Global overview
The U.S. dollar steadied off its lows ahead of a slew of economic data that could strengthen the case for the Federal Reserve to raise interest rates. The steadier greenback rose above one-week lows against the euro and edged off its lowest level in one and two months versus the Canadian dollar and UK pound, respectively. The buck has limped to the month- and quarter-end finish line after the collapse of two U.S. regional banks added to economic uncertainty and suggested less leeway for the Fed to fight inflation by raising lending rates. Markets are split on whether the Fed will raise rates from roughly 4.9% when central bankers next meet in early May. To help sway the Fed’s fluid rate debate, all eyes today are on fresh numbers on personal spending, inflation, and consumer sentiment. The dollar index has depreciated about 2.5% in March and may need a hot set of data to catch a reprieve. Forecasts call for slower consumer spending and steady underlying inflation of 4.7% over the last 12 months. The Mexican peso climbed to three-week highs after the Bank of Mexico Thursday raised its key rate by 25 basis points to new historic highs of 11.25%.
Euro hits speed bump in slower inflation
The euro slipped below recent highs against the U.S. dollar after area inflation cooled more than expected and to the lowest level in a year. Headline euro area inflation slowed to a 6.9% annual rate in March, compared to forecasts of 7.1% from 8.5% in February. Still, core inflation, which is less volatile by subtracting food and energy costs, ticked up to new record highs of 5.7%. Lower than expected headline inflation served as a catalyst to book profit in the euro’s surge, but the mixed picture of inflation maintains pressure on the ECB stay the course on raising rates to push prices back to officials’ 2% goal.
Sterling posts largest monthly gain since November
Sterling pared earlier gains that lifted it to its highest level in more than two months against its U.S. rival. GBP/USD’s close to 3% rally this month had the pair on pace for its best monthly performance since last November. A weaker dollar and higher UK inflation proved a bullish combination for the pound with latter opening the door wider for the Bank of England to raise interest rates. Meanwhile, evidence the UK economy may not be in as bad shape as previously thought offered underlying support for the pound. The final estimate of UK growth for the fourth quarter enjoyed a surprise upgrade to 0.1% from zero the prior estimate.
Canada’s economy shows surprise resilience
The Canadian dollar had its rally to five-week highs against its U.S. rival validated by stronger than expected domestic growth. Canada’s economy grew at a 0.5% monthly pace in January which was above forecasts of 0.3% and marked a recovery from December’s mild contraction. Canada’s stats bureau forecast the economy grew 0.3% in February. Evidence of a resilient economy in the face of the highest interest rates in over 15 years suggests the door remains cracked for central bankers to move off the sidelines and raise rates if inflation should moderate too slowly.
Dollar wavers after data casts doubt on rate hikes
The U.S. dollar moved lower after weaker than expected readings on the consumer and inflation suggested the Fed was almost done raising interest rates. Personal spending rose by a tepid 0.2% in February, a slightly cooler than expected reading. The Fed’s main measure of inflation, the PCE price index, cooled to a 5% annual rate in February from 5.3% in January. The less volatile core PCE price index slowed a tick to a 4.6% annual pace. Evidence of the Fed’s aggressive rate hikes cooling both the economy and inflation is consistent with policymakers moving to the sidelines sooner rather than later, a dollar-negative scenario.
Dollar struggles as U.S. interest rates near peak levels
Table: rolling 7-day currency trends and trading ranges
Key global risk events
Calendar: Mar 27-31
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