• Hot US inflation played second fiddle to optimism over US-Russia talks.
• Fed Chair Jay Powell suggests looking at today’s US PPI print to get a better sense of the inflation backdrop.
• UK Q4 real GDP overshot expectations but details were unimpressive. UK still on a stagflation path. Swiss January CPI suggests SNB can afford to pause its easing cycle. Philippines central bank unexpectedly pauses easing.

USD is holding on to yesterday’s losses triggered by an encouraging geopolitical development. President Donald Trump agreed with Russian President Vladimir Putin to start negotiating “immediately” an end to the war in Ukraine. Trump added that he’ll probably meet Putin in Saudi Arabia in the “not-too-distant future.”

US

Still, USD downside is limited as the US will maintain a wide bond yield advantage against all other major economies. The unexpected increase in the US January CPI data confirms that progress on inflation is stalling well above 2% and suggests the bar for additional Fed funds rate cuts is high. Headline CPI rose 3.0 y/y (consensus: 2.9%) vs. 2.9% in December while Core CPI ex. food & energy increased 3.3% y/y (consensus: 3.1%) vs. 3.2% in December. Super core CPI (core services less housing) – a key measure of underlying inflation - was virtually unchanged at 4% y/y. But inflation momentum gained traction as super core CPI increased 0.8% m/m vs. 0.2% in December, the biggest monthly rise in one year.

Fed officials were on spin control after the hot US CPI print. Chicago Fed President Austan Goolsbee (FOMC voter) called yesterday’s inflation read “sobering,” but added it’s “just one month.” Meanwhile, Fed Chair Jay Powell pointed out that the latest CPI data show that “we’re close but not there on inflation” but also stressed that the Fed doesn’t get excited about 1 or 2 inflation readings. Powell added we target PCE inflation which is a better measure and said to watch-out for today’s PPI data for a readthrough to PCE.

US headline PPI is expected at 3.3% y/y vs. 3.3% in December and core PPI is projected at 3.3% y/y vs. 3.5% in December. Attention will be on the PPI services ex-trade, transportation, and warehousing because it feeds into the core PCE calculations. In December, this measure of core services PPI fell to a 13-month low at 3.9% y/y vs. 4.5% in November.

Fed funds futures priced-out odds of 50bps cuts this year following yesterday’s US CPI data. Only one full 25bps cut is now priced-in for October. A further cooling in core services PPI inflation today would mitigate concerns of resurging price pressures and lead US rate expectations to reprice bets for 50bps of easing in 2025.

UK

GBP/USD recovered briefly above 1.2500. UK economic activity surprises to the upside. Monthly real GDP grew 0.4% in December (consensus: 0.1%) vs. 0.1% in November largely driven by growth in the service sector. On a quarterly basis, preliminary real GDP unexpectedly rose 0.1% q/q (consensus: -0.1%) vs. 0% in Q3 but the details were unimpressive. There was no growth in real household expenditure and gross fixed capital formation fell. Inventory restocking was the main growth driver while net trade the biggest drag.

Beyond Q4, the Bank of England’s (BOE) macroeconomic projections point to near-term stagflation conditions which is a drag for GBP. For Q1 2025, the BOE forecasts real GDP at just 0.1% q/q and CPI inflation at 2.8% y/y.

SWITZERLAND

CHF is outperforming all major currencies. Switzerland’s January CPI print suggests the Swiss National Bank’s (SNB) can afford to pause its easing cycle at its next March 20 meeting. Headline CPI printed in line with consensus at 0.4% y/y vs. 0.6% in December but is tracking slightly above the SNB’s Q1 forecast of 0.3% y/y. Also, core CPI inflation unexpectedly quickened to 0.9% y/y (consensus: 0.6%) vs. 0.7% in December. At its December meeting, the SNB slashed rates 50bps to 0.50% but scrapped previous reference that “further cuts in the SNB policy rate may become necessary in the coming quarters.” Markets continue to almost fully price-in a 25bps cut in March. We doubt the SNB will deliver more cuts in the near-term and see more upside potential to CHF.

EUROZONE

EUR/USD is consolidating above 1.0400. ECB Governing Council member Joachim Nagel cautioned against easing aggressively. Nagel said “There is no reason to act hastily in the present uncertain environment”, adding “the closer we get to the neutral rate, the more appropriate it becomes to take a gradual approach.” Bundesbank staff calculations put neutral at 1.80%-2.50%, while ECB staff estimates neutral at 1.75%-2.25%.

Markets imply another 75bps of ECB cuts in the next 12 months which would see the policy rate bottom at 2.00%. Unlike the Fed, the ECB has scope to deliver on rate cut expectations which can pull EUR/USD lower. The Eurozone growth outlook is sluggish, and the disinflationary process is well on track.

NEW ZEALAND

NZD/USD pared back part of yesterday’s gains. The Q1 RBNZ survey of inflation expectations leaves plenty of room for the RBNZ to deliver a 50bps cut to 3.75% next week. Firms’ inflation expectations 2, 5 and 10 years out all dipped closer to 2%. Bottom line: NZ-US 2-year bond yield spreads can further weigh on NZD/USD.

AUSTRALIA

AUD/USD has retraced 50% of yesterday’s bounce. The Melbourne Institute measure of inflation expectations one year out rose to 4.6% in February vs. 4.0% in January, matching its April 2024 high. RBA cash rate futures hardly budged and still imply 87% probability of a 25bps rate cut next week. Indeed, softer inflation pressures in Q4 support the case for the RBA to start easing. Bottom line: RBA/Fed policy trend and sluggish Chinese economic activity point to additional AUD/USD downside.

CANADA

USD/CAD recovered towards 1.4300 after hitting a two-month low at 1.4255. Yesterday’s Bank of Canada (BOC) January 29 meeting Summary of Deliberation highlighted the bank’s concern around trade disputes. “Members viewed the impact of prolonged trade uncertainty on business investment and consumer confidence as the main downside risk to the outlook…Even if no tariffs were imposed, a long period of uncertainty under the cloud of tariff threats would almost certainly damage business investment in Canada.” Members also agreed that it would not be appropriate to provide any guidance on the future path for the policy interest rate in its communications “given the high level of uncertainty surrounding the outlook, and the wide range and complexity of potential trade conflict scenarios.”

Markets expect the BOC to deliver more rate cuts. We agree. Interest rate futures imply 50bps of BOC cuts over the next 12 months that should see the policy rate bottom at 2.50%, which would be at the lower end of the BOC’s neutral range estimate of 2.25% to 3.25%. While USD/CAD is extremely overvalued (we estimate fundamental equilibrium around 1.2000), the overshoot has more legs. FED/BOC policy trend, risk of all-out trade war between Canada and the US, and the Trump administration’s focus on lowering energy prices support a higher USD/CAD.

PHILIPPINES

Philippines central bank unexpectedly left the policy rate unchanged at 5.75%. All analysts surveyed by Bloomberg, except one, had a 25bps cut penciled-in. The central bank statement noted “On balance, uncertainty about the outlook for inflation and growth warrant keeping monetary policy settings steady.” However, more cuts are in the pipeline as the statement indicated “Looking ahead, the BSP anticipates continuing its measured shift to less restrictive monetary policy settings.” Indeed, Governor Remolona stuck to his guidance for a total 50bps reduction this year and said that a cut is on the table at the next April meeting. The swaps market is more aggressive and is pricing in 175bps of total easing over the next 12 months that would see the policy rate bottom near 4.00%.