The Fed’s favorite inflation metric to be updated

The USD found support yesterday after a series of upbeat economic data. Yesterday, the results of the GDP Advance showcased that the US economy grew stronger than expected in the fourth quarter of 2022 boosting optimism that a “soft landing” scenario might be plausible. More specifically, the growth rate expanded to 2.9% and beat economists’ expectations for 2.6% increase, but ultimately below the 3.2% rate recorded in the previous quarter. A robust labour market has not yet shown any cracks and consumer spending rose but at slower pace. The weekly initial jobless claims figure validated that view, with the results pointing out that the labour market remains resilient, as the count came out at 186k for the week, beating expectations of a 205k increase. The US Durable Goods Orders, recoded an unexpected surge to the 5.6%, exceeding expectations for a 2.5% increase. The strong rebound from the -2.1% rate recorded in the previous month was the sharpest gain that was recorded since July of 2020. Bond yields, and more specifically the benchmark US 10-year treasury yield, rose from its four-month low to the 3.5% yesterday, after the favorable GDP results. The data essentially gives more leeway for the Fed to continue on with more rate hikes, extending its monetary policy campaign. The central bank is scheduled to deliver its latest interest rate decision on the 1st of February, and currently the FFF imply a 95% probability for a 25-basis points rate hike scenario to occur.

In today’s, early Asian session, Japan’s Tokyo CPI print topped expectations, accelerating to 4.3% with the fastest pace in 42 years and placed more pressure on the BoJ to exit its loose monetary policy by YCC adjustments. Governor Kuroda appears determined at sticking to his guns however. Later today the market’s attention is seen shifting towards the release of the Fed’s favorite metric for keeping track of the inflationary problem, the Core PCE index. According to estimates the year-on- year Core PCE rate is expected to ease to 4.4%, down from 4.7% and should that be the case, we may see pressure on the dollar, as the result would practically reaffirm that inflationary pressures within the US economy are abating, mirroring the CPI results reported earlier in January. Should the actual figure meet the expectation that would incentivize the Fed to opt for a smaller, 25 basis points rate hike, in the its February meeting next week. Also of importance is the month on month adjusted Consumption rate for the month of December, which according to estimates is expected to contract to the -0.1%, down from the 0.1% rate of the previous month. Should the actual rate meet the expectation we may see the dollar facing some pressure.

USDIndex rose yesterday but still remains close to the 101.30 (S1) support base. We hold a bearish outlook bias given the descending trendline initiated on the 6 of January. Should the bears reign over, we may see the index breaking the 101.30 (S1) support line and aim for the 100.30 (S2) support level. Should the bulls take over, we may see the pair breaking the 102.30 (R1) resistance line and head to the 103.20 (R2) level.USD/JPY extended is sideways motion despite the uptick of Tokyo CPI to fresh highs and remains confined between 129.00 (S1) support and 131.00 (R1) resistance levels. We hold our sideways bias for an extension of the price action between the two bounds. Should the bulls take over, we may see the pair breaking the 131.00 (R1) line and aim for the 132.80 (R2) resistance barrier. Should the bears take initiative , we may see break below the 129.00 (S1) and the move lower, closer to the 127.20 (S2) support base.

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Today we would also like to highlight the final result of the University of Michigan Sentiment index for January and New Zealand’s Trade Balance for December on Monday’s early Asian session.