Written by Geopolitics in the spotlight
It is US CPI day, and, under normal circumstances, investors would have been focusing on the late-January Fed meeting and the possibility of another rate cut. However, the newsflow is dominated by geopolitics and specifically Iran.
With the demonstrations on the ground continuing at full force, reports highlight that the US President is ‘leaning’ towards Iran strikes while he also threatened to impose 25% tariffs on countries – such as China and Turkey – that are doing business with Iran. Contrary to the Maduro capture from America’s backyard, a military operation in Iran is a completely different ballgame considering Iran’s importance in the region, but also the risk of retaliation, particularly regarding the Strait of Hormuz.
The speculation, though, has been enough to push oil to its highest level since December 8. At the time of writing, it is hovering around $60. There are some key resistance levels ahead, but should the current move persist, the key battle will probably take place in the $63 area.
Interestingly, gold printed a fresh all-time high at $4,630 before retreating somewhat. While profit taking and the stronger US dollar could be credited for this decline, gold’s trend remains bullish and is supported by the newsflow. In particular, Trump’s obsession with Greenland, which in the extreme scenario could even lead to the dissolution of NATO, could materially benefit the precious metal.
Muted risk off benefits the dollar
The dollar is bid today, partly benefiting from the geopolitical developments, following Monday’s weak session, which was mostly a product of the unexpected Fed probe. With Fed Chair Powell responding forcefully and quite unexpectedly considering his overall approach, the Fed’s effective No. 2, New York Fed President Williams, was on the wires earlier today.
While avoiding appearing confrontational with Trump, Williams is clearly supporting Powell in the current spat, protecting the independence and credibility of the Fed. These critical factors are under threat as President Trump is on the home stretch to announce the next Fed Chair, with the main criterion being the candidate’s willingness to aggressively cut rates, as Trump wishes.
US CPI in focus today
From a monetary policy aspect, Williams is comfortable with the current stance and the quite favourable conditions, essentially denting any possibility for a rate cut and a dovish tilt at the January 27-28 meeting. Williams also talked about inflation, which is today’s key release, stressing that upside inflation risks have eased.
Economists are looking for an unchanged 2.7% rate in the headline indicator, while core inflation is seen accelerating to 2.7%. Interestingly, the recent Fed minutes revealed that members expected inflation to remain elevated in the first part of 2026, before gradually decelerating towards the 2% target in 2027.
As the market is mostly sensitive to softer prints at this stage, confirmation of these forecasts, or even a small upside surprise, are unlikely to unsettle the current market expectations of 51bps of easing by year-end. However, a significant easing in inflationary pressures would bring forward the next rate cut currently pencilled in for July, especially as board member Miran and other uber-doves increase their dovish rhetoric, denting the dollar’s appeal.
Yen sells off, verbal interventions intensify
When Finance Minister Satsuki Katayama, Economy Minister Kiuchi, and the Japanese government spokesperson focus on the yen on the same day, essentially verbally intervening to prop it up, it is evident that the situation is critical. Dollar/yen is trying to climb above 159, breaking out of the recent trading range as markets react to reports that PM Takaichi may dissolve the Lower House on January 23, with fresh elections taking place in mid-February.
With these political shenanigans diminishing the chances of a hawkish BoJ meeting on January 22, the risk of an actual intervention is rising, with 160 being the critical level.
By XM.com
