MUFG’s Senior Currency Analyst Lloyd Chan notes that the US Dollar stayed firm after stronger US nonfarm payrolls but lacked sustained upside as markets doubt how much further US rates can reprice in a hawkish direction. He highlights that January US CPI is now the key catalyst, with any upside surprise needed to drive renewed hawkish repricing and Dollar gains.

CPI surprise needed to lift Dollar

"Stronger-than-expected US nonfarm payrolls have helped ease some near-term market concerns about a sharp deterioration in the labour market, but the data did little to meaningfully shift the broader macro narrative. The US dollar held firm following the nonfarm payrolls report, yet failed to generate sustained upside momentum, reflecting market skepticism about how much further US rates can reprice in a hawkish direction."

"Focus now shifts squarely to the US CPI release later today, which is likely to be the next key catalyst for rates and FX markets. Our US strategist expects January core CPI to rise by 0.25%mom and 2.6%yoy, with base effects providing a notable lift to the annual print. Bloomberg consensus, by comparison, looks for 2.5%yoy for both headline and core CPI."

"From a market perspective, CPI would likely need to exceed market expectations to trigger a renewed hawkish repricing of the Fed rate path. Conversely, an outcome broadly in line with consensus, or softer, should allow markets to maintain expectations for around two Fed rate cuts this year, containing dollar upside."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)