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Markets in Waiting Mode – Action Forex

Market movers today

A very quiet day with no data of interest. Instead markets will be awaiting the US CPI data on Thursday.

We have some ECB speeches out during the day with Holzmann, Villeroy and De Cos speaking.

Overnight China will release PPI and CPI inflation for December.

The 60 second overview

Markets: Yesterday and overnight have proven relatively calm and uneventful sessions. Markets are eagerly awaiting tomorrow’s US CPI print which will be key for the size of the February Fed rate hike. At this stage markets are clearly leaning towards a 25bp hike with the short-end of the US rates curve pricing around 26bp. We still think it is a very close call but for now highlight that we think markets are underestimating the likelihood of a 50bp hike amid the last months’ easing of global financial conditions.

Fed Chair Powell took part in yesterday’s Riksbank symposium in honour of Stefan Ingves stepping down as Riksbank governor. Meanwhile, Powell refrained from giving any new policy signals to markets which seemed like a slight relief to markets. Also a decline in US NFIB Small business optimism marked another “bad news is good news for markets” event as markets priced in less monetary tightening following the release.

In terms of market price action most asset classes have traded fairly sideways over the last 24 hours although the latter part of the US session yesterday was characterised by slight optimism with equities moving modestly higher and US yields settling lower. A big story of the year so far has been the rally in EUR/USD – driven by both a stronger EUR and a weakening of the USD. However, also this rally has stalled this week ahead of the US CPI release. Brent crude continues to trade close to the USD 80/bbl mark while European natural gas prices for now seem to have found a bottom around EUR 70/MWh.

Norwegian inflation: Yesterday’s release for December showed core inflation picking up very slightly to 5.8% Y/Y from 5.7% in November. While this was marginally higher than Norges Bank’s expectations of 5.7% we do not see this as sufficient for Norges Bank to hike policy rates next week. Also the details were in our view by no means alarming. Meanwhile, rates markets are still pricing in a close to 30% probability that policy rates will be lifted by an additional 25bp already next week. Our base case remains that the peak in policy rates has already been reached in Norway although it is a very close call on whether we could get a final 25bp hike in March.

FI: Bearish rates sentiment dominated yesterday with moderate spread tightening lead by the periphery. 10y German bunds ended 8bp higher at 2.3% in a bearish steepening move amid significant supply in euro space yesterday. Interestingly, the Belgian 10y syndication attracted significant bids (leading to relative outperformance to peers). Several ECB speakers were on the wires confirming the need for further policy tightening as already guided at many previous occasions.

FX: EUR/USD held steady above 1.07 yesterday and USD/JPY traded around 132 as the market is in wait-and-see mode before tomorrow’s US CPI release. EUR/NOK rallied above 10.70 again after inflation dropped in Norway.

Credit: Following a strong start to 2023, secondary credit spreads were slightly under pressure yesterday where iTraxx Xover widened 7.4bp and Main 2.6bp. Meanwhile, sentiment remained firm in primary markets where new issues continue to be well absorbed.

Nordic macro

There are no data releases out today of particular market or economic importance.

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