Daily Market Outlook, February 10, 2022

Overnight Headlines

Asian stock markets are mostly up this morning ahead of today’s important US inflation release. Market risk sentiment may have been helped by US Federal Reserve policymaker Mester’s claim that they did not want to disrupt markets. She did warn that interest rates were likely to rise but said there was no compelling case for an immediate 50 basis point hike. Meanwhile, UK PM Johnson said yesterday that all Covid restrictions will end in England in two weeks’ time. The UK RICS housing index rose to 74 in January from 69.

Given ongoing concerns about inflationary pressures, today’s January US CPI report is probably the key release of the week for markets. Annual inflation seems certain to move up again and markets expect a new 40-year high of 7.6% (from 7.0% in December). Look for above consensus with some economists seemingly expecting much of the recent rise in energy prices to show up in the February numbers. However, there is agreement that inflation is set to rise further with a risk that it could hit 8% in February. Core inflation (excluding food and energy) is also expected to have increased to 6% from 5.5%, which would be a near 40-year high.

US inflation seems likely to peak in Q1 and should fall sharply in the second half of the year as last year’s big increases in oil and gas prices fall out of annual comparisons. However, the extent to which ‘core’ inflation will ease is more uncertain given ongoing concerns about wage pressures from a tight labour market. That is likely to be the key focus for the US Federal Reserve this year and the number one determinant of the extent to which US interest rates will rise.

Tonight’s speech by BoE Governor Bailey will be watched closely for further clues on the outlook for UK monetary policy. Most of last week’s policy update was broadly as expected but the hawkish surprise was that 4 of the 9 Monetary Policy Committee members voted to hike interest rates by 50 basis points rather than just 25. The BoE did partially offset this with relatively dovish forward guidance which suggested that market interest rate expectations are too high, but the overall result was to further raise those expectations. Markets will be looking for further clues tonight on whether Bank Rate will again be raised in March but it will also be interesting to watch the extent to which Bailey pushes back against market expectations.

The UK GDP update for December, to be released early tomorrow is forecast to show a fall in activity primarily due to the impact of Omicron. Look for a monthly decline of 0.7% led by consumer-facing services but other parts of the economy are likely to have been less affected.

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.1250 (470M), 1.1290-00 (698M) 1.1315 (414M), 1.1330-40 (1.85BLN), 1.1375-80 (455M) 1.1410-15 (450M), 1.1420-30 (670M), 1.1440-50 (615M) 1.1460-65 (420M), 1.1490-00 (1.6BLN), 1.1520-25 (637M) 1.1540 (289M), 1.1580-90 (605M), 1.1595-00 (1.6BLN) 1.1620 (500M), 1.1720 (415M)
USD/JPY: 114.50-55 (500M), 116.25 (300M)
GBP/USD: 1.3300 (342M), 1.3400 (300M), 1.3415 (513M) 1.3500-05 (920M), 1.3520 (811M). EUR/GBP 0.8405 (700M)
USD/CHF: 0.9170-75 (490M). USD/CAD: 1.2670-80 (960M) 1.2810 (1.2BLN), 1.3000 (400M)
AUD/USD: 0.7150-60 (1.48BLN), 0.7170-80 (847M) 0.7190-00 (610M).
USD/ZAR: 14.90 (310M), 15.65-85 (640M)