Dominant dollar and plunging pound eye latest CPI data

* USD turns lower again on tariff story and profit taking

* Trump team studies gradual, phased in tariff hikes, increasing by 2-5% per month

* Traders brace for S&P 500’s busiest inflation day since March 2023

* Gold avoids technical rejection after tailwind emerges, Trump’s tariff plan

FX: USD fell for a second straight day after topping out on Monday above 110.  As we wrote yesterday, sellers emerged around the US stock market close with the Dollar Index printing a bearish shooting start candlestick. A Bloomberg report suggested Trump may adopt a gradual approach to tariff hikes. Markets were waiting for some kind of denial, similar to last week’s Washington Post story, but none has come (yet). PPI came in softer than expected and this will feed into the core PCE data at the end of the month. This is the Fed’s favoured inflation gauge.

EUR outperformed even though we had mixed comments from ECB officials. Rates being cut to neutral by mid-2025 came from one side while a hawks said it was unclear if the Governing Council would reduce rates at its next meeting. Markets are virtually fully priced in for a 25bps cut on 30 January.

GBP printed a doji candle denoting some indecision. Ten-year Gilt yields closed at cycle highs ahead of CPI data today. See below for more details.

USD/JPY was mildly bid and traded back in the recent range. Friday’s high is at 158.87 and well in the MoF intervention range. Rate hikes bets remain close to 50:50 for this month’s BoJ meeting. US 10-year yields made fresh highs for the move, above 4.80%.

AUD got above 0.62 before closing below the figure but still up on the day. The long-term low from October 2022 is at 0.6169. We get jobs data released on Thursday. USD/CAD remains in the range between 1.43 and 1.4450. Crude prices are lower while general risk sentiment was marginally more positive later in the US session.

US stocks: Major US stock indices were mixed with materials and value outperforming. The S&P 500 finished 0.11% higher at 5842. The tech-laden Nasdaq closed 0.13% lower at 20,757. The Dow settled 0.52% higher at 42,518. Tech underperformed with Meta lower by over 2.3%. The unofficial Q4 and full-year earnings season kicks off today with big banks leading the way. Companies face pressure to justify elevated valuations amid sticky inflation and relatively restrictive and still-high interest rates. Current valuations see the benchmark S&P 500 priced at around 22 times projected earnings, which is above the historical average. Analysts are forecasting earnings growth of about 10-12%, supported by solid economic fundamentals, but they also warn of potential headwinds. Key focus areas include tech-driven growth in AI, consumer spending shifts, and robust performance expected from financials.

Asian stocks: Futures are mixed. Indices also traded mixed on Tuesday following the lead from Wall Street. The Nikkei 225 tanked after the holiday break with a rate hike getting some exposure. BoJ governor Himino pointed to the meeting being live too. The ASX 200 was positive on gains from commodity-related sectors. China outperformed with the Hang Seng Index snapping a six-day losing streak. The CSI300 was buoyed by a rally in chipmakers after the US announced tighter restrictions on AI chip exports to China. Optimism was further supported by Beijing’s signals to boost consumption and attract foreign investment, alongside improving trade data showing higher exports and a 27-month high in imports.

Gold steadied on mixed dollar performance.

Day Ahead – UK and US CPI

It’s inflation day on both sides of the Atlantic with UK and US CPI releases. Expectations are for headline UK inflation to tick higher to 2.7% from 2.6% with the core rate expected to nudge lower by one-tenth to 3.4% and services at 4.8% from 5%. One source of uncertainty comes from whether businesses have front-run labour costs increases due to the recent budget by raising prices. Hotter than expected data could see the 10-year Gilt yield hit 5%. That puts pressure on GBP, even though the pound typically goes up on CPI surprises.

Headline US CPI is expected to rise +0.3% m/m in December, matching the November reading and y/y tick up to 2.9% from 2.7%. The three-month annualised rate has picked up markedly since the summer. The core is forecast at 0.2% m/m and 3.3% y/y. Inflationary concerns are massively on the rise with ISM prices paid data hitting multi-month highs, buoyant labour markets, Trump 2.0 and the latest Atlanta Fed GDP estimate at 2.7%. Better than forecast data will likely propel the dollar to new highs and the 10-year US Treasury yield closer to the key 5% level.

Chart of the Day – GBP looking for some love

The current bond sell-off, led by UK gilts, shows that lots of government cannot afford hotter US inflation. Sticky figures in the UK and what it means for the Bank of England rate cycle could spell more trouble for the gilt market. Rising yields means higher borrowing which erodes the UK government’s fiscal headroom. That raises the risk of March spending cuts which is a sterling negative.

On the flip side, a soft UK CPI number, if say the services figure come in below the consensus print of 4.8%, could see UK interest rates finally turn lower as the market re-prices more BoE easing ahead. Both scenarios are potentially bad for sterling. Of course, a soft US CPI could reverse any losses in GBP and slow the dollar and yield surge. There’s a major Fib level at 1.2259, with a swing low at 1.2037. Resistance sits at last year’s low at 1.2299.

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