US yields jump after inflation soars to its biggest rise in forty years

Fed’s Bullard Seeks Bold Rate Rise, USD Mostly Up in Choppy Trade

Summary: It was all happening overnight in the FX markets after the US Headline CPI in January rose at an annual rate of 7.5%, beating economist’s forecasts at 7.3%. The year-on-year pace of US inflation was the highest in nearly 40 years. Annual core Inflation rate rose to 6.0% for the month, up from a previous 5.5%, and higher than estimates at 5.9%. The benchmark US 10-year treasury bond yield soared to 2.04%, up 10 basis points from 1.94% yesterday. Two-year US bond rates rocketed up a whopping 25 basis points to 1.61% from 1.36%, its highest level since December 2019. James Bullard, St Louis Federal Reserve President, said that he wants a full percentage point of interest rate rises in the next 3 Fed meetings.

(Source: Tradingview.com)

However, it was not one way for the US Dollar as other global bond rates also spiked. In volatile trade, the Dollar Index (USD/DXY), which measures the value of the Greenback against a basket of 6 major currencies, settled at 95.55 from 95.50. Against the yield sensitive Japanese Yen, the US Dollar climbed 0.31% to 115.95 (115.55). The Greenback rallied 0.29% against the Canadian Dollar to 1.2714 from 1.2675 after Bank of Canada Governor Tiff Macklem said that the current inflation in the country is mostly a supply issue. The Australian Dollar dipped to 0.7170 after spiking to an overnight high at 0.7249 following the RBA’s move to end QE. The Euro (EUR/USD) tumbled to an overnight low at 1.1375 before spiking to 1.1495, eventually settling at 1.1430. Trade in the share currency was volatile. ECB Vice-President Luis de Guindos said yesterday that they would raise its main interest rate only “if and when” it sees inflation stabilising at it’s 2% goal. The British Pound (GBP/USD) settled with modest gains to 1.3558 from 1.3542. Against the Asian and Emerging Market currencies, the Dollar was mostly higher.

The USD/SGD pair (US Dollar-Singapore Dollar) edged up to 1.3450 from 1.3425. Against the Offshore Chinese Yuan, the Greenback (USD/CNH) was little changed at 6.3625. Equity markets fell following the hawkish comments from Bullard. The DOW was last at 35,245 from 35,835 while the S&P 500 lost 1.8% to 4,505 (4,585). Other global bond yields finished higher. Germany’s 10-year Bund yield was up 7 basis points to 0.28%. The UK 10-year Gilt yield climbed 9 basis points to 1.52%. Japanese 10-year JGB yield edged up two basis points to 0.22%. Australia’s 10-year bond yield climbed 10 basis points to 2.20% (2.10%).

• EUR/USD – the shared currency trading in a choppy range, initially climbing to 1.1495 before tumbling to 1.1375 lows. The Euro rallied back to settle at 1.1430 at the close. Yesterday, the EUR/USD opened at 1.1425. Germany’s 10-year Bund yield climbed 9 basis points, almost matching that of the US bond rate.
• GBP/USD – Sterling managed to settle higher versus the Greenback finishing at 1.3558 from 1.3542 yesterday. Trade was also volatile with an overnight high at 1.3644 hit before tumbling to its New York close. Overnight, the British currency tumbled to a low at 1.3521.
• AUD/USD – The Aussie Battler had its own roller coaster ride, soaring to an overnight peak at 0.7249 after the RBA formally ended its QE program. Yesterday, the AUD/USD pair opened at 0.7180. This morning, the Aussie Battler was changing hands at 0.7170 US cents. In a speech just released, the RBA Governor Philip Lowe said that the bank’s board is prepared to be patient. AUD/USD was little changed at 0.7162.
• USD/JPY – against the yield sensitive Japanese currency, the Greenback rallied to 115.95 at the close of trade in New York (115.55 yesterday). The higher US bond yields lifted this currency pair to an overnight high at 116.34 before easing to its close. Overnight low traded was at 115.48.

On the Lookout: After the choppy moves so far this week, what can we look forward to today? The economic calendar kicked off with New Zealand’s NZ Business NZ PMI for January which eased to 52.1 from December’s 53.8. The Kiwi (NZD/USD) was little changed at 0.6675 (0.6679 NY close). Japanese markets are closed with a holiday today (National Foundation Day). Europe starts off with Germany’s Final January CPI (m/m f/c 0.4% from 0.5%; y/y f/c 4.9% from 5.3%). Watch this data for any big changes and discrepancies. The UK follows next with its UK Preliminary GDP (q/q f/c 1.1% from 1.1%, y/y f/c 6.3% from 8.0% - ACY Finlogix), UK December Trade Balance (f/c -GBP 12.5 billion from -GBP 11.34 billion – ACY Finlogix), UK December Manufacturing Production (y/y f/c 1.7% from 0.4% - ACY Finlogix), UK Industrial Production (y/y f/c 0.6% from previous 0.1% - ACY Finlogix). Germany is next with its January Wholesale Prices (m/m no f/c, previous was 0.2%; y/y no f/c, previous was 16.1%). Switzerland releases its January Inflation Rate (m/m f/c 0% from -0.1%; y/y f/c 1.5% from 1.5% - ACY Finlogix). The US rounds up today’s economic data releases with its University of Michigan February Preliminary Consumer Sentiment Index (f/c 67.5 from 67.2).

Trading Perspective: After a volatile week, truly one can say, “Thank God it’s Friday.”. However, its not over till its over. Expect more FX volatility today. The rise in US inflation to near 40-year highs has put a lot of pressure on the Federal Reserve. Many traders are expecting the US central bank to respond aggressively and the likelihood that they will raise rates by 50 basis points in March is real. This will keep the US Dollar on the front foot against it rivals. It is surprising that the Dollar is not higher this morning. Which suggests to this writer, that the speculators have been sitting long of US Dollars. Once again, the best tactic for any trader is to be flexible, keep within the recent ranges (even if they are wide). Watch for further central bank rhetoric as we approach the weekend. The CBOE VIX Volatility Index soared a whopping 19.8% to 23.91 from its previous close of 19.96 which is huge although it was not highlighted. Expect more choppy trade today. Happy days!

• AUD/USD – the Australian Dollar has performed remarkably well considering the yesterday’s climb in US inflation. While the RBA has ended QE, which supports the AUD/USD pair, the currency is not out of the woods yet. AUD/USD closed at 0.7170 after trading to an overnight high at 0.7249. Immediate resistance for today lies at 0.7200 and 0.7240. Immediate support is found at 0.7170 and 0.7140 (overnight low traded was at 0.7147). Look for the Aussie to trade a choppy 0.7140-0.7240 range today. Prefer to sell rallies.
• EUR/USD – the shared currency got some respite as speculative Euro short bets used to dip to cover. Overnight the Euro traded to a low at 1.1375 before rallying in late New York to 1.1430. This morning, the EUR/USD pair has edged lower to 1.1417. Immediate support for today lies at 1.1400 followed by 1.1370. Immediate resistance lies at 1.1440, 1.1470 and 1.1500. Look for further volatile trade in a likely range today of 1.1385-1.1485. Sell rallies.
• USD/JPY – against the Japanese currency the Greenback soared to an overnight high at 116.34 following the release of the US CPI report. At the close of New York, USD/JPY settled at 115.95 (115.55 open yesterday). Immediate resistance today lies at 116.20 followed by 116.50. Immediate support can be found at 115.80 and 115.50. Look for this currency pair to consolidate in a likely range between 115.85 and 116.65. Trade the range shag on this one.
• GBP/USD – Sterling rose against the US Dollar to 1.3558 from 1.3542 yesterday. Overnight high traded for the GBP/USD pair was at 1.3644. On the day, immediate resistance can be found at 1.3600 followed by 1.3630 and 1.3660. Immediate support lies at 1.3540 followed by 1.3510 and 1.3480. The UK releases a plethora of economic data today which includes UK Preliminary GDP, UK Manufacturing, and Industrial Production. Economists are looking for an easing of these components. The risk then may be for a less than expected easing. Look for further choppy trade in a likely range today of 1.3510-1.3630 today. Prefer to sell rallies.

At the end of the day, every yield tells a story. Happy days. Happy Friday and trading all, and a top weekend as well.