Citi

European Open

Risk sentiment remains stable, with modest follow through during the Asia session due to Lunar New Year Holidays. The themes remain the same – how much more hawkish the FOMC can be vs market expectations, and whether the ECB could be forced to pivot on inflation trends. Therefore we may see some further two way price action with upside risks to the overall Eurozone CPI print at 10:00 GMT though we suspect EURUSD may cap out around 1.13 ahead of the ECB. ADP data in the US is unlikely to move markets ahead of what's expected to be a temporarily soft NFP number on Friday.

AUD continued to be the highlight of the Asia session with RBA Governor Lowe doubling down on his February message, guiding expectations towards late 2022 or early 2023 for lift off. INR FX underperformed slightly after Tuesday’s budget announcement, while PEN sees the appointment of a potentially market friendly finance minister, and some uncertainty about the PM. RUB continues to recover though geopolitical headlines remain.

What’s in focus

USD: Ticking along.

A hawkish Fed means that we see further USD upside over time in particular vs funders, as outlined in Our humble and nimble view of USD upside. To recap Tuesday’s Fedspeak:

–Philly Fed President Harker said he “sees four 25bp hikes in 2022,” but when questioned on whether a 50bp hike, he sounded more tentative. Harker also said he wouldn’t commit to balance sheet reduction until further data is seen and suggested the Fed could possibly sell assets at an unconfirmed time.

–Bullard also sounded cautious on balance sheet runoff, though our US economist, Andrew Hollenhorst, confirmed that Citi’s base case is still for balance sheet reduction to start in July (Q3), with May or June (Q2) not being too surprising.

Credit Agricole

Asia overnight

The Lunar New Year holidays continue to limit the news-flow coming from Asia, and as such G10 currencies have been treading water overnight, with daily moves of no more than +/-0.1% against the USD. With equity futures broadly flashing green, risk sentiment appears as slightly supportive, as the AUD has been the marginal outperformer on the day, thanks primarily to the comments made by the RBA governor who did not rule out the possibility of 2022 rate hikes.

USD: ADP yet to regain some predictive credentials The USD was marginally offered against other G10 FX at the start of February although long UST yields crept higher on the day. The surprising rebound in the prices paid component of the latest US ISM manufacturing survey may have revived the prospects of more entrenched inflationary pressures across US supply chains. In the meantime, production and new orders cooled to their lowest level in more than 18 months, while employment firmed somewhat. This was nicely complemented by a further rise in JOLTS job openings in December, although attention is rather focused on the January developments. In that respect, today the ADP survey could offer the first gauge of US private employment in 2022, even though market participants could remember that the ADP release failed to predict the massive NFP disappointment of the past couple of months. As such, the knock-on effect on the USD could be fairly limited ahead of the more important publication of the January US jobs report on Friday.