Daily Forex Analysis: 11 Jan 2024

CURRENCIES:

Key Points:

The December U.S. inflation report, releasing on Thursday, will be a focal point for markets.
While core CPI is expected to moderate on a year-over-year basis, the headline gauge is predicted to reaccelerate, posing challenges for the Federal Reserve.
Gold prices, yields, the U.S. dollar, and the Nasdaq 100 are expected to be highly sensitive to the consumer price index data.

Market Overview:

Wall Street will closely monitor the U.S. Bureau of Labor Statistics‘ consumer price index report on Thursday.
The data could influence the Federal Reserve’s future monetary policy decisions, including the timing of the first interest rate cut.
December headline CPI is projected to increase by 0.2% month-over-month, pushing the annual rate to 3.2%, a setback for the Fed aiming for a 2.0% inflation target.
The core gauge is forecasted to rise by 0.3% month-over-month, with the 12-month reading easing to 3.8% from the previous 4.0%.

Market Response Scenarios:

Market response will depend on how the inflation figures align with consensus estimates, considering two scenarios: an upside surprise or lower-than-projected numbers.

Potential Outcomes:

A hot CPI report exceeding forecasts may prompt traders to unwind dovish bets on the Fed’s path, resulting in higher Treasury yields and a stronger U.S. dollar. This could bear negatively on gold, stocks, and indices like the S&P 500 and Nasdaq 100.
Conversely, a benign report with figures milder than anticipated, especially on core metrics, may validate aggressive wagers on rate reductions in 2024. This scenario could be bullish for gold and risk assets.

Market Dynamics:

Current market pricing suggests around 130 basis points of easing for the new year. The resilience of the U.S. economy and signs of stabilization may make the FOMC hesitant to significantly cut borrowing costs, adding significance to the December CPI report.

Focus: Investors seeking clues on Federal Reserve’s interest rate decisions
Expected Inflation Rates:
- Annual Headline Inflation: 3.2%
- Annual Core Inflation: 3.8% (excluding food and energy)
Importance: Critical for investors, influencing the Fed’s monetary policy and potential interest rate cuts
Market Expectations:
- Bank of America expects slightly higher readings than consensus, leaving room for a Fed rate cut in March.
- Markets currently price in a roughly 67% chance of a Fed rate cut in March.
Monthly Changes (December):
- Overall Prices: Expected to increase by 0.2%
- Core Inflation: Expected to increase by 0.3%
Key Areas to Watch (Goldman Sachs):
- Car prices and shelter expected to continue declining.
- Airfares could pose an upside risk, with a potential 5% increase in December.
Fed Officials’ Comments:
- Fed officials, including Governor Michelle Bowman and Atlanta Fed President Raphael Bostic, show a measured approach.
- Bowman suggests a potential rate cut if inflation falls further, while Bostic emphasizes the need to evolve with the economy.
Market Reaction Expectations: Wall Street strategists temper expectations for stock reactions, considering an already aggressive rally and potential asymmetric risk in CPI numbers.