DXY closed below the 103.4-105 range set after the last month’s FOMC meeting. DXY fell with the US Treasury yields during the European session into the early US session. DXY and the 2Y yield found support at 103 and 4.18% respectively, on San Francisco Fed President Mary Daly’s comments. Although Daly was open to a 25 bps or 50 bps hike at the FOMC meeting on 1 February, she also favoured the Fed Funds Rate (FFR) peaking and pausing above 5% this year. Daly’s stance, which Fed Chair Jerome Powell will repeat today, presented a challenge for USD bears because the UST 2Y yield is below the 4.25-4.5% FFR range. The S&P 500 index ended the overnight session with a 0.1% loss, giving up its initial 1.4% gains. WTI crude oil prices also shed Monday’s gains from 4% to 1.4%, ending at USD75/barrel, near the USD70 low on 9 December. Unable to shake off the growth fears that accompanied slowing inflation, markets are likely to stay defensive ahead of Powell’s speech today.
GBP appreciated 0.8% to 1.2184, back to 20 December levels. GBP’s recovery above 1.15 started after the Bank of England matched the Fed’s 75 and 50 bps hikes in November and December, respectively. The BOE will probably do so again on 2 February, one day after the FOMC meeting. However, we noted that GBP’s fall from 1.2446 to 1.1908 between 14 December and 5 January was consistent with an increase in speculative GBP shorts. According to CFTC data, net short non-commercial GBP positions increased to 20k contracts for the 3 January week from 5.6k a fortnight ago. Speculators added gross short GBP positions at a faster pace than gross longs. Although the Bank of England worries about stubbornly high inflation, consensus sees a five-quarter recession into 3Q23. UK property experts reckoned higher rates and recession could lower property prices by 5-12% this year. At current levels, GBP has retraced its losses to the Fed’s first 75 bps hike in mid-June. Unless the Fed and US CPI send the USD decidedly lower this week, GBP may not deviate far from 1.20 for now.
Quote of the day
“Patience is bitter, but its fruit is sweet.”
Jean-Jacques Rousseau
10 January in history
In 1984, the United States and the Vatican reestablished relations after a 117-year break.
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