investingLive European FX news wrap: Awaiting the US CPI report

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It’s been a pretty boring session in terms of news flow and market moves. The only notable news we got was early in the session when it was reported that Japanese PM Takaichi has conveyed to a ruling party executive of her intention to dissolve parliament’s lower house. That could set up for a snap election in either early or the middle of February. The next ordinary Diet session is scheduled for 23 January and that is the timing in which Takaichi is reported to be making this call. This is just a confirmation of similar reports we got on Friday,

In terms of market moves, it’s been pretty quiet all around. Crude oil has been the only outlier as tensions between US and Iran continue to increase the geopolitical risk premium and drive prices higher. Just yesterday, we got reports that Trump considered strikes on Iran and late in the evening he threatened 25% tariff on any country doing business with Iran.

Other than that, not much has happened as traders await the US CPI report at 13:30 GMT/08:30 ET. Headline CPI Y/Y is expected at 2.7% vs 2.7% prior, while the M/M figure is seen at 0.3% vs 0.3% prior. The Core CPI Y/Y is expected at 2.7% vs 2.6% prior, while the M/M reading is seen at 0.3% vs 0.2% prior.

The Fed signalled a pause at the last policy decision by adding the line saying “in considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks”.

As a reminder, the Fed projected just one rate cut this year, while the market is still betting on two, with the first one expected in June. The latest NFP report saw the unemployment rate falling to 4.4% vs 4.6% prior. The data was overall good and reaffirmed the Fed’s patient stance.

Barring another notable weakening in the labour market, inflation data is what is likely to determine the extent of Fed’s policy easing this year. In the bigger picture, the Fed’s reaction function remains dovish, so we would need strong reasons for them to consider rate hikes. For now, the worst case scenario is that they hold rates higher for longer.

This article was written by Giuseppe Dellamotta at investinglive.com.