SOFR OPTIONS: Post-Open Option Update

• Latest comments from the US President to Fox on the potential for a deal with Iran has renewed the greenback selling. The earlier rapid selloff for the DXY fell just shy of last week’s pullback lows, keeping the index above the 20-day EMA and the greenback uptrend intact, for now. Latest price action is seeing us put pressure on this average as we edge closer to last week’s lows, located at 98.98.
• We are seeing some mixed performance across the G10, with the daily adjustments for the likes of GBP and JPY representing the most enthusiasm to the latest boost to risk. GBPUSD is now up ~0.65% to trade back above 1.3420. A key resistance to monitor is at the 50-day EMA, currently at 1.3449. Despite being pierced, a clear break of this EMA would signal a possible reversal.
• A very volatile session for AUDUSD continues, and while we have only just nudged back into positive territory on the session, the pair has bounced an impressive 1.7% from session lows. Downside momentum had picked up on a break of the March lows before the Trump comments, and market participants will now be monitoring these false technical breaks.

Gov Miran remains the FOMC's biggest dove, telling Bloomberg TV on Monday that the Fed shouldn't conduct policy based on short-term developments including the recent jump in energy prices. He argues that the Fed should look through oil shocks, unless there were either rises in longer-term inflation expectations or a wage-price spiral. He's unconcerned about both, eyeing the potential negative demand shock arising from the jump in oil prices.

• Miran confirms that he penciled in 4 rate cuts by end-2026 in the March SEP (he'd said he would in an interview prior to the meeting; previously in December his Dot Plot had implied 6 cuts; in both cases he's got the most dovish outlook on the Committee). This came alongside an increase in his forecast for inflation for the year.
• But "higher oil prices depress demand and take money out of the pockets of consumers and redirects it to gas and other energy costs. That depresses demand and causes unemployment to move higher. That offsets increase in inflation."
• As a result, he says the "balance of risks changes but it changes evenly. Because the negative supply shock, that is, the oil prices, is also a negative demand shock. You are taking money out of goods and services. I see the labor market trend continuing the softening for the last three years. Taking money out of goods and services that is not energy to devote to higher energy prices is exactly the type of thing that worries me that the trend might accelerate. I think it got worse on both sides."
• "Traditional Federal Reserve wisdom is oil shocks headline inflation but do not pass that much into core as much as they do into headline, and the two ways that you would want to respond to it, so therefore you look through an oil shock typically. The two exceptions would be if inflation expectations beyond the first year start to move higher. That has not happened thus far. Inflation expectations for the first you have moved higher of course but be on the first year there has not been that much movement medium-term, longer-term expectations have been coming down lately. There is evidence of that. The reason you want to respond to an oil shock is if you saw a wage price spiral, responding to oil and gas price increases. That could result in reinforcing inflation. It has been declining on a steady basis so that is something that I don't really see right now."
• I boosted my inflation for the year reflecting that in part. However, as I said before, it is way too early to draw conclusions it is bleeding beyond headline inflation in a way that matters for monetary policy. Don't forget higher oil prices depress demand and take money out of the pockets of consumers and redirects it to gas and other energy costs. That depresses demand and causes unemployment to move higher. That offsets increase in inflation.

Chicago Fed's Goolsbee on CNBC Monday sounds concerned about the inflationary impact of the Middle East conflict, saying that the energy price shock "definitely throws a wrench" into disinflationary progress: "Last year, I was a voter, and I dissented at the last meeting of the year because we did not have the data to show that inflation was going away. The argument that rates should go down in the immediate term was premised on that the inflation was going to be transitory and go away. I remained fairly optimistic that by the end of 26 rates could go down, but I wanted to see proof that we're back on an inflation headed to 2% this definitely throws a wrench into the plans we do need to see progress. "

• "To have already been operating at an inflation rate that was uncomfortably high and stuck well above the target, and now to add something that might be a lasting gasoline price shock, I think this is, as I say, an intense moment, and we have to hope that this does not prove to be a lasting impact on the economy,"
• Goolsbee, asked about the possibility of the Fed hiking rates: "Everything is always on the table. We could be back to the environment with multiple rate cuts for the year. If inflation behaves, I could see circumstances where we would need to raise rates if it was going a different way and inflation was getting out of control. The key is, historically, oil shocks have been a stagflationary shock, that is: make employment worse, while at the same time they're making inflation worse. And that's the that's the worst kind of shock. That's the most uncomfortable thing for a central bank to have to face, because there's not an obvious playbook."
• But importantly, he doesn't see inflation expectations as problematic yet: "I've been optimistic over the longer term and a little more pessimistic on inflation in the shorter term, because it seemed to me that there were a number of things that could make this a repeat of the team transitory mistake, where everyone assumed the supply chain will just fix itself real quick and the inflation will go away. So far, inflation expectations do seem anchored, but it's a little bit of the sunburn theory of inflation expectations. Once they start to go wrong, you're going to wish you put on sunscreen. "
• Asked how much job market weakness he would be willing to look through in the fight against inflation, Goolsbee says that the Fed's framework dictates that the FOMC would assess which side of the dual mandate has the higher deviation from target, and how long will it take to for each side to get back to "something acceptable". He suggests that it looks like inflation is the bigger problem of the two "at the moment":
• "If you look at the unemployment rate, it hasn't gone up much. So the payroll job creation as an indicator of labor market slack, I think is a little fraught at a moment when population growth and immigration and there are a bunch of question marks about labor supply. So I prefer looking at rates like the unemployment rate, the layoff rate, the hiring rate, the vacancy rate, most of those have shown stability, and are at levels that are closer to full employment than we are on the target on the inflation side. So at the moment, I think the inflation has got to be a little ahead of the employment."