After just barely managing to snap its week-long losing streak in yesterday’s trading session, the United States Dollar swung wildly on the heels of February’s US inflation report.
Overview
Billed as maybe the key domestic economic event for the month, potentially even more impactful than the Federal Reserve’s interest rate decision next week, CPI did not disappoint and came in a touch higher than expectations. The monthly figure showed prices grew 0.4% in February, and core prices (excluding food and energy) also grew by 0.4%, which was above expectations. The annualized core reading showed a 3.8% increase in prices, excluding food and energy, since this time last year, lower than last month’s 3.9% figure but still above market consensus expectations. After initially gaining almost half a percent, the Bloomberg Dollar Spot Index has moved back toward flat on the morning as traders begin to digest the implications of continued inflationary pressure.
Obviously, continued heat on inflation is not what the Federal Reserve is looking for. When Jerome Powell said last week they were close to being confident enough that inflation is normalizing to begin looking toward interest rate cuts. Today’s report shows that January’s hot print may not be quite the anomaly markets wanted to believe it was and could prompt a more hawkish tone shift next week than previously anticipated. Oddly enough, though, today’s release is not prompting quite the change in overnight swaps that one might expect. Markets continue to pivot back and forth between June and July as the timeline for the first cut from the Fed – today, they happen to look more toward July. Traders still believe that the Fed will cut three times this year with the door open for a fourth. Whether this is just wishful thinking remains to be seen, and Powell’s tone next week will provide more clues.
While the underlying economic trend is still disinflation, there are clear cautionary signs. The Fed will likely say next week that further signs of inflation continuing to decrease, especially in conjunction with a softer jobs report last week, are needed before cutting the interest rate, but we believe the Dollar may have maxed out its potential gains on such news earlier this year.
What to Watch Today…
GBP ⇓
Pound Sterling, after gaining consistently against USD for more than a week, is finding some softer ground this morning after British unemployment fell last month for the first time since July. Easing wage growth is also a sign of relief for the Bank of England, as average weekly earnings cooled slightly to 5.6% from 5.8%. Economic growth prospects in the UK do remain rather grim, so a cooling labor market is a key part of the equation for the BoE.
JPY ⇓
The Japanese Yen’s roller coaster ride continues this morning, losing north of half a percent of ground against USD after Bank of Japan Governor Kazuo Ueda poured cold water on market expectations of an interest rate hike next week. Citing weak growth in consumption of non-durable goods, he effectively placed next week’s BoJ meeting back into ‘live’ status. We still believe the Japanese central bank is unlikely to end the world’s last negative interest rate this month and is more likely to do so in April.
