The Morning Update

The USD slips, oil prices firmed, equity markets are up, and US yields are lower ahead of the US inflation report today. Currency markets, for the most part, remain on the sidelines. In contrast, equity markets across Asia and Europe are all higher as investors await the US inflation report that could help clarify the path for Federal Reserve policy. The US inflation report has dominated market focus this week, and expectations are that CPI ex Food & Energy y/y will ease to 3.8% in December from 4% in November. "Confirmation that prices are easing will boost confidence that a May cut can be expected, and that could prompt some rally in stocks and bonds," said Stuart Cole, Chief Macroeconomist at Equiti Capital in London. On Wednesday, NY Fed President Williams said that Fed officials need to see more signs of cooling in the economy before reducing rates. Still, he noted that currency policy levels are adequate to bring inflation back to the central bank's target. Elsewhere, the SEC officially approves Bitcoin ETFs starting today, and Bitcoin advances towards US$ 47k. Oil prices firmed as Middle East tensions increased supply concerns. In focus today, the US CPI report will be the primary driver for markets. Also in focus today are the US initial jobless claims and the monthly budget statement.

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In other news. The SEC approves first spot bitcoin ETFs to boost crypto advocates as bitcoin hits 21-month highs. Taiwan opposition candidate rules out unification talks with China. Polish opposition takes to streets against Donald Tusk. Ecuador's president declares war with drug gangs as prison guards held hostage. Hague court to begin hearing case alleging Israeli genocide in Gaza. Alaska and United cancel more flights as Boeing probes 'quality' issue. US House Republican hardliners challenge Johnson over spending deal.

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In currency markets. Currency markets remain range-bound ahead of today's crucial US inflation report. CNY and Asian currencies are up 0.15% on average vs USD. Trading currencies remain mixed, with MXN down 0.3%, while CHF is flat, JPY, NOK, SEK & NZD are up 0.2%, ZAR gained 0.3%, and AUD strengthened by 0.4% vs USD.

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In commodity markets. Oil prices strengthened by 1.5%, Natural Gas prices rallied by 2%, Gold and Silver prices firmed by 0.35%, Copper prices gained by 0.5%, Wheat prices slipped by 0.2%, and Soybean prices increased by 0.6%.

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CAD holds within the weekly trading range as investors have chosen to remain on the sidelines, looking to the US CPI number to indicate the Fed's timing on interest rate cuts. Expectations that the Fed will ease in March have faded, with many economists now looking at May for the Fed's first interest rate cut. With no CAD economic releases today, we look to the US inflation report to drive the C$ direction intraday.

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EURCAD remains flat, as both currencies remain on the sidelines despite firming oil prices.

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EUR continues to consolidate below 1.1000 ahead of the US CPI data. Improving risk-on sentiment and increasing headwinds against the USD have helped the Euro rebound to its weekly highs as markets await the US CPI report. Domestically we saw Italian Industrial output slip below expectations, while Spain's industrial output improved. Intraday investors continue to keep their powder dry, remaining on the sidelines as they look to the US inflation report for guidance on the Fed's next steps.

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GBPEUR edges slightly higher in thin trading despite the latest data out of the UK showing that the British economy shrank in October, increasing the risk of recession.

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GBP struggles to hold above 1.2750 heading into today's US inflation report. The pound bounced off 1.2690 on Wednesday to retest at 1.2770 as risk sentiment improved after the BoE Governor's testimony yesterday. The BoE Governor addressed lawmakers and pointed to the decline in mortgage rates as markets have shifted to the view that the BoE's bench market rate will decline swiftly in 2024. Economists expect that the BoE will likely be the last of the major central banks to ease interest rates, and the increasing interest differential will help prove longer-term support vs the USD and Euro. Intraday, the US CPI core rate will drive the pound's direction.