MUFG on USD - FJElite

The testimony from Fed Chair Warsh looks to have curtailed the move weaker for the dollar. Just like following his first FOMC meeting, Warsh spoke with conviction in relation to the Fed achieving its 2% inflation goal. The CPI print was not “mission accomplished" and he wasn’t going to “cherry pick" data. He added that he was "doubling down" on the Fed’s inflation goal. We don’t really view this as “hawkish” given he is merely promising to focus on what is the legal mandate of the Federal Reserve. However, he again is emphasising his inflation fighting credentials that understandably is being interpreted that the bias should still be skewed to the Fed hiking rather than cutting while inflation remains this far from target (core 2.6% now).

There is also likely an element of market participants not yet being used to Warsh’s style. Previously we would very likely have heard a positive comment on the low inflation print that markets could have interpreted as “dovish". But Warsh is not going to offer any forward guidance, and Warsh looks set to focus on the bigger picture rather than providing a running commentary on next monetary policy steps. The numerous reviews launched also gives Warsh cover to hold off on any strong message beyond reiterating the legal mandate of the Fed.

Despite the muted FX reaction, the scale of weakness in the CPI report certainly helps weaken on key pillar of support for the dollar - the prospect of a near-term hike. That can open up scope for further dollar depreciation. However, it is difficult to trade with conviction given the re-escalation in the conflict in the Middle East and the 13% surge in crude oil prices this week. But EUR/USD continues to struggle to sustain declines below the 1.1400 level and at the very least the CPI data reinforces the support around that level.