US Open Note – Market in a volatile day; dollar surges to more than 1 ½ -year high

PCE price index ticks up; Rates in US rise

December’s PCE data came into focus today from investors. The core PCE price index rose from 4.8% to 4.9% year-on-year. Currently, it is the highest since September 1983 and well above the Fed's 2% goal rate. Personal income and spending also came in at 0.3% and -0.6% m/m respectively. Because of the widespread distribution of the omicron variety, retail sales and consumption decreased in December of last year.

Rates in the United States are rising, which is supporting the dollar. For the first time since January 19, the two-year yield is trading at 1.22%, while the 10-year yield is trading at 1.84% and is nearing the 1.90% cycle high. A fifth rate increase this year is already priced in. In spite of this, the terminal Fed Funds rate is projected to fall short of 2% when the market should probably be looking at 2.5% or more.

ECB rate decision next week

The European Central Bank (ECB) is scheduled to meet on Thursday, and the expectation is a dovish hold on interest rates. After confirming that PEPP is over in March, the bank is expected to forcefully resist market expectations of tightening. At a time when the Eurozone economy has numerous challenges and is obviously faltering, stricter monetary policies are the last thing that the region needs right now. Next Wednesday the release of January's CPI numbers are on cards, which are projected to show a headline rate of 4.3% y/y compared to December's 5.0% and a core rate of 1.9% y/y compared to December's 2.6%.

FX news

In the currency markets, the US dollar index is continuing the upside rally, recording a fresh 19-month high of 97.40 supported by the rally in the two-year Treasury yield after the Fed’s relatively hawkish policy meeting. Dollar/yen is maintaining its upswing, jumping to 115.60, while euro/dollar is plunging to a 20-month low of 1.1120. US index futures suggest another negative session. However, pound/dollar’s volatility is weak, holding around 1.3400 at the moment.

In commodity currencies, dollar/loonie is advancing from the third consecutive day, while the aussie and the kiwi are tumbling to 18- and 17-month lows respectively, versus the dollar.

Elsewhere, oil prices are flattening around the previous highs, while gold prices plummeted below $1,800/per ounce again with strong momentum, with the next target coming near $1,760/per ounce.

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