European FX starts the day on the back foot. Events in the Middle East are also being cautiously monitored, although it is important to say that energy markets remain quite orderly, and European natural gas has actually dropped below EUR30/Mwh, a very welcome development for European industry.

Onto the day ahead, what catches our eye is a 5:00 pm CET speech from the Federal Reserve’s Christopher Waller. Recall that he delivered the definitive and market-moving “something appears to be giving” speech in late November. Back then, it concluded that the conflict between strong US growth and disinflation appeared to be resolving in the favour of disinflation. The speech provided an important lead indicator for the Fed’s dovish turn at the December FOMC meeting. We presume today that he will stick to that same core message of successful disinflation and will not want to get involved in the fine-tuning of discussing a 2024 easing cycle, but not starting in March. We thus see event risk as a benign one – slightly negative for the dollar and positive for risk.

We also note an overnight story from the Wall Street Journal’s Nick Timiraos that the Fed could consider slowing its Quantitative Tightening scheme – US $60bn in US Treasuries currently rolling off the Fed’s balance sheet each month – at coming meetings. It is not clear whether this could be on the agenda for the 31 January meeting, but it would also support the less hawkish stance from the Fed announced above.

DXY has clear resistance at 103.10/20 and the case we have outlined above suggests that these levels may well prove the top of the day’s trading range. If we are wrong and Waller has been sent out to push back against aggressive easing expectations (markets price 18bp of a 25bp first cut in March and 158bp of easing this year) then DXY can break resistance and head to the 104.00/25 area multi-day.

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