US Open Note – Dollar speeds down a slippery slope; stocks steady

Dollar extends inflation decline; initial jobless claims tick higher

The latest CPI inflation report out of the United States was not a big surprise on Wednesday. Despite a minor pickup in the core measure, the annual headline gauge came in line with expectations at 7.0% - the highest since 1982.

However, investors sold the dollar as three rate hikes by the Fed are already fully priced in to launch potentially after bond tapering ends in March, while a fourth one also seems likely in policymakers’ mind according to the Philadelphia's Fed president.

Hence, the path of monetary tightening is seen largely set for 2022 and there could be a little deviation in forward guidance– at least for now – given the risk of recession if the Fed slams on the brakes even harder at a time when the fast-spreading Omicron variant is forcing a huge number of workers to isolate themselves, and inflation is putting pressure on business returns and consumer pockets. In other words, the Fed is expected to hold the ship steady unless inflation grows further to extreme levels, while seeking to avoid any significant damage in consumption habits.

Investors may hear more from the Fed when Governor Lael Brainard appears in Congress for a hearing regarding her nomination as deputy chair today at 14:00 GMT. Fed policymakers Charles Evans and Thomas Barkin will also be on the wires today.

In market action, global bond yields continued to consolidate weekly gains. Having crossed below a supportive trendline, dollar/yen is marking another negative day near the 50-day moving average at 114.25, shrugging off a slight increase in US initial jobless claims. The number of people applying for unemployment benefits ticked up to 230k in the week ending January 8 compared to 200k expected and 207k registered during the preceding week.

European currencies in bullish party

On the other hand, pound/dollar has furiously advanced to a three-month high after exiting the seven-month-old bearish channel. Of note, the pair is currently seeking a close above the 200-day simple moving average at 1.3740.

Likewise, the downturn in the greenback helped the euro advance above a tough descending trendline and climb to a two-month high of 1.1477 today. With the ECB lagging the BoE, the British pound could prove more resilient than the euro, something also reflected by the persisting decline in euro/pound. Yet, how long the ECB could stay underwater remains to be seen. Note that investors are gradually becoming positive that a 0.10 bps rate hike might occur during the last quarter of the year. Speaking at a Reuter's event in New York, ECB’s Vice President Luis de Guindos almost embraced that scenario, acknowledging that inflation could exceed projections this year and omicron may not derail economic growth.

Stocks neutral, commodities in focus

Meanwhile in stock markets, the pan-European STOXX 600 was oscillating between gains and losses, with shares in utilities and financial stocks balancing declines in healthcare and consumer cyclicals.

Wall Street is poised to open neutral too. The earnings season will formally kick off on Friday, with big US banks reporting financial results for Q4, but results from Delta airlines could provide some direction on the outlook for the pandemic-stricken aviation today.

Commodity prices will also be in the spotlight in the coming sessions. WTI crude is facing some resistance around $83.00/barrel, but is not far below October’s 7-year high. Natural gas futures and copper prices also staged an impressive rally on Wednesday before calm returned to the markets.

In metals, despite the latest pickup, gold is still capped below the key $1,830/ounce resistance. Given its quiet response to monetary developments over the past two months, it would be interesting to see whether the precious metal can regain its shine this year or further lose its appeal.


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