Expectations of UK-EU deal.
The US PCE prices index recorded a 0.6% increase for January with the annual increase strengthening to 5.4% from 5.3%. The core index also increased 0.6% on the month compared with expectations of 0.4%. The year-on-year increase strengthened to 4.7% from 4.6% and significantly higher than market expectations of 4.3%.
Given that the PCE index is a core inflation metric for the Federal Reserve, the stronger than expected reading reinforced market fears that the Federal Reserve would have to take a more aggressive stance in raising interest rates.
Cleveland Fed President Mester stated that inflation is still too high and that risks are still tilted to the upside. She still thinks that rates need to be somewhat above 5.0%. Fed Governor Jefferson stated that the current pace of wage increases is not consistent with 2% inflation.
There was slightly less hawkish rhetoric from St Louis Fed President Bullard who stated that the economy may fall under the rubric of credible disinflation.
Wall Street equities dipped after the US data with the S&P 500 index back below the 4,000 level and global markets were also on the defensive with fragile risk appetite.
The dollar posted sharp gains following the PCE prices data with the currency index hitting 7-week highs.
Over the weekend, Bank of Japan Governor Kuroda stated that he is resolved to maintain an ultra-loose policy. Governor nominee Ueda stated that there will need to be higher trend inflation for the central bank to adjust monetary policy.
Bank of England Monetary Policy Committee member Tenreyro stated that the impact of the energy price shock and lags in monetary policy brought the risk of raising borrowing costs too high.
There are strong expectations that the UK and EU will reach a deal in the Northern Ireland protocol on Monday with Prime Minister Sunak and EU Commission President von-der Leyen due to hold a press conference later in the day. Reaction from the Northern Ireland DUP and Conservative MPs will be watched closely.
The Euro lost ground into Friday’s US open as the dollar maintained a firm overall tone. Higher US yield and hawkish Fed rhetoric supported the US currency. EUR/USD dipped to 7-week lows below 1.0550 and was held below this level on Monday.
Higher US yields and dovish Bank of Japan rhetoric undermined the yen. USD/JPY posted strong gains to highs near 136.50 on Friday. Dovish BoJ rhetoric curbed potential yen support with USD/JPY around 136.30 on Monday.
The Swiss franc was unable to make headway during Friday. EUR/CHF edged higher to 0.9920 with USD/CHF jumping to 10-week highs above 0.9400.
Sterling was hampered by weaker global equities with trade hopes having little net impact. GBP/USD posted lows below 1.1950 and was held below this level on Monday.
A stronger dollar and weaker equities undermined commodity currencies. AUD/USD dipped to 7-week lows around 0.6720 on Friday and tested 0.6700 on Monday. USD/CAD strengthened to 7-week highs around 1.3660 before settling around 1.3620.