STIR: Steady Rally In Fed Rates Back To Three Cuts For 2025

• Pressure on core fixed income and the associated higher yields on Tuesday have supported a recovery for Cross/JPY, with USDJPY briefly rising to a high of 152.60 roughly 1% off the Monday lows. Spot has since moderated to ~152.30 amid a broader dollar offer, but is consolidating 0.3% gains as we approach the APAC crossover
• Plenty of room for USDJPY to correct further to the topside, given the powerful move lower last week and additional profit taking dynamics potentially in play ahead of tomorrow’s US CPI release. 152.89 (Jan 6 high) and 153.72 (Jan 27 low) are levels to watch on the topside.
• In similar vein, EURJPY has traded on the front foot following last week’s near 3% plunge. We have noted that the short-term trend is oversold, and today’s 0.6% advance is allowing this condition to unwind. Initial resistances are located at 157.97 (Feb 3 low) and 158.86 (Feb 6 high), however firm resistance is not seen until the 20-day EMA and the significant pivot level of 160.00.
• Firmer equity indices have weighed broadly on the US dollar, allowing the DXY to erode the moderate rally seen Monday - as markets shrug off the most recent announcement of US tariffs on steel and aluminium.
• Both the EUR and GBP are outperforming, rising roughly 0.4% against the dollar. Sterling has been buoyed by comments from BOE’s Mann whose relatively hawkish lean may have assisted GBP at the margin. More constructive AUD price action is seeing AUDUSD flirt with resistance at 0.6302, the 50-day EMA, of which a break would be a bullish development and place the immediate focus on 0.6331, the Jan 24 high and a key resistance.
• All attention turns to US CPI on Wednesday, where consensus sees core CPI inflation accelerating to a seasonally adjusted 0.3% M/M (unrounded 0.29%) in January.

Not many revelations in the Powell testimony, though his characterization about the labor market and neutral rates in the Q&A seemed noteworthy from a hawksih perspective.

• Asked whether he sees evidence of a higher neutral rate emerging, Powell says: "Yes. I mean, let me say there was a lot of reason to be concerned about downside risk in the labor market toward the middle of [last] year, but really that concern has diminished significantly. The labor market is very strong. I think the evidence is - my own view, and there are many different views on this, but is that the neutral rate will have risen meaningfully. Very hard to be precise about it. From what it was, it was clearly very, very low before the pandemic. Extraordinarily low, historically so. But yes, I think it's moved up, and many of my colleagues on the FOMC feel so feel that way too. It certainly seems that way."
• This is arguably close to his characterization of the upward shift in the neutral rate vs pre-pandemic levels in previous appearances.
• But we can't recall the last time Powell called the labor market "very strong" - indeed he in recent months he repeatedly called it "solid", albeit having "cooled" from an "overheated" state (as he did in his prepared text today). Might be a slip of the tongue (he has routinely called the economy "strong overall"), but potentially noteworthy after January's surprise drop in the unemployment rate.

Israeli Prime Minister Benjamin Netanyahu has warned of a "return to intense fighting" if Hamas does not return Israeli hostages by Saturday. The Jerusalem Post reports that the decision was reached unanimously by the Israeli Security Cabinet.

• Netanyahu: "I have just concluded an in-depth four-hour discussion in the Security Cabinet... If Hamas does not return our hostages by Saturday noon, the ceasefire will end, and the military will return to intense fighting until Hamas is finally defeated.”
• Netanyahu: "In light of Hamas's announcement of its decision to violate the agreement and not release our hostages, I instructed the IDF last night to amass forces inside and around the Gaza Strip... This operation is underway as we speak and will be completed as soon as possible."
• The comments come as US President Donald Trump begins a bilateral meeting with King Abdullah II of Jordan at the White House - his first meeting with an Arab leader since returning the office and first with a regional leader since his widely reported comments on the displacement of Gazans and US-led reconstruction of the Gaza Strip.
• King Abdullah said ahead of the meeting that Jordan will "support Trump" to achieve "peace and stability" in the region.
• Haaretz notes that Trump's Middle East envoy Steve Witkoff is expected to visit Israel later today, after a trip to Russia. Netanyahu noted in his statement that the Security Cabinet "welcomed Trump's revolutionary vision for the future of Gaza,"