecast to drop out of the 5.9% Y/Y-6.6% Y/Y range it has been hovering in since January 2022 (5.7% Y/Y consensus). Over the past two months, we’ve seen significant market reaction to sub-par (headline) inflation outcomes. Unlike previously, we’ve had strong anticipation moves in the build-up to this afternoon’s number. In theory, this suggests room for an asymmetric market reaction: small additional core bond gains in case of a weaker or close-to consensus number and heavy losses in case of an upward surprise. We fear though that current market momentum is too strong to make a hawkish U-turn. From a technical point of view, the US 10-yr yield this morning arrived at last Friday’s low (3.51%) with key support (50% retracement on July/Oct move higher & Dec 22 correction low) standing at 3.42%/3.40%. EUR/USD is heavily testing the resistance zone stretching from 1.0735 to 1.0787. The CPI outcome could trigger the break with the next reference being 1.0901 (50% retracement on the EUR/USD decline between May 2021 and September 2022).

The Japanese yen outperforms this morning (USD/JPY 131.70) on a local press report by Yomiuri that the central bank will review the side-effects of its ultra-easy monetary policy at their meeting next week. The study comes after the BoJ widened the corridor around its 0% target for the 10-yr yield from 25 bps to 50 bps at the end of last year. Japanese bonds underperform this morning with yields rising up to 4 bps. Apart from the US CPI, today’s calendar includes the final auction of the US Treasury’s mid-month refinancing operation: a $18bn 30-yr Bond sale. Yesterday’s 10-yr Note auction went well.

News Headlines

Chinese December CPI inflation rose modestly to 1.8% Y/Y, up from 1.6% in November. Food price inflation accelerated to 4.8% Y/Y. The core figure excluding food and energy, rose slightly from 0.6% Y/Y to 0.7% Y/Y as was the case for services prices (0.6% Y/Y). While still very low, the reopening of the economy might cause a gradual further rise in services-related price rises later this year. In the meantime, factory gate prices eased, printing at  -0.7%Y/Y up from -1.3% in December. The ‘rebound’ in PPI inflation was more modest than expected. This probably reflects an ongoing modest demand due to the sharp rise in Covid cases at the end of last year. Ongoing soft data leave authorities, including the PBOC, room for a (selective) stimulative policy. At USD/CNY 6.757, the yuan this morning is nearing the strongest levels since mid-August though it mainly reflects USD weakness.

Australia in November again reported a rising/bigger than expected trade surplus, as imports decreased 1.5% while exports remained broadly stable (-0.4%). Australia uninterruptedly reported trade balance surpluses since January 2018. The trend is supported by ongoing high prices in several commodities, including metals (iron ore). After gaining in the early days of this of the year. The Aussie dollar currently trades little changed at AUD/USD 0.691.

Today is the most important day of the trading week, in terms of economic data release, as the US will reveal its latest CPI update, and it could be a make-or-break moment for the market sentiment.

Consumer price inflation in the US probably eased to 6.5%, from 7.1% printed a month earlier.

Beyond the headline figure, the core inflation should be closely watched, and should also ease enough to spur Fed doves. The core inflation fell to 6% at last release, from a peak of 6.6% printed for October, and is expected to fall to 5.7% at today's release.

The Federal Reserve (Fed) officials have insisted that they will also be focusing on specific categories, like services excluding housing, energy and food cost to have a sense of where consumer prices are headed, and what are the next policy steps.

Overall, a data set in line with the soft expectations, or ideally softer, should further boost the Fed doves, increase the bets of a 25bp hike in February, pull the treasury yields and the US dollar further down and give a further boost to equities.

If, however, the CPI print is higher than expected, and God Forbid, higher than last month, then we could see a sharp repricing in favour of a 50bp at the next FOMC meeting.

The market currently gives more than 77% chance for a 25bp hike in February.

In the markets 

US equities extended gains yesterday, on hope that softening inflation will further boost the Fed doves. The S&P500 advanced 1.28%, as Nasdaq 100 jumped 1.76% and closed a touch above its 50-DMA. The US 2-year yield is waiting to find direction near its 100-DMA, while the 10-year yield is steady, slightly above the 3.50% level. The US dollar index is testing the 103 support.

Today’s US inflation data will help move things, to one side or the other. But keep in mind that there is room for decent hawkish pricing given that the money markets still price that the US interest rates will top around 4.9%, while the Fed officials are struggling to convince investors that they will go above 5%.

One last thing about inflation

Even if we welcome a soft, and encouraging CPI figure at today’s release, I don’t think that inflation will be on a smooth downward path this year.

The Chinese reopening, rebound in energy and commodity prices are the major risks to inflation.

Copper futures, a major barometer for economic growth, are up by nearly 13% since the start of the year, and more than 30% since the end-of-September dip, with a stronger case building for a further rally than the contrary – especially after the Chinese return from their New Year break.

US crude, on the other hand, rallied more than 4% yesterday, even though the EIA data showed that the US crude inventories jumped by more than 18 mio barrels, and gasoline inventories increased above 4 mio barrels last week.

Released early this morning, the Chinese inflation advanced to 1.8% as expected, but the contraction in producer prices has been slower than what analysts penciled in. With the reopening, the Chinese producer prices will also pick up momentum, and that may become a problem for price prospects for the rest of the world.

Trading dovish Fed expectations via bonds 

Softening Fed expectations, combined to mild recession odds should give a more sustainable boost to bonds, before stocks this year – as potential recession will certainly erode corporate profits and cause further headache for stock investors.  Therefore, bonds could be a better option than stocks for trading softer Fed expectations, as stocks will be subject to earnings risk in the coming weeks.

Daily Pivots: (S1) 0.9936; (P) 0.9980; (R1) 1.0061; More....

EUR/CHF's rally accelerates to as high as 1.0047 so far today. Intraday bias stays on the upside for 61.8% projection of 0.9407 to 0.9953 from 0.9720 at 1.0057, which is close to 1.0072 medium term fibonacci level. Decisive break there will carry larger bullish implication and target 100% projection at 1.0266 next. On the downside, below 0.9983 minor support will turn intraday bias neutral and bring consolidation first, before staging another rally.

In the bigger picture, focus is now on 38.2% retracement of 1.1149 to 0.9407 at 1.0072. Sustained break there will also have 55 week EMA (now at 1.0041) taken out firmly. That would be an initial sign of long term bullish reversal. Further rally would then be seen to 1.0505 long term support turned resistance (2020 low). However, rejection by 1.0072 will maintain medium term bearishness for another fall at a later stage.

Daily Pivots: (S1) 0.8828; (P) 0.8855; (R1) 0.8881; More...

Intraday bias in EUR/GBP remains neutral first. Sustained break of 0.8876 will confirm resumption of rise from 0.8545. Next target is 61.8% retracement of 0.9276 to 0.8545 at 0.8997. Meanwhile , outlook will stay bullish as long as 55 day EMA (now at 0.8732) holds, in case of another retreat.

In the bigger picture, outlook is mixed for now as rise from 0.8545 would either be part of the up trend from 0.8201 (2022 low), or just a correction to 0.9267 (2022 high). As long as 55 week EMA (now at 0.8616) holds, the former case is in favor, and break of 0.9267 should be seen next as up trend resumes at a later stage. However, sustained break of 55 week EMA will shift favor to the latter case, for another decline back towards 0.8201.

Daily Pivots: (S1) 1.5525; (P) 1.5575; (R1) 1.5627; More...

Intraday bias in EUR/AUD remains neutral at this point. While further fall cannot be ruled out, strong support could be seen from 38.2% retracement of 1.4281 to 1.5976 at 1.5329 to complete the correction from 1.5976. Firm break of 1.5614 minor resistance will turn bias back to the upside for retesting 1.5976. However, sustained trading below 1.5329 will carry larger bearish implication and target 61.8% retracement at 1.4928.

In the bigger picture, it's still early to confirm if rise from 1.4281 represents bullish trend reversal. But as long as 1.5271 support holds, such rally is in favor to continue. Break of 1.5976 will target 1.6434 key resistance next. On the other hand, firm break of 1.5271 will retain medium term bearishness instead.

Daily Pivots: (S1) 141.95; (P) 142.40; (R1) 142.99; More....

Intraday bias in EUR/JPY remains neutral for the moment. On the downside, below 140.15 minor support will turn bias back to the downside 137.37 low. break there will resume the decline from 148.38 to 135.40 fibonacci level. However, considering bullish convergence condition in 4 hour MACD, break of 142.92 will argue that the correction from 148.38 might have completed. Intraday bias will be turned back to the upside for 146.71 resistance.

In the bigger picture, as long as 55 week EMA (now at 138.64) holds, larger up trend from 114.42 (2020 low) is still in progress for 149.76 long term resistance. However, firm break of 55 week EMA will bring deeper fall to 38.2% retracement of 114.42 to 148.38 at 135.40. Sustained break there will raise the chance of trend reversal, and target 61.8% retracement at 127.39.

Daily Pivots: (S1) 160.60; (P) 160.91; (R1) 161.29; More...

Intraday bias in GBP/JPY remains neutral for the moment. On the downside, break of 158.49 minor support will turn bias back to the downside for retesting 155.33. Further break there will resume the fall from 172.11 to 153.70 fibonacci level. Nevertheless, considering bullish convergence condition in 4 hour MACD, firm break of 162.32 will argue that such decline has completed, and turn bias back to the upside for 55 day EMA (now at 163.15) and above.

In the bigger picture, as long as 153.02 support turned resistance holds, decline from 172.11 medium term top is expected to continue to 38.2% retracement of 123.94 to 172.11 at 153.70. Sustained break there will raise the change of trend reversal and target 61.8% retracement at 142.34. Nevertheless, break of 153.02 support turned resistance will argue that the decline has completed, and retain medium term bullishness.

Daily Pivots: (S1) 0.6877; (P) 0.6902; (R1) 0.6930; More...

Intraday bias in AUD/USD remains neutral for the moment. Outlook will stay bullish as long as 0.6721 support holds. Break of 0.6949 will resume larger rise from 0.6169 to 61.8% projection of 0.6169 to 0.6892 from 0.6721 at 0.7444 next. However, firm break of 0.6721 will indicate near term reversal and turn bias back to the downside.

In the bigger picture, corrective decline from 0.8006 (2021 high) should have completed with three waves down to 0.6169 (2022 low). Further rally should be seen to 61.8% retracement of 0.8006 to 0.6169 at 0.6871. Sustained break there will pave the way to retest 0.8006. This will now remain the favored case as long as 0.6721 support holds.

Daily Pivots: (S1) 1.3405; (P) 1.3425; (R1) 1.3445; More....

Intraday bias in USD/CAD stays neutral and outlook is unchanged. Another fall could still be seen through 1.3355 temporary low. But strong support would be seen above 1.3224 to contain downside. Above 1.3483 minor resistance will turn bias back to the upside for 1.3704 resistance. However, sustained break of 1.3222/4 cluster support will resume the whole fall from 1.3976 and carry larger bearish implications.

In the bigger picture, as long as 1.3222 cluster support (38.2% retracement of 1.2005 to 1.3976 at 1.3223) holds, larger up trend from 1.2005 (2021 low) is still expected to resume through 1.3976 high at a later stage. However, firm break of 1.3222/3 will indicate that the trend might have reversed. Deeper fall would be seen to next cluster support at 1.2726 (61.8% retracement at 1.2758).

Daily Pivots: (S1) 132.09; (P) 132.48; (R1) 132.89; More...

Intraday bias in USD/JPY remains neutral at this point. On the upside, firm break of 134.76 resistance should confirm short term bottoming, and bring stronger rise to 138.16 cluster resistance (38.2% retracement of 151.93 to 129.49 at 138.06). However, break of 129.49 will resume the whole decline from 151.93 instead.

In the bigger picture, a medium term top was in place at 151.93. Sustained trading below 55 week EMA (now at 131.73) would raise the chance of bearish trend reversal. Deeper fall would be seen to 61.8% retracement of 102.58 to 151.93 at 121.43. This will now remain the favored case as long as 55 day EMA (now at 137.08) holds.