US inflation reading for January 2022 that was released yesterday sent shockwaves through the financial markets. Another massive acceleration in US consumer price growth has reignited fears that the Federal Reserve may be more aggressive when it comes to policy tightening. Goldman Sachs projects 7 rate hikes in 2022 while Fed's Bullard said that a 100 basis points of tightening may be needed by July. An expected steep pick-up in borrowing costs, that will pressure companies with higher share of debt, is reflected in pricing of credit default swaps. CDS are instruments allowing investors to insure against default risk of the underlying asset. Pricing of CDS for top US companies jumped to 65 bp - the highest level since November 2020.
While expectations of quicker tightening are negative for equities, US dollar benefits from outlook for higher rates. USD gained against other major currencies yesterday and remains strong today. Taking a look at the USDJPY chart, we can see that the pair tested recent post-pandemic highs yesterday but failed to break above. Nevertheless, pair continues to trade near the resistance zone ranging above 116.00 handle. Breaking above this zone would mean reaching the highest level since the turn of 2016 and 2017. On the other hand, should the pair pullback, the first near-term support to watch can be found at the upward trendline.
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Source: xStation5
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