Rise in Core Inflation | Current Market Sentiment

There is no trade call for the session. Yesterday’s NY session saw the Fed keep rates on hold as expected, however the overall communication was much more dovish than the market anticipated in light of the recent rise in core inflation.

Current Market Sentiment:

The Fed’s dot-plot rate forecasts were downgraded from seeing an average of four hikes through 2016 in December, to now only two. This was below the markets expectations of a revision to three hikes for this year. Growth and inflation forecasts were also downgraded. Further, the statement focused on downside risks and appeared to completely dismiss the rise in core CPI to 2.3% and core PCE to 1.7%. The statement said that “Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices”. Clearly, this refers to headline inflation and the Fed have stated repeatedly and have written on their website that they do not pay much attention to headline inflation but rather core measures to assess underlying inflation trends. During the press conference Yellen referred to the marked rise in core inflation as potentially caused by transitory factors; “Core inflation (which excludes energy and food prices) has also picked up, although it remains to be seen if this firming will be sustained.” The communication also cited lower global growth and lack of sustained rise in wage inflation. Nevertheless, April remains a live meeting and the trend in core inflation between now and then will be the key determinant of when they next raise rates. The USD sold-off across the board.

During the Asian session, GDP from New Zealand beat estimates at 0.9% for the fourth quarter, above 0.7% expected. For 2015, growth was at 2.3% above the expected 2.1%. Kiwi rallied a further 65 pips to extend on its rally, up over 200 pips from pre-FOMC lows.

The Aussie also saw further upside on employment data; the unemployment rate dropped to 5.8% below expected 6.0%, however only 300 jobs were added, below the estimated gain of 11,000. 15,900 full time jobs were added. The drop in the jobless rate was enough to keep the Aussie buoyed, up nearly 200 pips from yesterday’s lows.

Ahead we have the monetary policy announcement from the SNB, Eurozone CPI and MPC minutes from the BoE.

Learn more about today’s upcoming events by watching weekly risk events video here.

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