FX Daily: CPI can help USD recover as Fed fears ease

Markets have started to rethink some of their USD-bearish Fed independence bets, following several pushbacks against the Department of Justice's probe into Jerome Powell from Republican lawmakers. Senator Thom Tillis went as far as saying he’ll oppose the next Chair nominee until the matter is resolved, while Treasury Secretary Scott Bessent reportedly flagged the financial market implications of the investigation to Trump.

Investors will keep seeking reassurance – ideally from Trump or the DoJ – but the risks of another rapid drop have abated. If the investigation is dropped, there’s a decent chance the dollar may come out stronger from this story. That’s because markets might then perceive Powell as more legitimised (if nothing else to prove a point) in adopting a hawkish stance.

Anyway, nerves appear calmer enough today to re-focus on data. We think the dollar faces some upside risks from what we anticipate will be a hotter-than-expected 0.4% MoM December core CPI print (consensus 0.3%). Our macro team’s rationale is that because of the shutdown, more data collection occurred later in November 2025, a period when Thanksgiving-related discounting is common. Compared with the full month of November 2024, this timing likely skewed that inflation reading lower. Reverting to more standard collection timings in December means risks of a hotter read.

A chunk of hawkish repricing already occurred last Friday after the jobs data, and markets increased implied cut probability on the back of the Fed investigation story. This means the upside for the dollar is not huge, but could allow USD crosses to keep edging back towards last Friday’s close.

The yen fell 0.5% to 158.91 per dollar, its weakest since July 2024, as speculation that Japanese PM Sanae Takaichi may call a snap election triggered renewed selling. The move surpassed January’s low of 158.87 and intensified concerns over potential intervention, with Japanese officials warning against excessive and speculative FX moves. Persistent US-Japan yield gaps, negative real rates, and capital outflows continue to weigh on the currency, with a potential slide above 160 USD/JPY. Intervention risk remains in focus after past actions when volatility spiked.

Francesco Pesole

Unless the Fed independence trade returns, EUR/USD might have missed its chance of a break above 1.1700 yesterday. As per above, we think US inflation can help the dollar recover further, and the euro is lacking any substantial bullish driver at this point.

The EUR:USD 2-year swap rate gap has rewidened by 9bp since the start of the year, and is at its widest since late November. With more upside risks for USD front-end rates today, we think there could be conditions for a move to 1.160 in the coming days.

Francesco Pesole

Bank of England Governor Andrew Bailey speaks this morning at an event. The full text will be released on Friday, and it’s unclear how much will be reported today and to what extent he’ll discuss monetary policy.

But the sterling market is on high alert for any hint by the highly divided MPC, especially given the current data scarcity. Only Thursday’s GDP data can move the needle a bit, while the next two major releases – jobs and inflation – are only due on 20-21 January. Two more members will speak tomorrow: Alan Taylor and Dave Ramsden, who both voted for a cut in December.

EUR/GBP has settled below 0.870, which is an area of moderate short-term undervaluation according to our models. Our view that the BoE will cut in March remains more dovish than market pricing (10bp) and underpins our call for a gradual appreciation of EUR/GBP in the coming months.

Francesco Pesole

Today, the focus shifts to inflation figures in Hungary and the Czech Republic. Hungarian December inflation should fall from 3.8% to 3.0% YoY in our forecast, below market expectations. The NBH expects 3.0% in its December forecast. Yesterday, NBH Governor Mihaly Varga mentioned that December inflation will be important for further decisions and attention will be on service prices. Our forecast is for the first cut in February and 50bp in total for the whole year. However, the risk is for more rate cuts and, most importantly, in our opinion, the market may price in more cuts in the coming years due to weak economic numbers, which have been confirmed in recent days by industry and retail sales figures for November.

In the Czech Republic, December inflation details will be published today, which should confirm the flash print, which surprised to the downside when it remained unchanged at 2.1% YoY. Flash figures indicated lower food, energy and goods prices pulled the headline down. On the other hand, service prices rose from 4.6% to 4.8% YoY in year-on-year terms. The question is where core inflation is, which surprisingly slowed in November, but December's numbers may show that it was a one-off.

In the FX market, we have been tactically bearish since the beginning of the year on the CEE region in general. After the jump in EUR/CZK last week, triggered by weaker inflation, EUR/HUF joined in yesterday, approaching 388, our target from the previous days. After today's inflation figures, we can expect the pressure to intensify and carry positioning in the forint to come under pressure. EUR/HUF could thus head towards 390, which should still be comfortable for the central bank. EUR/CZK closed with only modest gains, but we retain the target of 24.350-400.

Frantisek Taborsky