Inflation was the main talking point in the US yesterday after stocks fell for the first time in 2018, as we approach the all-important CPI readings on Friday afternoon. Comments from the Fed’s Bullard, notoriously dovish, caused a stir after he said that to make up for the lacklustre inflation readings we would need to see over a decade of plus 2.5% inflation. As we know, inflation is a key battleground for many Fed members, with some choosing to hold off voting for rate hikes in favour of allowing inflation to poke its head back above the 2.5% target rate.
In recent months Janet Yellen has been particularly unmoved by the lower inflation rate, focusing more on tightening policy and reducing the bulging balance sheet. It has been suggested that the FED will look to new policy frameworks when new Fed Chair Jerome Powell takes office, after missing inflation targets for the last 5 years. Former Fed chair Ben Bernanke suggested in an interview recently that the Fed are “symmetrical” when it comes to the inflation target, insinuating that they were unmoved whether above or below target. This has clearly been highlighted when the Fed have moved rates despite undershooting the target. Another indication of this is that despite the recent headlines, the interest rate probability still remains at 99.7% chance of no change at the January FOMC, jumping to an 82% chance of a hike at the March meeting.
Elsewhere in the US there were big moves for the Canadian Dollar and the Mexican Peso after fears that Trump was going to pull the US out of NAFTA altogether. The White House moved to silence the rumours by saying that the President had not changed his stance on NAFTA, but of course that was largely ignored. This again highlights the fragility of anything dependent on Donald Trump and the current administration. On the back of that USD/CAD jumped above 1.2580.
Overnight stories from China came out to deny that they were to reduce or halt purchases of US Treasuries. The news yesterday had seen the US dollar pummeled against its major counterparts, but after the rebuttal has somewhat recovered, with EUR/USD back below yesterday’s lows. Today sees the major news coming from the eurozone as the ECB meeting minutes are released, again, much like the US we should see a focus on inflation targets, however we do not expect to see a change in guidance or language until at least the summer.