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Markets await latest US inflation data

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Markets in Europe enjoyed a positive but cautious start to the week, with the FTSE 100 posting a new record close, helped by European natural gas prices which fell to their lowest levels in nearly 18 months.

US markets were also reasonably buoyant after losing ground last week, with the gains fairly solid across the board, ahead of today’s US January consumer price index (CPI) inflation report. Asia markets have had a mixed session after the Japanese government nominated Kazuo Ueda as the next Bank of Japan governor, when Kuroda leaves in April, with the Japanese yen edging a little higher, as speculation continues as to whether he will be more hawkish than his predecessor. European markets look set to open unchanged. 

Today's CPI report is expected to act as an important indicator as to how many more 25bps rate hikes might be in the pipeline, as the Fed looks to push inflation back to its 2% target. 

Before that we get the latest wages and unemployment numbers from the UK for the three months to December. Unemployment is expected to remain steady at 3.7%, however wages are expected to continue rising from the 6.4% seem in November, up to 6.5%, and perhaps even higher. Anecdotally, wage growth around the country has been trending at well above 10%, which suggests that whatever CPI inflation does when the numbers are released tomorrow, the Bank of England’s job is unlikely to get any easier, with the prospect of at least another two rate hikes in the coming months. The data is expected to show that CPI has slowed further, to 10.1%. 

Headline CPI in the US has been trending lower for several months now, so much so that it prompted Fed chair Jay Powell at the recent Fed meeting to acknowledge that there were some disinflationary trends playing out in the US economy, which wasn’t an unreasonable observation to make. Nonetheless Powell’s comments set various hares running about the prospect of rate cuts before the end of the year, which then ran into the wall of a bumper US non-farm payrolls figure of 517,000 for January, earlier this month. The milder weather in January also appears to have prompted a bit of a hiring spree, along with slightly higher prices, which could well last for a couple of months, and as such could start to slow the pace of the decline in prices.  

In December, US CPI slowed to 6.5%, while core prices fell to 5.7% from 6%, as markets priced in another downshift in the Fed’s hiking cycle to 25bps. Today’s numbers for January could go some way to reinforcing the more hawkish commentary we’ve seen from various Fed officials since the January rate meeting, as well as upend US stock markets even further. While US 2-year yields have jumped sharply in the last week or so, US stock markets still appear to be working on the basis of rate cuts within the next 12 months. 

It should also be noted that the recent ISM services report reinforced the resilience from the US jobs report, as well resilience in prices paid which came in at 67.8. Wage growth is also looking strong particularly in hospitality and leisure. This stickiness in prices is likely to be reflected in a similar uptick in inflationary pressure, with headline CPI expected to rise 0.4% on a monthly basis, and by 6.2% year-on-year. Core prices are also expected to rise by 0.5%, and 5.4% year-on-year.

EUR/USD – slipped to a one month low at 1.0655 yesterday, before recovering slightly. Needs to recover above the 1.0780/90 area to stabilise and prevent a move towards the lows this year at 1.0480. A move above 1.0800 targets a move towards 1.0920. 

GBP/USD – held above 1.2000 yesterday, sandwiched between resistance at the 50-day SMA, at 1.2190 and support at the 200-day SMA at 1.1970. Below 1.1960 retargets the 1.1835 area, while a move above 1.2200 argues for a move towards 1.2300.

EUR/GBP – while below the 0.8870/80 the euro has struggled although we do have support at the 0.8820 level last week. A move up through the 0.8880 retargets the 0.8930 area. Below 0.8820 targets a move towards 0.8780.

USD/JPY – broken above the 50-day SMA but has run into resistance at the previous peaks at 132.90/00. We need to break above 133.00 to trigger a potential move towards 134.50. Interim support now at 130.20. 

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