Will Inflation Numbers Revive the Dollar?

Earlier in the Day:

There were no material stats released through the Asian session this morning to provide the markets with direction, as focus begins to shift towards Trump’s first State of the Union Speech tomorrow and the FOMC’s monetary policy decision and more important rate statement on Wednesday.

The Dollar has been on the back foot throughout the year, which has seen the Aussie Dollar close at levels not seen since early 2015. The rally in the Aussie Dollar has been an impressive one and, while the Japanese Yen and Kiwi Dollar have seen current levels in recent months, the 3.56% year to-date rise through to Friday’s $0.811 close will be an issue for the RBA.

Barring a catastrophe, the Aussie Dollar should begin to pull back to sub-$0.80 levels in the coming weeks. This week’s FOMC meeting will consider the U.S Tax Reform Bill, which hadn’t been considered in the December gathering and, should inflation figures out of the U.S show signs of moving towards the FED’s 2% objective, policy divergence is going to more strongly favour the U.S Dollar.

The RBA is in no position to lift rates at present, or even give the markets a hint of a rate hike. Household debt levels, tepid wage growth, not to mention the effects of a stronger Aussie Dollar on the economy continued to be the RBA’s reasons to remain in a holding pattern, at least until the FED begins to project a more aggressive rate path for this year and next.

Australian 4^th quarter inflation figures due out on Wednesday could further complicate matters, with inflation forecasted to accelerate through the quarter. It’s going to come down to whether Yellen makes a bold exit in her final meeting as the FED Chair.

At the time of writing, the Aussie Dollar was down 0.17% to $0.8096, as the U.S Dollar finds support, with the Yen down 0.11% to ¥108.7 against the U.S Dollar and the Kiwi Dollar off by 0.14% to $0.734, the Kiwi Dollar also on the higher side when considering what lies ahead from an RBNZ monetary policy perspective.

In the equity markets, it was a mixed bag at the time of writing, with the softer Yen supporting the Nikkei, which was up 0.5%, joined by the ASX200, up 0.55% ahead of the close, while the Hang Seng and CSI300 struggled through the early part of the session The Hang Seng gave up early gains, down 0.04%, while the CSI300 tumbled 1.16% at the time of writing.

The slump on the CSI300 may well be over concerns that U.S-China trade terms may be heading towards some choppy waters. This week’s State of the Union speech could provide some clues as to what’s next and it’s not just China that is going to be anxious…

The Day Ahead:

It’s a quiet start to the week for the EUR, with no material stats scheduled for release out of the Eurozone, leaving the markets to consider Germany’s import and export price index figures for December, which are forecasted to be EUR negative.

While it’s a quiet start to the week, there’s plenty for the markets to consider, with Eurozone and member state 4^th quarter GDP numbers and January prelim inflation figures scheduled for release through the week.

Last week’s data and Darghi’s views on the economy appear to be aligned, with the stronger EUR having done little to dent demand for European goods until now.

Of greater concern than the strength of the EUR may be threats made by the U.S president over the weekend, who raised the issue of unfair trade terms with the EU for the first time since the early days in office, when Trump had suggested that Germany’s economy was benefitting from the weakness in the EUR.

The U.S administration is certainly on a war path when it comes to trade and, while the Dollar has softened, the recent tariffs on washing machines and solar panels could be the start of a broader set of tariffs on economies that are not playing to Trump’s tune.

While Merkel is in grand coalition talks, there’s unlikely to be much of a response, with Trump capable of raising the issue of trade in tomorrow’s State of the Union speech.

At the time of writing, the EUR was down 0.12% to $1.2412, with direction through the day in the hands of the Dollar.

For the Pound, it’s not just a quiet day ahead, but a relatively quiet week, with key stats for the week limited to private sector PMI numbers due out on Thursday and Friday.

Dollar strength through the early part of the day has weighed on the Pound, which was down 0.16% to $1.4137 at the time of writing, with Brexit trouble adding to the negative sentiment. News hit the wires over the weekend of Theresa May’s EU (Withdrawal) Bill being slammed by the Lords Constitution Committee ahead of the Bill being debated in the House of Lords on Tuesday.

Pressure is building on the British Prime Minister and the Tory Party continues to be divided into the pro and anti Brexiteers and until there is some unity and commitment from both sides to deliver the electorate’s wishes, Brexit will remain in the hands of the EU.

Across the Pond, key stats through the U.S session include the FED’s preferred Core PCE Price Index figures December, together with personal spending numbers.

As the markets begin to look head to Wednesday’s FOMC meeting, this afternoon’s figures are all the more influential, with recent economic data out of the U.S having pointed to an uptick in inflation at the end of the year.

Focus will be on inflation, but personal spending will need to be in line with or better than forecast, with the Dollar certainly capable of another tumble.

At the time of writing, the Dollar Spot Index was up 0.08% to 89.141, easing back from an intraday high 89.327, with the Dollar bulls yet to come out of hiding.