Kiwi slips ahead of key US inflation update

Key Movers

Price action across majors was largely muted throughout Wednesday as markets pare big bets ahead of a critical US inflation update. The US dollar gained against the yen, yet dipped against the euro and GBP. Softer-than-expected local macroeconomic data in Japan dampened hopes the Bank of Japan (BoJ) will raise rates out of Negative territory later this month. Support for a BoJ monetary policy adjustment has been growing over the last 6 weeks as policymakers discuss a possible amendment to the current policy program. Some analysts had been pricing a rate hike as early as January helping add some support to the Yen but this week's softer data will likely ensure policymakers defer action until at least April. The Dollar pushed back above 145.50 JPY and is trading near 1.0970 against the Euro.

Our attention turns now to the December US CPI inflation report. Traders are pricing in an easing in Fed policy through 2024, yet the timing and trajectory of rate cuts depend heavily on the inflation narrative. While we expect a small uptick in month-on-month headline inflation, annual inflation pressures should continue to ease, elevating potential calls for a March rate cut and weighing on the USD. In contrast, a surprise miss to the upside will afford the Fed scope to push back against market expectations, forcing analysts to delay expectations for a rate cut, likely until H2. With relative monetary policy a primary driver of short-term direction we expect volatility leading out of tonight’s inflation update.