NZD tracks sideways as markets eye all important US inflation update

Key Movers

With little news flow on hand to drive direction through trade on Wednesday price action across major currencies offered little to excite investors. The AUD stood out as the day’s top performer while the Swiss Franc faltered giving up near 1% and was the days leading underperformer. With the Euro and GBP largely flat market attentions are clearly affixed to tonight’s US inflation print. As we near the peak in the expected Fed funds rate the pace of ongoing rate hikes depends heavily on the persistence of inflation pressures. Having seemingly peaked through Q4 last year policy makers have suggested a penchant for slowing the pace of monetary policy adjustment affording more time to assess and digest the impact of rising interest rates. Fears of a mid-year recession remain real and a slower pace of rate hikes at the very least may help the Fed cushion the fall. We expect headline inflation will move back below 7% printing 6.5%, while core inflation should move nearer 5.7% year on year. An outcome in line with consensus expectations will likely elevate calls for a 25-basis point rate hike in February followed by a 2^nd quarter point hike in March and a 3^rd in May with rates then holding into the end of the year. A slow down in the pace of hikes and a clear path to a peak Fed Funds rate could weigh on the USD and prompt a break below key technical support lines. That said a surprise uptick in price pressures will push the Fed to keep the foot down and continuing raising rates in half point increments, likely lifting expectations for the peak rate and drive a near term USD rebound.