U.S. Dollar
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U.S. Dollar Surge Looks Very Different for British Pound vs. Japanese Yen

By:Ilya Spivak

The British pound may suffer deeper losses while the yen finds a lifeline against the surging U.S. dollar as U.K. inflation and Japanese economic growth data hit the wires

  • The U.S. dollar moves sharply higher as Fed rate cut outlook cools after inflation data.
  • The British pound at risk if U.K. CPI data disappoints, shifting BOE expectations.
  • The Japanese yen may rebound as GDP data highlights no BOJ rate cuts ahead.

The U.S. dollar is racing higher as expected after consumer price index (CPI) inflation data topped baseline forecasts, pushing back on Federal Reserve interest-rate-cut expectations.

The markets now price in an 80 basis points (bps) in interest-rate easing. That’s down 22 bps from yesterday, implying that nearly one full 25 bps cut has been dropped from the outlook.

While the greenback is trading broadly higher, some of its major currency counterparts are holding up decidedly better than others. The British pound is a particular standout, trading down less than 0.5%. The U.K. unit has benefited from its own repricing of stimulus expectations since the beginning of the year.

British pound for the win?

As it stands, the markets are pricing in just 50 bps in Bank of England (BOE) rate cuts in 2024. That is down from 144 bps in the last days of December 2023, implying that nearly 1% in easing has been factored out of the equation. The pound’s resilience will now be tested as U.K. inflation data comes across the wires.

Economists expect U.K. price growth to quicken in January. Headline CPI is projected to grow 4.2% year-on-year, up from 4% in December. This would be the first back-to-back monthly CPI rise since October 2022. The core measure excluding volatile food and energy prices is penciled in at 5.2%, up from 5.1% in the prior month.

1m sonia futures
Source: ONS

Analytics from Citigroup suggest that UK economic data outcomes have increasingly deteriorated relative to baseline forecasts in the past two months. This suggests that–despite some notably upbeat results, like January’s purchasing managers index (PMI) surveys—surprise risk is tilted to the downside. The pound may suffer if CPI disappoints.

Japanese yen: ready to rebound?

Meanwhile, the Japanese yen may have a bit of room to recover after suffering the largest loss in two weeks against the dollar.

It will be looking to fourth-quarter gross domestic product (GDP) data for direction. Analysts see the economy growing at an annualized rate of 1.4%, returning to expansion after a sharp 2.9% contraction in the third quarter.

While the middling outcome seems unlikely to do much to advance the case for a more hawkish Bank of Japan policy stance, it might just remind the markets that the central bank is the only one of its major peers that is not angling to cut rates in 2024. That might offer the battered currency a lifeline.

Japan OIS-implied interest rates
Source: JPX

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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