Currency Watch: CPI Surprises and Market Shifts.

• US CPI Could Surprise Lower – A 0.2% MoM print (vs. 0.3% expected) could boost Fed confidence in disinflation and increase the chances of a 50bp rate cut in 2025.
• DXY Faces Downside Risks – With lower US interest rate volatility, DXY could slip toward 107.30/50 unless new tariffs disrupt the trend.
• Eurozone Equities Provide a Tailwind for EUR – Stronger macro data and ECB flexibility could help, but weak growth and expected rate cuts may cap gains.
• EUR/CHF Strengthens Amid Ukraine Optimism – A recovery toward 0.9500/9520 is possible as investors reprice for potential geopolitical shifts.
• GBP Steady as Fed Maintains Caution – Powell’s hawkish stance keeps rate cuts off the table for now, with markets focused on today’s US inflation print.

USD: Will CPI Surprise With a Softer Print?

The DXY dollar index weakened slightly yesterday, largely due to euro strength. Some of the so-called “Trump trades” are showing signs of fatigue, as policy reversals on tariffs this year have made it harder to draw clear conclusions. Markets are now watching for potential “reciprocal” tariffs, which could impact countries like Korea, India, and Brazil.

The real challenge for traders is the unpredictability of Washington’s next move—tariff expansion could happen any day, making it difficult to call a meaningful dollar correction without clear macroeconomic support.

Could today’s US inflation data provide that support? The CPI series undergoes annual benchmark revisions today, creating some uncertainty. There’s a possibility that January’s CPI print could come in at 0.2% month-on-month instead of the expected 0.3%. If that happens, the Federal Reserve might gain more confidence in the disinflation process, leading markets to price in a 50bp rate cut for 2025, up from the current 35bp.

With US interest rate volatility declining—the MOVE index is back at January lows—there’s now some downside risk to the dollar, with DXY potentially dipping to 107.30/50. However, any new tariff announcements could quickly derail expectations of a weaker USD.

EUR: Is There Room for an Upside Move?

There’s been a lot of discussion about eurozone equities outperforming this year. Possible drivers include stronger-than-expected macroeconomic data, the European Central Bank’s greater flexibility to cut rates compared to the Fed, lower equity valuations in Europe versus the US, and even speculation about a ceasefire in Ukraine.

Historically, increased investment in eurozone equities—often unhedged in FX markets—has provided support for the euro. We recall 2017, when relief from the French and Dutch elections led to a strong euro and equity rerating.

That said, it’s difficult to see strong bullish momentum for the euro today. Growth remains sluggish, fiscal support is limited, and the ECB is likely to cut rates by another 100bp this year. If EUR/USD manages a short-term rebound toward 1.0450, it may struggle to sustain those gains.

Meanwhile, EUR/CHF is rebounding, potentially influenced by optimism around Ukraine. Before Russia’s invasion, EUR/CHF was trading above 1.05, and with softer Swiss inflation data and the Swiss National Bank projecting inflation to drop to 0.2% year-over-year next quarter, we may see EUR/CHF push toward 0.9500/9520 this week. Investors will also be watching for updates from the Munich Security Conference, which could drive further revaluation.

GBP: Sterling Holds Firm as US Inflation Looms

The British pound is holding near 1.2450 against the US dollar as traders await the US CPI release at 13:30 GMT. Markets expect the annual core CPI (excluding food and energy) to slow slightly to 3.1% from 3.2% in December, while the overall headline inflation rate is forecasted to remain steady at 2.9%. On a monthly basis, both core and headline CPI are projected to rise by 0.3%.

Investors are closely watching US inflation data, as it will shape expectations for how long the Federal Reserve keeps interest rates steady in the 4.25%-4.50% range. Fed Chair Jerome Powell, speaking before Congress on Tuesday, reiterated that the central bank is in “no hurry to cut rates” given resilient economic growth and persistent inflationary pressures. He warned that easing policy “too fast or too much” could slow progress on inflation, reinforcing the Fed’s cautious stance.