Traders react to US inflation fears and a new BoJ Governor 

  • US CPI showing signs of stickiness: Inflation did not fall as much as expected. Added to hawkish Fed speak, this is fuelling the expectation of a higher peak rate. 
  • USD gaining: With Treasury yields moving higher, USD has strengthened on major forex pairs.
  • GBP slides as UK core CPI drops sharply: Core inflation has dropped to 5.8% in January (from 6.3%) significantly below the 6.2% forecast).
  • The new BoJ Governor will likely be more hawkish: The announcement of Kazuo Ueda could induce a break from the more dovish Kuroda.  
  • USD strength sours risk appetite: With concerns over the need for higher US interest rates, equities are falling back this morning. US futures are around -0.5% with European indices also weaker early on. 
  • Metals also weighed down: Commodities are also under selling pressure. Gold, silver and oil are all over -1% lower.

Inflation gives forex traders much to ponder

US CPI inflation has added to the expectation that the Federal Reserve will need to continue hiking interest rates for longer than previously thought.

With Headline CPI at 6.5% in December, the consensus forecast was for a drop to 6.2%. However, inflation proved to be more sticky than expected in January, with headline CPI dropping only to 6.4%. Core CPI fell to 5.6% (from 5.7%), again higher than expected.

fed funds espressoFed Funds futures now price decisively for a peak rate of above 5.00%, with CME Group FedWatch seeing the probability at 82%.This is all driving US bond yields and the US dollar higher.

treadury yield espressoYesterday, we discussed how the US 2-year Treasury yield moving above the key barrier of 4.57% would open the upside once more. This move is now underway and has opened the November high at 4.88%.

We are also seeing the USD strengthening across major forex.

GBP underperformance as UK inflation drops

One of the key underperformers this morning is the GBP. UK CPI inflation has dropped more than expected on both the headline (to 10.1%) and core (to 5.8%).

This surprise fall has come as services inflation (which has been the key driver of the overall inflation rise) has dropped back.

It now means that there will be an element of doubt (at least in markets, if not at the Bank of England) as to whether a 25bps hike is required in March. Furthermore, if this drop in inflation continues in February and March, there will be serious consideration given to the prospect of a pause in May.

This is weighing on GBP this morning.

Ueda could mean a (slightly) less dovish BoJ 

When the Bank of Japan tweaked its yield curve control bands in December (widening them to +/- 0.50%) it was seen by markets as a signal that the ultra-dovish stance was coming to an end.

However, in the early part of 2023, the BoJ remains staunchly dovish. This looks likely to continue into the end of the tenure of Governor Haruhiko Kuroda (whose second 5-year term ends on 8th April).

However, there is some market interest as Kazuo Ueda has been nominated to succeed Kuroda. There will now be a series of parliamentary hearings (likely on 24th February) before Ueda is to expected be confirmed as the next BoJ Governor.

Ueda is seen as imparting gradual policy normalisation, as opposed to any abrupt paradigm shift. Although further tweaks to the yield curve control could be seen in the coming months, any serious policy tightening (ending YCC and moving to positive interest rates) is still expected by the consensus to be into 2024.

This may therefore be more of a slow burn for a sustained phase of JPY outperformance.

Markets will be watching the Japanese 10-year yield for any moves decisively above +0.50% to test the BoJ.

GBP/USD falling sharply, USD/JPY less decisive


Cable has been ranging for the past three months. Technical indicators show that this is likely to continue. However, this morning, we see a stronger USD pulling GBP/USD lower.

  • The pullback from yesterday’s high has left resistance at 1.2269, leaving the pair trading under the now flat 21 and 55-day moving averages.
  • The daily RSI has also turned lower under 50.

This all points to a negative bias within the trading range. 

GBPUSD espresso

A test of initial support at 1.2030 could be seen, under which opens 1.1960. The key range support comes in between 1.1840/1.1900. 


The near-term outlook for the JPY suffered amid the strengthening USD. We are seeing positive candles developing. There are higher lows and now higher highs forming as recovery begins to take hold.

  • The improvement in the daily RSI reflects this as it is now holding above 50
  • The 21-day moving average has been an excellent basis of resistance on the way down, but has turned higher and is now a basis of support.

USDJPY espressoA test of 134.75 resistance is being eyed. The support at 129.80 is now a key higher low.

Support and resistance levels for USD/JPY, Gold, S&P 500, and more

support and resistance espresso

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