Yesterday’s macro news flow was on the heavy side, and the market’s reaction to it was vibrant and unpredictable. The markets were focused on US inflation, and the reading was closely watched. The headline CPI number bolted up to 7.5% in January, outpacing the 7.3% median consensus and setting a 40-year high. The same index, stripped of highly volatile components (food and energy), grew by 6.0% YoY (vs. 5.9% expected) and 0.6% MoM (vs. 0.5% expected). To complete the picture, it should be noted that the number of initial jobless claims turned out to be lower than expected (223k vs. 230k), while the budget surplus in January, on the contrary, exceeded the median forecast ($119 bln vs. $25 bln projected).
The knee-jerk reaction to red-hot US inflation was an upward spike in the dollar. The logic here is rudimentary: the higher inflation runs, the sooner and stronger the Fed will start tightening monetary policy. The EURUSD pair broke through the 1.1395 pivot point support level, retracing to a February 3 low. But then less than half an hour later, the market turned around sharply, deciding that runaway inflation would be negative for the dollar. EURUSD punched higher this time, breaking out of what had turned into resistance at 1.1484, hitting a high since November 10.
But not even that reaction was not final. It was followed by a statement from the St. Louis Fed President and FOMC voter James Bullard. In particular, Bullard said that he favored 100 bps of interest-rate hikes by July 1, and a half-point rate increase in March, while not ruling out that an emergency Fed meeting could be held to raise rates. A number of investment bank analysts, including those at Bank of America and Goldman Sachs, said they are now looking for seven 25 bp rate hikes by year-end, whereas before Thursday only 3-5 increments were on the table.
In the upshot, EURUSD reversed once again and nosedived below 1.1395 again, pushing for a retracement to the 1.1121 medium-term support level.
Germany’s harmonized consumer price index for January showed a 5.1% YoY increase. This figure matched the median consensus, so the news had no noticeable impact.
Upcoming macro releases (GMT 3)
Today:
- 18:00 US: Michigan consumer expectations (Jan)
- 19:00 US: Fed monetary policy report
- 21:00 US: Baker Hughes weekly oil rig count
Tuesday, February 15:
- 13:00 Germany: ZEW economic sentiment (February)
- 13:00 Germany: ZEW current conditions (February)
- 13:00 Eurozone: GDP (YoY, preliminary Q4)
- 13:00 Eurozone: GDP (QoQ, preliminary Q4)
- 16:30 US: PPI (YoY, January)