- USD is consolidating near yesterday’s low. The US January CPI print will likely show that progress on inflation may be stalling.
- Fed officials continue to insist there’s no rush to resume easing. Fed Chair Powell testifies again today. Don’t expect new policy-relevant insights.
- Bank of Canada January meeting Summary of Deliberation and Bank of England rate-setter Megan Greene are today’s other highlights.
USD stabilized following yesterday’s dip driven by yield differentials. 2-year Treasury yields drifted modestly higher as Fed officials continue to insist there’s no rush to resume easing. However, there was a greater pick-up in comparable European and UK bond yields which lifted EUR and GBP versus USD. This is not sustainable. The Eurozone’s unimpressive macro backdrop suggests the ECB has scope to ease policy further while the UK’s stagflation backdrop is a near-term drag for GBP.
In contrast, 2-year bond yield spreads between the US and Japan widened in favor of a firmer USD/JPY. Bank of Japan (BOJ) Governor Ueda pointed out again that the size of interest rate hikes will depend on whether the economic and price outlooks are realized. Markets continue to expect the BOJ policy rate to peak at around 1.00% over the next two years which is a headwind for JGB yields.
During yesterday’s Senate testimony, Fed Chair Powell reiterated “with our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance.” Similarly, Cleveland Fed President Beth Hammack (2026 FOMC voter) stressed “2% inflation is not in sight just yet.” Hammack added, “Taking the case of tariffs as one example, it is appropriate for policy to be patient in assessing their ultimate effects…Given the recent history with elevated inflation, the risks to the inflation outlook appear skewed to the upside…” Finally, New York Fed President John Williams cautioned “it will take time before we can achieve that target [2% inflation] on a sustained basis.”
Powell also defended the Fed’s independence. Powell reminded the audience that it was “pretty clearly not allowed under the law” for a sitting president to dismiss or demote a Fed chair or Fed governors. As a background, changes to the Fed’s mandate or structure require congressional approval. Presidents can only impact Fed policy indirectly by their appointments to the Board of Governors and as Fed Chair.
In that regard, Fed Chair Jay Powell’s term ends May 2026. But it’s worth noting that if he is replaced as Chair, Powell would remain on the Board of Governors until January 31, 2028. Fed Governor Adriana Kugler’s term on the board ends January 31, 2026. These two will be the only opportunities for President Donald Trump to appoint new Governors.
Meanwhile, Powell refused to be dragged into a discussion on the impact of tariffs on Fed policy. Powell said “it’s not the Fed’s job to make or comment on tariff policy. That’s for elected people, and it’s not for us to comment.”
Today, Powell testifies to the US House Committee on Financial Services (10:00am New York). Later, Atlanta Fed President Raphael Bostic (non-voter) speaks on the economic outlook (12:00pm New York) and Fed Governor Christopher Waller speaks on stablecoins (5:05pm New York).
US
The US January CPI data is the focus today (8:30am New York). Headline CPI is expected at 2.9% y/y vs. 2.9% in December and core CPI is expected at 3.2% y/y vs. 3.2% in December. The Cleveland Fed’s Nowcast model forecasts headline and core at 2.9% y/y and 3.1% y/y, respectively. Survey-based measures consumer inflation expectations one year ahead have raised the possibility that progress on inflation may be stalling above 2%.
Bottom line: the slower US disinflationary process and solid economic activity suggest the Fed easing cycle will be shallower than is currently priced-in which is USD bullish. Fed funds futures currently imply 70% odds the Fed delivers 50bps of cuts in 2025 while the FOMC projects 50bps of rate cuts this year.
CANADA
USD/CAD is trading at the lower end of its year-to-date 1.4260-1.4800 range. The Bank of Canada (BOC) releases the Summary of Deliberation from its January meeting (1:00pm New York). At that meeting, the BOC delivered on expectations and slashed the policy rate 25bps to 3.00%. The BOC also announced technical changes to its monetary policy implementation framework and signaled that the bar for additional easing is high. The BOC reiterated that “the cumulative reduction in the policy rate since last June is substantial” and lifted inflation projections for 2025 and 2026. Nonetheless, markets expect the BOC to deliver more rate cuts, which is an ongoing drag for CAD. We agree. The swaps market is pricing in 50bps of easing over the next 12 months that would see the policy rate bottom at 2.50%.
CHILE
Banco Central de Chile minutes offered more color behind the bank’s hawkish hold at the January 28 meeting. According to the minutes “Several Board members stressed the need to emphasize the Board’s concern about the evolution of two-year inflation expectations” and “One Board member added that it should be made clear that the Bank would act with appropriate severity, which implied being willing to change the direction of monetary policy and move rates upwards, if necessary.” The swaps market has fully priced-in a 25bps hike over the next 12 months.
HUNGARY
National Bank of Hungary minutes of the January 28 meeting will be released today (8:00am New York). At that meeting, the bank kept rates steady at 6.50% for the fourth straight month but the policy guidance was more hawkish. In its post-decision statement, the central bank warned that “risks to the outlook for inflation warrant the maintenance of tight monetary conditions.” Previously, the statement read “the risks to the outlook for inflation warrant further pause in cutting interest rates.” The swaps market no longer price-in material odds of a rate cut in the next 12 months after CPI inflation overshot expectations and printed above the bank’s tolerance band in January.
