US Dollar Looks to Inflation Data for Salvation

2017-01-18 06:17:00 Ilya Spivak

Talking Points:

US Dollar may bounce if CPI data rekindles Fed rate hike speculation
British Pound corrects lower after yesterday’s explosive upward push
Yen declines as Japanese stocks recover from “hard Brexit” concerns

The British Pound underperformed in Asian trade as markets digested explosive gains in the preceding session. The UK unit added more than 2 percent against an average of its major counterparts yesterday as Prime Minister Theresa may struck a conciliatory tone in a much-anticipated Brexit strategy speech. She pledged to “pursue a bold and ambitious free trade agreement with the EU” even as she pulls the UK out of the single market.

The Yen likewise faced selling pressure as Japan’s benchmark Nikkei 225 stock index traded higher, undermining the appeal of the standby anti-risk currency. “Hard Brexit” fears helped engineer a sharp decline for Japanese shares yesterday and today’s action seems to mark a follow-on retracement. The US Dollar corrected higher after suffering steep losses amid the resumption of “Trump trade” unwinding.

The greenback may find scope for a further recovery as December’s US CPI figures cross the wires. Fed rate hike speculation may find renewed vigor if inflation is shown to have accelerated more than the markets are expecting (2.1 percent on-year), echoing the wage growth data that gave the US unit its most significant gain so far in 2017.

The European data docket offers little to be excited about. UK jobless claims data and the revised Eurozone CPI figures are unlikely to see a strong response from the British Pound and the Euro given their limited impact on near-term BOE and ECB policy. The former central bank seems locked in wait-and-see mode and traders will probably wait for the other’s rate decision later this week before acting on secondary evidence.

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