Greenback Holds Ground After Slight PPI Miss, Sterling Weakens Again as Gilt Yields Eye 5% – Action Forex

Dollar is holding steady against its peers in early U.S. trading, with softer-than-expected PPI report failing to trigger significant selling pressure. Market sentiment continues to shift toward the possibility that the Fed might refrain from additional rate cuts in 2025. Fed funds futures are currently pricing in less than 60% probability of a 25bps rate reduction in the first half of the year.

Attention now turns to Tuesday’s U.S. Consumer Price Index (CPI) data, which is anticipated to be a more significant indicator of inflationary trends and policy direction. Currently, the market expects a significant interest rate differential of 200-300 basis points between Fed and ECB by the terminal point of the currency easing cycle. Should domestic inflationary pressures in the US show any signs of resurgence, this differential could skew further toward the higher end of the range, solidifying Dollar strength.

Meanwhile, the Pound continues to bear the brunt of market concerns over the UK’s fiscal health. The relentless selloff in UK government bonds drove 10-year Gilt yield to above 4.9%, with a break above 5% psychological barrier appearing increasingly imminent. Such a move could intensify the downward pressure on Sterling, which is already grappling with domestic economic challenges. The UK is bracing for a pivotal week, with CPI data scheduled for Wednesday and GDP figures following on Thursday. These releases could determine whether the Pound can stabilize or face further deterioration.

On the weekly leaderboard, Sterling is the worst performer so far, followed by Yen and Dollar. Kiwi leads the pack with Aussie and Loonie close behind. Euro and Swiss Franc remain in middle positions.

In Europe, at the time of writing, FTSE is down -0.13%. DAX is up 0.83%. CAC is up 0.86%. UK 10-year yield is down -0.004 at 4.887. Germany 10-year yield is up 0022 at 2.617. Earlier in Asia, Nikkei fell -1.83%. Hong Kong HSI rose 1.83%. China Shanghai SSE rose 2.54%. Singapore Strait Times fell -0.08%. Japan 10-year JGB yield rose 0.0319 to 1.244.

US PPI rises 0.2% mom, 3.3% yoy in Dec, miss expectations

US producer prices rose modestly in December, with PPI for final demand increasing by 0.2% mom, falling short of market expectations of 0.3%. The gain was driven primarily by 0.6% mom increase in goods prices, which included a sharp 3.5% rise in energy costs.

In contrast, prices for services remained flat. Excluding the more volatile components of food and energy, core PPI was unchanged for the month, missing the anticipated 0.2% mom increase.

On an annual basis, headline PPI edged higher from 3.0% to 3.3% yoy, narrowly below the forecast of 3.4% yoy. Core PPI, excluding food and energy, rose from 3.4% to 3.5% yoy, also underwhelming expectations of 3.8% yoy.

BoJ’s Himino signals rate hike possible in upcoming meeting

In remarks today, BoJ Deputy Governor Ryozo Himino signaled that a rate hike remains a tangible possibility at the upcoming policy meeting. He said the board “will discuss whether to raise interest rates next week, base its decision on thee projections detailed in the quarterly outlook report.

Himino stated, “When the appropriate timing comes, we must shift policy without delay, as the effect of monetary policy is said to show up with a lag of one to one-and-a-half years.”

The Deputy Governor clarified that BoJ does not rely on a predefined “checklist” for rate decisions. Instead, the board intends to thoroughly analyze the economic outlook and inflation expectations to determine the next steps.

Australian Westpac consumer sentiment dips again, RBA easing unlikely before May

Australia’s Westpac Consumer Sentiment fell -0.7% mom in January, settling at 92.1, reflecting a second consecutive decline. However, Westpac noted a divergence within the data: current conditions sub-indexes weakened, while forward-looking measures were flat or showed slight gains.

RBA faces a mixed picture as it prepares for its next policy meeting on February 17–18. While the central bank appears increasingly confident about bringing inflation back within its 2–3% target range, labor market “stopped easing” in the latter half of 2024 and subdued consumer surveys highlighted “mixed signals”.

According to Westpac, RBA is likely to keep interest rates unchanged in February, with an easing cycle more probable to commence in May.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2131; (P) 1.2172; (R1) 1.2244; More…

Intraday bias in GBP/USD remains neutral as consolidations continue above 1.2099 temporary low. While stronger recovery cannot be ruled out, outlook will stay bearish as long as 1.2486 support turned resistance holds. Break of 1.2099 will resume the decline from 1.3433 to 100% projection of 1.3433 to 1.2486 from 1.2810 at 1.1863.

In the bigger picture, rise from 1.0351 (2022 low) should have already completed at 1.3433, and the trend has reversed. Further fall is now expected as long as 1.2810 resistance holds. Deeper decline should be seen to 61.8% retracement of 1.0351 to 1.3433 at 1.1528, even as a corrective move.