US inflation data the focus today

The dollar is drifting lower this morning ahead of inflation data in the US later today. EURUSD and GBPUSD are trading at around $1.0980 and $1.2770 respectively, leaving EURGBP at £0.86. The consensus expects headline CPI inflation to have nudged up to 3.2% in December with the core rate seen dipping to 3.8%. Lower than forecast inflation would probably boost expectations for a Fed rate cut in March and weigh on the dollar, while an upside surprise could see the timing of a first cut pushed out and the dollar gain ground.

Markets essentially treaded water yesterday ahead of the inflation data. Bond yields ended marginally higher on the day, while European and US equities chalked up modest gains.

ECB’s Schnabel says interest rates need to remain restrictive “to ensure that inflation sustainably returns to 2%”. She notes that “a slowing economy is part of monetary policy transmission,” and indeed her ECB colleague, de Guindos, said yesterday the Euro area may have entered into recession in the final quarter of 2023.  Of course, to the extent that weaker economic activity contributes to a further fall in inflation, it will ultimately allow the ECB to lower rates.

In the same vein, Fed member Williams, while acknowledging the progress in reducing inflation, says “we will need to maintain a restrictive stance of policy for some time” and “it will only be appropriate to dial back the degree of policy restraint when we are confident that inflation is moving toward 2% on a sustained basis.”

As mentioned, US inflation is the key release today.  Other data due include weekly jobless claims and real hourly earnings in the US as well.