Yen rally continues as Yield Curve Control circles the drain

The US dollar has remained under pressure as hopes of a “soft landing” continue to build and risk sentiment improves. While yesterday’s key US CPI data came out roughly in line with consensus expectations, and the market reaction was more limited than those after most CPI reports last year, equity markets have continued to rally and interest rate differentials to shift against the US. The DXY index is now down more than 10% from its late-September peak; the dollar bull market is hanging by a thread. Our sense is still that a rebound is on the cards: at this point, the good news on US inflation is largely discounted in money markets, which have now priced in a rapid “pivot” from the Fed despite FOMC members continuing to push back against that narrative. Likewise, the relief rally in European currencies on the back of the drop in natural gas prices over recent months and the ECB’s ultra-hawkish December meeting looks to have mostly run its course.