US CPI inflation takes center stage

Will the US CPIs help the dollar rebound?

The US dollar pulled back against most of the other major currencies on Wednesday, gaining ground only against the yen, and closing the day virtually unchanged against the kiwi and the loonie. Today, the greenback is down against all its counterparts.

Despite the ups and downs in the dollar during the last couple of days, investors maintain a firm view that the Fed will lower borrowing costs by around 140 basis points this year, assigning a nearly 70% probability for the first quarter-point reduction in March.

However, that view will be put to the test today when the US CPI numbers for December will be released. The core CPI is expected to have slowed further to 3.8% y/y from 4.0%, but the headline rate is seen ticking up to 3.2% y/y from 3.1%. Maybe this is due to base effects as the 2022 downtrend in oil prices is now dropping out of the y/y calculation.

Remarks by New York Fed President Williams that it is too soon to call for rate cuts were ignored by market participants yesterday. However, a rebound in headline inflation and a core rate still nearly double the Fed’s objective could eventually prompt them to reconsider their view on the Fed’s future policy path and thereby lower the probability of a March rate reduction, which could prove positive for Treasury yields and the US dollar.

A few hours after the CPI numbers, investors may pay attention to a speech by Richmond Fed President Thomas Barkin as he will be the first Committee member to speak in the aftermath of the data. If he argues that the inflation outlook supports the notion of no rate cuts soon, the greenback could extend any CPI-related gains.

Yen slides after Japan’s wage data disappoint

The yen was the only currency against which the dollar secured significant gains yesterday. Perhaps this was due to Japanese data revealing on Wednesday that wage income slowed from 1.5% y/y to 0.2% in November, the slowest pace in nearly two years.

Combined with the slowdown in the Tokyo CPI data on Tuesday, this release suggests that BoJ policymakers are not in a rush to take interest rates out of negative territory. They may prefer to wait for the outcome of the spring wage negotiations. With unions demanding hikes of at least 5%, which could take real wage growth into positive territory, April seems a better choice for the BoJ to raise interest rates.

The yen may stay on the back foot for a while longer as more traders start accepting the idea that a BoJ rate increase is not imminent. However, with other major central banks seen reducing interest rates later this year and the BoJ eventually beginning to tighten, the current yen slide may be better considered a corrective retreat rather than a bearish reversal.

Wall Street turns north again, SEC approves 11 bitcoin ETFs

All three of Wall Street’s main indices rebounded yesterday, with the Nasdaq gaining the most as tech giants were once again the biggest boost. Nvidia hit a new record high after fellow chipmaker TSMC beat revenue expectations, adding to the notion that AI-related future growth opportunities are not fully priced in yet.

That said, any attempts for higher levels and new record highs in equity indices may be delayed if today’s CPIs reveal stickier-than-expected inflation. The fact that the earnings season is kicking off on Friday may also prompt investors to adopt a more cautious approach.

In the crypto world, the Securities and Exchange Commission (SEC) approved 11 applications for bitcoin-backed exchange traded funds (ETFs). Bitcoin gained slightly on the announcement, but it pulled back soon thereafter to close the day with only 1.2% gains, perhaps as the decision was already priced in.

Overall, the outlook for Bitcoin likely remains positive as the decision is a big step towards the institutionalization of cryptocurrencies and it may gain the trust of more investors who want to invest in the crypto king without directly owning it.