We’re not convinced that a higher inflation figure will trigger sustained further USD gains

Markets

Fed Chair Powell’s appearance before the Senate Banking Committee yesterday didn’t yield much clues on (changes in) monetary policy in the Trump 2.0 era. The Fed Chair understandably stuck to data dependency. After having reduced policy restriction in the second half of last year, a strong economy and labour market give the Fed ample room to assess the impact of upcoming developments. In this respect Powell still held the view that it was unwise to speculate on the potential impact of the new government policy/proposals. The Fed is in no rush to cut rates. The Fed Chair also advocated to keep monetary policy out of the political debate as the best way for the Fed to serve its dual mandate. Many questions were on regulation and supervision instead on monetary policy. The US yield curve yesterday bear steepened with yields rising between 0.9 bps (2-y) and 4.0 bps (30-y), but most of this move already occurred before Powell’s testimony. The $58 bln US Treasury auction met solid investor interest. Regarding the data, there was a slightly bigger than expected decline in NFIB small business confidence, admittedly from a strong level, with quite a substantial rise in the uncertainty index (100 from 86). European yields showed tentative signs of bottoming after the end-January/early February setback. German yields added between 5.8 bps (2-y) and 7.7 bps 30-y). We didn’t see any specific trigger. US equity markets showed no clear trend (S&P 500 +0.03%) as markets still try to assesses the impact/reaction to the announcement of 25% tariffs on steel and aluminum. The EuroStoxx50 (+0.61%) again outperformed the US. Oil extended its rebound (Brent $77 p/b close). The dollar lost ground throughout the session but stays rangebound (DXY close 107.96 from 108.33, EUR/USD 1.036 from 1.0307).

Asian equities this morning are mostly trading in mildly positive territory. There are few eco data except for the US January CPI data to be released this afternoon. Consensus (headline 0.3% M/M and 2.9% Y/Y, core 0.3% M/M and 3.1% Y/Y) is broadly in line with last month. The market currently already scaled back expectations on Fed easing quite substantially (first additional 25 bps rate cut only fully discounted by September and less than 50% chance on a next step by year end). Given this starting point, an upward surprise is probably needed to further price out Fed easing. Maybe, LT yields still have some additional upside in case of an in-line/higher than expected figure. Later today, the US Treasury will sell $42 bln 10-y Notes. The dollar recently held relatively strong but failed to make further headway, despite the avalanche of announcements on tariffs. We’re not convinced that a higher inflation figure will trigger sustained further USD gains. EUR/USD 1.0442 is first intermediate resistance. Recent yen outperformance stalled as markets also grow uncertain on the potential impact of tariffs for Japanese exports. USD/JPY this morning rebounds further to 153.6 (compared to a low near 151 end last week).

News and Views

The European Commission is considering a price cap on gas prices, the Financial Times reported citing people familiar with the early-stage talks. Prices have recently surged to the highest level in more than two years on rapidly depleting stock levels and a lack of alternative (renewable) energy sources. The EC proposed a cap back in 2022, at the height of the energy crisis that followed Russia’s invasion, but it was never put in practice due to its high knock-in level compared to actual prices. Mario Draghi in his competitive report of last year recommended of bringing in “dynamic caps” instead for situations when EU gas prices diverge from global ones. One of the EU officials said they are studying Draghi’s suggestion in detail.

Bank of Japan governor Ueda appearing before parliament repeated that follow-up rate hikes will depend on the economy and price evolution. While the central bank usually looks at underlying gauges that exclude energy and fresh food to assess inflation strength, Ueda noted that "Rises in the prices of food, including fresh food, won't necessarily be temporary and there's the chance that this will impact people's mindsets and price expectations." Prices in Japan rose 3.6% y/y in December compared to the 3% core measure. Ueda also confirmed the central bank will conduct a review of its current plan to taper government bond purchases in June. In July of last year the BoJ said it plans to halve the monthly buying pace to JPY 3tn as of January-March 2026.

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