The Morning Update

The USD is flat, oil prices firmed, equity markets are down, and US yields rise ahead of the US inflation report. Currency markets remain range-bound, while equities consolidate as markets await January's US Consumer Price Index reading, due this morning, which could offer insight into when the Federal Reserve could cut interest rates in 2024. The inflation report is forecast to show the first reading below 3% y/y headline inflation since March 2021. Fed policymakers continue to message to markets that rate-cut bets have become overblown. Grace Peters, head of global investments strategy at JPMorgan Private Bank, said, "Despite expecting CPI to print below 3%, we still think the market is over-exuberant when it comes to when the first cut comes in." Elsewhere, oil prices strengthen as Middle East risk continues to dominate sentiment, and comments from the OPEC secretary general believe the long-term demand outlook is robust. Intraday, the US economic docket will be dominated by the US Consumer Price Index to provide direction to currency markets today.

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In other news. Russia will double its military presence along NATO's border, Estonia warns. Japan's PM Kishida seeks a summit with North Korea's Kim Jong Un. The US Senate is poised to approve the $95 billion Ukraine bill. Thailand grants parole to former PM Thaksin. UK wage growth slows down again, but BoE will likely remain on alert. EU lawmakers ratify political deal on AI rules. The head of the French farmers union says protests could resume. Canada's BCE borrows $1.45 billion from the US debt market; last week, the company announced it would cut jobs by about 9%.

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In currency news. The USD advances near 150 vs. JPY ahead of the US inflation report. GBP edges higher after faster-than-forecast wage growth. CHF fell to a 9-week low after Swiss CPI slowed more than forecast in January. CNY is up slightly by 0.05%, while Asian currencies are flat on average vs USD. Trading currencies are under pressure, with CHF weakened by 0.5%, NZD & SEK down by 0.35%, JPY, MXN & AUD slipping 0.1%, while NOK is flat, and outlier ZAR rallies 0.55% vs USD.

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In commodity news. Oil & SIlver prices gained by 0.75%, Natural Gas & copper prices eased by 0.4%, Gold & Copper prices firmed by 0.4%, and Wheat prices weakened by 0.7%.

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CAD remains steady within a narrow range as investors remain sidelined with the lack of Canadian economic data and ahead of today's US CPI report. Domestically, oil prices are expected to strengthen from ongoing Middle Eastern tensions. At the same time, the focus will be on Deputy Governor Rhys Mendes's comments scheduled on Wednesday for possible insights into the BoC's rate direction. Intraday, the US inflation will be the primary driver for the loonie today.

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EURCAD remains within a tight trading range as investors remain sidelined ahead of the US CPI report.

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EUR continues to be capped at 1.0800 ahead of the US inflation report. Over the last week, the Euro has remained trapped within a tight 1.0750-1.0800 trading range from ongoing Middle East tensions and uncertainty on central bank rate uncertainty. This morning, we saw mixed ZEW sentiment data from Germany, which failed to provide a clear directional view for investors. Investors are pricing in just a 10% probability of a Fed easing in March, while today's CPI report could guide investors with expectations increasing that the Fed could pivot its policy as soon as May.

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GBPEUR extends gains to a near 18-month high as expectations increase that the BoE will maintain its current interest policy, beyond the ECB.

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GBP strengthens through 1.2650 after stronger-than-expected UK labor market data. The UK's ILO unemployment rate declined to 3.8% in the three months to December, down from 4.25%, which beat analysts' expectations of 4%. At the same time, wage inflation softened to 6.2% in December, down from 6.7%. The data suggest that the Bank of England is not in the position it wants to be in to drop interest rates, and is expected to be the last of the major central banks to lower its interest rates vs its peers. Intraday, the US inflation report will be the primary driver for the pound today.