FX recap NZD stars in lacklustre trade ahead of US CPI

After being hit by profit-taking yesterday, the US dollar was trading mixed on Wednesday morning when this report was written. The greenback was holding its own well against the euro and the pound but was down against some commodity dollars. FX market participants were looking forward to US consumer inflation data, due for release at 13:30 GMT (08:30 ET), for direction.

RBNZ refuses to signal rate cut

As mentioned, the dollar was trading mixed with commodity dollars once again outperforming, in part due to the ongoing risk-on sentiment. The New Zealand dollar has been the biggest riser in G10 currencies overnight. It jumped around 100 pips on short-covering as the Reserve Bank of New Zealand (RBNZ) refused to signal a cut in interest rates with RBNZ Governor Adrian Orr saying that the chances of a cut have not increased. The RBNZ had been widely expected by analysts – ourselves included – to be a bit more dovish like other central banks recently. So, the market has been wrong-footed.

Eurozone data disappoints and UK CPI misses

In Europe, the euro and pound both fell in reaction to more disappointing Eurozone macro data and as UK inflation eased more sharply than expected.

Industrial production in the euro area fell 0.9% in December compared a smaller 0.4% decline expected and comes on the back of a 1.7% drop the month before. The DAX eased off its best levels in reaction to the latest soft eurozone data, while the euro showed only a modest negative reaction. Could we see a more pronounced reaction later on today?

Meanwhile, the GBP/USD initially edged lower in reaction to the latest UK Consumer Price Index (CPI) measure of inflation pointing to lower prices. But with Brexit being the focal point, pound traders shrugged off the domestic data once again. Still, the weaker inflation data has raised the prospects of UK interest rates remaining low for even longer, pushing the FTSE near its 2019 high of 7187 before coming off its best levels as the pound rebounded to turn positive on the day.

According to the ONS, the headline UK CPI stood at 1.8% year-over-year in January, falling below the Bank of England’s 2% target for the first time in two years. The slowdown in headline inflation was more than 1.9% expected and compares to 2.1% in December. Other measures of inflation were mixed, with core CPI remaining unchanged at 1.9% as expected while the Retail Price Index (RPI) eased to 2.5%, compared to 2.6% expected and 2.7% in December.