Instimatch - FX morning commentary - 15/1/25

Good morning

US PPI inflation came in softer than expected at 0.2%m/m. More importantly for markets, the components which feed into the Fed’s preferred measure of inflation the core PCE was somewhat stickier, in particular for airfares. As such, the latest estimates are that core PCE could rise 0.2%m/m – a decent inflation print still but not providing the Fed any incremental signal to change its current policy stance. Meanwhile, US NFIB Small Business index rose to its highest since 2018, on the back of a post US Election bounce. Seven of 10 index components improved with a significant jump in businesses expecting better conditions and a drop in uncertainty. The 3 months ahead price plans sub-component, which has a good leading relationship with CPI, was somewhat sticky, pointing to some possible signs of a near-term bounce in US inflation.

The USD index steadied to 109.22 in Asian trade after falling from a two-year high.  Overall, the USD still appears vulnerable to a near-term setback, as many dollar-positive drivers appear largely priced into the market, leaving the greenback exposed to downside risks.

The US CPI takes centre stage today but is unlikely to relieve the bearish pressure. Consensus sees core CPI at 0.3%m/m and headline at 0.4%m/m. In y/y terms both core and headline CPI would thus remain close to 3%. Later in the day the Fed will also release its Beige Book.

The UK’s CPI figure will put the focus on gilts in the European morning as 10-y yields remain close to the highest levels since 2008. From the Eurozone we will get industrial production data for the bloc, but the main focus is likely to stay on ECB speakers Vice President de Guindos, France’s Villeroy and Croatia’s Vujcic lined up.

EUR/USD downward pressure has paused as rate differentials and reports suggesting that tariffs during Trump's initial months may be less aggressive and more gradual than anticipated helped lift EUR/USD into the 1.03 range.

GBP extended its underperformance with EUR/GBP testing the October top at 0.8448 as UK Chancellor Reeves was unable to calm investor nerves over the government’s fiscal trajectory. December inflation numbers this morning don’t make the GBP-dynamic any easier. Headline, core and services inflation all slowed more than hoped in y/y-terms, respectively to 2.5%, 3.2% and 4.4%. Recent sterling weakness came on the back of rising risk premia. Slowing inflation is welcome, but could deprive the UK currency faster from short-term interest rate support.

USD/JPY came under pressure overnight leaving the pair trading 0.4% lower at 157.38.  BOJ Governor Kazuo Ueda indicated that the central bank may consider raising interest rates if economic and price conditions continue to improve.  Ueda stated that the timing of interest rate hikes will largely depend on the economic policies of the new U.S. administration and the progress of this year’s wage negotiations in Japan.

Asian currencies were somewhat mixed overnight with the Singapore dollar, South Korean won outperforming, while the Indonesian rupiah, Indian Rupee and Philippines peso underperforming.

The jobless rate in South Korea jumped to 3.7% in December (vs 2.7% in November, 2.9% market consensus). The political uncertainty is clearly having a negative impact on labour market conditions in the country. With upcoming data expected to show a further deterioration, the Bank of Korea is expected to pledge to support growth and restore confidence, thus frontload its rate cuts. Traders now expect a 25bp cut in January and February which is likely to weigh on the KRW.

There were reports that India’s new central bank governor.  Sanjay Malhotra is willing to allow the Indian rupee to move more freely in tandem with peers in the region, while still intervening in the foreign exchange market to curb excessive moves. According to the report, Governor Malhotra has held multiple meetings with departments in RBI ahead of his first monetary policy meeting and showed keen interest in the RBI’s currency intervention.  The RBI seems set to turn less interventionist and allow the INR to adjust weaker, consensus forecast is for USD/INR to rise further to 88.50 by Q4 2025.