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Marketmind: Dollar swoons in upbeat inflation vigil

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Marketmind: Dollar swoons in upbeat inflation vigil
© Reuters. FILE PHOTO: Vegetables are pictured at a produce shop at Reading Terminal Market after the inflation rate hit a 40-year high in January, in Philadelphia, Pennsylvania, U.S. February 19, 2022. REUTERS/Hannah Beier

A look at the day ahead in U.S. and global markets from Mike Dolan

World markets leaned positively into another critical U.S. inflation report later on Wednesday, seeding a dollar slide to two-month lows that’s revved-up yen and sterling gains.

The importance of the monthly U.S. consumer price report for Federal Reserve thinking and the entire U.S. rates complex is not hard to see. For now, futures are confident of at least one more quarter-point Fed hike this month but still see less than a 50-50 chance of another move by yearend.

And June’s CPI readout should be a marker if the consensus forecast for almost a full percentage-point drop in the headline inflation rate to two year lows of just 3.1% is borne out. Perhaps more important for the Fed, however, is how much the now higher “core” rate of inflation recedes – and that drop is expected to be by a more modest 0.3 point to 5.0%.

Still, encouraged by a screed of other positive disinflation signals this week, U.S. markets are relatively buoyant going into the release and still feel the end of the Fed rate rise campaign is nigh.

U.S. stocks climbed for the second day in a row on Tuesday and futures are positive ahead of today’s open – with more signs of rotation in the outperformance of small cap stocks versus the mega cap tech sector, while banks advanced ahead of second-quarter earnings later this week.

Fed futures haven’t shifted much, but Treasury bond yields continue to walk back from last week’s peaks and volatility there has ebbed a bit – with one eye on a 10-year Treasury auction later in the session.

But the dollar’s ongoing slide was most notable.

Alongside thoughts of ‘peak Fed’, speculation seems to be rising once again that the Bank of Japan will gradually wind-down its super-easy monetary policy stance over the coming months. The dollar/yen exchange rate, now almost 4% down from mid-year peaks, skidded to its lowest in almost a month.

Spurred by aggressive expectations of Bank of England interest hikes far above the Fed’s, in order to rein in Britain’s outlying inflation problem, the pound briefly hit its highest in 15 months on Wednesday before recoiling. UK bank stocks pushed higher on the rates view and a relatively clean bill of health from Wednesday’s financial stability report from the BOE.

Other central banks also gave some cause for applause.

The Reserve Bank of New Zealand paused its long-running rate rise campaign early on Tuesday. And although the Bank of Canada is expected to raise rates another notch later in the day, the decision will be watched closely for hesitation there too.

Elsewhere, Asia bourses were mixed. dialled back amid the sharp yen gains. Shanghai stocks fell, but Hong Kong added more than 1% on this month’s optimistic noises about tech sector regulation and upbeat credit data. European indices were up smartly.

The deals world was enlivened as Microsoft (NASDAQ:) cleared major hurdles to its plan to buy videogame maker Activision Blizzard (NASDAQ:) on Tuesday after a U.S. judge gave a thumbs-up to the $69 billion deal and a British regulator suggested it could reconsider its opposition. Activision shares surged 10% and Microsoft shares rose 64 cents to $332.47.

Events to watch for later on Wednesday:

* U.S. June consumer price report

* Bank of Canada policy decision

* Federal Reserve issues ‘Beige Book’ of economic conditions

* Richmond Federal Reserve President Thomas Barkin, Atlanta Fed President Raphael Bostic, Minneapolis Fed chief Neel Kashkari and Cleveland Fed boss Loretta Mester all speak

* U.S. President Joe Biden at NATO summit in Vilnius

* U.S. Treasury sells 10-year notes

 

(By Mike Dolan, editing by Nick Macfie mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)

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Japanese yen subdued despite BOJ deputy governor’s rate hike hint

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Investing.com– The Japanese yen exhibited minimal movement on Tuesday, despite Bank of Japan (BOJ) Deputy Governor Ryozo Himino indicating a potential hike in the upcoming policy meeting.

Himino suggested that the central bank might consider raising rates, citing sustained wage growth and expectations of a clearer U.S. policy landscape following President-elect Donald Trump’s inaugural address later this month.

The yen’s pair edged 0.1% higher to 157.62 yen on Tuesday.

In recent months, the BOJ has been adjusting its monetary policy to address rising inflation. In March last year, it ended its negative interest rate policy, and by July, it had increased the short-term policy rate to 0.25%.

These measures aim to achieve a stable 2% inflation target, supported by robust wage growth and a weakening yen, which have contributed to higher import costs.

Despite these developments, the yen’s exchange rate against the U.S. dollar remained relatively stable, reflecting market skepticism about the likelihood of an imminent rate hike.

Analysts suggest that while the BOJ is signaling a shift towards policy normalization, uncertainties surrounding global economic conditions and domestic wage dynamics may lead to a cautious approach.

Barclays (LON:) expects the central bank to implement rate hikes in March and October, with a terminal rate of 0.75%.

The BOJ’s next policy meeting is scheduled for January 23-24, where new growth and price projections will be discussed.

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UBS notes hedge funds sell GBP amid UK fiscal worries

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US dollar to stay stronger for longer, UBS says

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Investing.com — UBS strategists expect the US dollar “to stay stronger for longer,” citing robust US economic activity and ongoing tariff concerns impacting other regions.

Monday saw the (DXY) soar to its highest level since November 2022, trading above the 110 mark during the session. This represents a roughly 9% appreciation since late September.

The US dollar’s recent strength has been bolstered by better-than-expected domestic data, including nonfarm payrolls and the services sector purchasing managers’ index. These positive indicators have led to a decrease in the anticipated number of Federal Reserve rate cuts this year, with the consequent rise in US yields lending broad support to the USD.

While US economic data is expected to remain solid in the near term, the outlook for Europe is less optimistic, with subdued growth prospects.

Although growth in China is forecasted to accelerate to 5% year-over-year for the fourth quarter, the threat of US tariffs poses a significant risk. Political and economic uncertainties in South Korea, the European Union, and the UK have been linked to weakness in their respective currencies.

According to UBS, potential monetary policy divergence is among the key factors that could further propel the dollar upward in the near term.

While the Fed is expected to cut rates by a total of 50 basis points in the second and third quarters, the European Central Bank is projected to reduce rates by 100 basis points in the first half of the year.

“Policy divergence is a powerful driver of currencies, which leads to trending FX markets and the potential for overshooting exchange rates,” strategists led by Mark Haefele wrote.

The firm also points out that tariff risks may not be fully accounted for in the current USD valuation. Despite the dollar’s recent rally being largely attributed to solid US macroeconomic data, the introduction of new tariffs could drive the dollar even higher.

UBS suggests that if tariffs are implemented, the DXY could trade between 110 and 115, with significant impacts on other major currency pairs.

“If tariffs were to materialize, DXY could trade in a 110-115 range, could drop below parity, could slide below 1.20, and could move toward 0.94, in our view,” strategists noted. 

However, the investment bank believes that the story of 2025 could be a tale of two halves, with the dollar strength in the first half of the year potentially reversing in the second half.

The current trading position of the USD, which is considered strongly overvalued and shows the highest level of dollar net length since 2015, supports this view.

UBS’s revised forecasts for the EUR/USD pair reflect this expected trajectory. Strategists expect the pair to trade at 1.00 in March, 1.02 in June, and 1.06 in December 2025.

In the case of China, despite the possibility of dramatically higher effective tariff rates, the CNY has only partially priced in this risk, with UBS reiterating its forecast for the to reach 7.50 by June.

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