Global asset markets have enjoyed a positive 24 hours driven largely by the marginally sub-consensus US core CPI reading for December. US short-dated yields fell 10bp on the view that inflation is not getting any worse. However, sticky headline and core inflation near 3% YoY still cast doubt on the Fed's ability to cut this year and just 36bp of Fed easing is priced for 2025. Last night's release of the Fed's Beige book noted that most of the Fed's 12 districts reported strong holiday sales, which exceeded expectations. Some are also thinking that the weekly initial claims figures are very low. So far, so US Dollar (USD) positive, ING’s FX analyst Chris Turner notes.
DXY can bounce ahead of Trump's inauguration on Monday
“The highlight of the day, however, should be Scott Bessent's nomination hearing in front of the Senate Finance Committee. He's going to be grilled about his views on various key topics, including the USD, tariffs and fiscal sustainability to name a few. In pre-released remarks, he's said he wants to ensure the USD remains the dominant reserve currency and that the 2017 TCJA tax cut be made permanent so there isn't a $4tr increase in taxes. On tariffs, in the run-up to the election, he's said that they are a useful negotiating tool. We also wonder whether Bessent will comment much on how tariffs will contribute to balancing government finances. If tariffs are highlighted as a key tool, then the USD could push back to the highs.”
“No doubt Bessent will be asked about the strong USD. As discussed in this month's edition of FX Talking, the inflation-adjusted DXY is now at its highest level since 1985. We doubt Bessent will want to go anywhere near the subject of a weaker USD, although there is a chance he could discuss the need for trading partners to strengthen their currencies – that's the outside risk today.”
“But that is a hard message to balance against the need for the USD to remain the world's pre-eminent reserve currency. On balance, we think the USD can say bid today. However, DXY moves back towards 110 and could see some profit-taking ahead of Monday's event risk in the form of Trump's inauguration.”
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