[MARKET ANALYSIS] USD slightly firmer, GBP mildly benefits on strong Retail Sales/PMIs, JPY underperforms post-CPI

DXY is incrementally firmer this morning and trades at the mid-point of a 97.84 to 98.07 range, with the peak of the day matching the WTD’s best; currently holding around its 50 DMA at 97.96. The markets had interesting comments via ultra dove Miran in the prior session, where he now “sees a less accommodative rate path” – he now pencils in 100bps of cuts in 2026 (vs 150bps in December).
Elsewhere, focus remains firmly on the geopolitical situation between US and Iran. To recap, President Trump said 15 days is the maximum deadline to reach an agreement with Iran, other it will be “unfortunate” for them. Recent reports in the WSJ suggest that Trump is weighing a “limited” strike, to force Iran into a deal. The USD will remain choppy on the mixed headlines, but a regional escalation (or all-out war), could see the Dollar receive haven-related inflows.
Back to the US, focus later today will be on the US GDP and PCE metrics, the latter is the Fed’s preferred measure of inflation. PCE Prices is expected to rise 0.3% M/M in December (prev. 0.2%), with the annual rate at 2.8% (unch). The core measure is expected to rise 0.3% M/M (prev. 0.2%), with the annual rate at 2.9% (prev. 2.8%).
GBP is incrementally firmer/flat. Retail Sales was an exceptionally strong report, with the upside attributed to strong “artwork and antiques sales, alongside continued strong sales from online jewellers”. But other components suggest that the pick-up was also seen in more conventional figures such as household goods store sales, with clothing sales also rising. Elsewhere, the PSNB was in a surplus in January and topped expectations – though the figure is subject to the usual caveats for the period (tax filings). GBP moved higher in an initial reaction, but then pared that move; thereafter, a strong set of PMI metrics took Cable to a session high of 1.3478. Despite the strong metrics, the inner report suggested that “ongoing worrying labour market weakness will likely result in a growing call for further rate cuts”. Market pricing for the BoE meeting was little moved, with the chance of a March cut priced in at 88% whilst April is fully priced.
JPY underperforms this morning, succumbing to the broader USD strength and following the region’s inflation report, which held a dovish skew. In brief, National CPI printed at 1.5% (exp. 1.6%), core was in-line whilst the supercore metric was a touch below the consensus. Elsewhere, PMIs printed better-than-expectations – benefiting from increased optimism following Takaichi’s landslide victory. Following the inflation data, Pantheon Macro wrote that the inflation report “justifies” the BoJ taking time on a rate hike. But it is worth noting that the firm sees the first hike in “October or December”, whilst markets price in a 56% chance of a cut in April, and fully priced in by July. Monetary policy aside, PM Takaichi noted that there is a lack of domestic investment in the region, and aims to help improve private investment in key sectors. Once again, she emphasised an “active but responsible” fiscal policy approach. USD/JPY in a 154.87-155.64 range.
Other G10s are broadly lower against the USD. Aussie manages to stay afloat, whilst the EUR moves a touch lower. More ECB-related newsflow, this time via the WSJ, which suggested that ECB's Lagarde said her baseline is finishing the ECB term, while she added that she has accomplished a lot but needs to make sure it is solid. On the data front, EZ PMIs continue to confirm the modest recovery picture in the EZ. The strong German report spurred fleeting EUR strength.