The Yen's Weakness Continues, and The Sterling is Poised For Further Gains
In the current market environment, the yen's weakness is a clearer development. Benchmark yields in Germany and the United Kingdom are extending their recent gains, while the US 10-year yield remains firm above 3.7%. However, the 10-year JGB yield remains constrained by the BoJ-imposed ceiling. For the time being, the dollar is mixed after traders refused to commit to yesterday's CPI data. Sterling, on the other hand, appears poised to benefit from any positive surprises in today's consumer inflation data. The question is whether the Pound's rally if it occurs, will lift the Euro and Swiss currencies or put them under pressure.
GBP/CHF is making some headway in breaking through 1.1206 minor resistance. Today's upside acceleration strengthens the case that the entire corrective pattern from 1.1574 has been completed. The resistance level of 1.1433 should be the next target. A strong break there will pave the way for a larger rally from 1.0813 to 1.1574 later in the month. Let's see how things go.
In Asia, the Nikkei fell -0.42%. The Hong Kong HSI has fallen -1.51%. The Shanghai SSE in China is down -0.47%. The Singapore Strait Times is down -1.06% today. Japan's 10-year JGB yield is -0.007 lower than 0.503. DOW dropped -0.46% overnight. The S& P 500 fell -0.03%. The NASDAQ increased by 0.57%. The 10-year yield increased from 0.044 to 3.761 percent.
Fed Harker: It will be higher than 5%
In response to yesterday's inflation report, Philadelphia Fed President Patrick Harker stated, "it was good and it was moving down, but not quickly." He went on to say that the FOMC will have to "let the data dictate" tightening and that the Fed funds rate will be above 5%. How much more than 5? It will be heavily influenced by what we see."
"In my opinion, we're not done yet... "However, we are likely to close," he said. "I expect that at some point this year, the policy rate will be restrictive enough that we will hold rates steady and let monetary policy do its work," he said in a prepared speech.
"Rates are now at a level that allows us to slow down and proceed cautiously, and I believe the days of raising 75 basis points at a time are long gone," Harker said. "At the most recent meeting, I voted for a hike of 25 basis points, which some might call slow but is closer to cruising speed in terms of tightening."
Fed Williams: We need all of the gears to be turning at the same time.
Yesterday, York Fed President John Williams stated, "We will stay the course until our job is done... We must bring the economy back into balance and keep inflation below 2% consistently."
"We need all of the gears to turn at the same time to restore the balance between demand and supply in the entire economy," Williams said. "We still have a long way to go to reach that goal."
He expects core inflation, which was 4.4% in December, to fall to 3% this year and then 2% over the next few years. This year, growth is expected to slow to 1%, with unemployment rising to between 4% and 5%.
RBA Lowe: I don't believe we've reached the peak of interest rates yet.
In a Senate hearing, RBA Governor Philip Lowe stated, "I don't think we're at the peak (on interest rates) yet, but how far we have to go up I don't know." He noted that inflation, which is currently sitting at 7.8%, was still "wage too high". Before there could be any significant changes in inflation, unemployment would have to rise.
"I understand why some people focus on the risks on one side, but we have to be mindful of the risk of higher inflation," Lowe cautioned. "It's damaging to the economy. And all evidence suggests that if inflation remains high for an extended period, expectations adjust, resulting in higher interest rates and increased unemployment."
"The risks are two-sided, and we're attempting to navigate a narrow path."
Looking Forward
The European session is dominated by UK inflation data, including CPI and PPI. Eurozone trade balance and industrial production will be released.
Later in the day, US retail sales will be highlighted, as well as Empire State manufacturing, industrial production, the NAHB housing index, and business inventories. Housing starts, manufacturing sales, and wholesale sales will be reported by Canada.