We were right about the importance of the speech from the Federal Reserve’s Christopher Waller yesterday. We were wrong about its content, where, in fact, he did push back against the market’s aggressive pricing of easing. Here is the key sentence:

This cycle, however, with economic activity and labor markets in good shape and inflation coming down gradually to 2 percent, I see no reason to move as quickly or cut as rapidly as in the past.

US yields pushed higher on the speech and the dollar strengthened. However, equity markets held up reasonably well. Since equity markets have had a large say in FX market pricing over the last couple of months, this may have been one of the reasons why the dollar was not even stronger yesterday.
On to today and the US highlight will be the release of December US retail sales. Our team is looking for a strong 0.6% month-on-month reading, which presumably will also question the market’s current pricing of a 62% chance of a Fed rate cut in March. Interestingly, despite Fed Waller’s speech yesterday, the market is still pricing 154bp of easing this year. That seems too much.

It was not our baseline call yesterday, but DXY did break resistance around 103.10/15 (now support) and the upside bias to US rates and a mixed risk environment warns of DXY extending to the 104.00/104.25 area.

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