FX Update: USD choppy on Fed jawboning, US yield reversal

FX Trading focus:

USD: rally capped as yields peak and reverse lower
The USD rally/consolidation peaked out yesterday and reversed yesterday due to a number of developments, including three regional Fed presidents (Bullard, George, Rosengren, all non-voters) weighing in against any sense of urgency on sending any shift in the Fed’s guidance on asset purchases, the recovery from the dip in risk sentiment, and a US auction of 10-year treasuries that went off without drama and saw yields retreating after the recent spike. Note: plenty of Fed speakers up later today, especially the influential Vice Chair Richard Clarida, who will be out discussing the Fed's new policy framework late today.

The return of USD selling yesterday may signal the end of the consolidation phase of USD strength, though that phase didn’t feel particularly satisfactory in terms of washing out some of the weak hands before the resumption of the trend, as it was awfully shallow. And today’s Also wondering how quickly we can return to a positive narrative until we get to the other side of the Biden inauguration as one wild card is the risk of significant unrest across the US in demonstrations set for this weekend and possibly on Inauguration Day on the 20^th as well. So, treading with light feet here – cognizant of strong background trend of USD weakness but not satisfied we are ready to rejoin the trend tactically.

Incoming: US CPI and China trade data
Data incoming today includes the US December CPI. The Fed uses the PCE series as its key input, but the official CPI comes out several weeks ahead – no drama expected here, though we did see quite a run-up in gasoline prices in December. The year-on-year comparisons get far more interesting starting in April due to basing effects of the collapse in everything last March/April. For December, expectations are running for a headline CPI of 1.3% year-on-year versus 1.2% in November and for core to stay at 1.6% year-on-year.

China’s December trade numbers are up tonight as well and expected to show a slightly moderating surplus after the record $75B number in November. Stimulus from the pandemic response has supercharged Chinese exports since mid-last year. But keep in mind that stimulus filters through to everything, including the commodity imports, in food, energy, metals, etc. that China requires to manufacture its value-added exports. The run-up in oil prices is a case in point and our commodities strategist Ole Hansen points out that the bitter cold of late has spiked natural gas import prices (LNG) so badly that diesel demand is soaring as an alternative. Over time, China’s oil imports have soared and its import volumes are some twice of what they were about six years ago, while LNG imports are at triple the levels of only five years ago. Watching the Chinese PPI in coming months will be an important gauge of inflation as well.

Chart: EURGBP
The most pronounced mover within G10 is sterling, where a new rally was kicked off yesterday by BoE Governor Bailey’s pushback against any guidance for a negative rates policy. Given the terrible current reality on the ground in the UK, with Covid-19 total lockdowns and concerns linked to post-Brexit red tap for customs declarations, not to mention the cloud of uncertainty still hanging over the financial services industry, it is hard to imagine what would prompt the BoE governor to signal negative rates. It is also a signal that sterling is very resilient and then some here. Besides the recent 1.3700+ top in GBPUSD, we are also watching the sub 0.8900 lows in EURGBP for a possible extension to the next areas of range support into 0.8300 eventually, although perhaps 0.8600 is a more reasonable target if this move lower sticks – we’ve had a couple of treacherous head-fakes recently.