Written by Convera’s Market Insights team
Dollar stabilises as US inflation eyed
George Vessey – Lead FX Strategist
The risk rally continues to ease slightly with US stocks kicking off the week in the red yesterday and the US dollar finding some much-needed support after suffering its worst week of 2024 last week. Investors are likely fearing a repeat of last month’s hotter-than-expected US inflation report, which sent the S&P 500 down 1.4%, its worst CPI-day since September 2022.
Although last Friday’s US non-farm payrolls number beat expectations, the unemployment rate rose from 3.7% to 3.9% and there were huge downside revisions of the prints from January and December raising questions on data quality. We are starting to see some cracks emerge in the US economy’s armour, as leading indicators are starting to turn more negative. The upcoming data will be key to gauge where we are within this theme and our confidence to call the end of US exceptionalism. Hence, the US consumer price inflation report today is critical. Last month saw consumer prices rise by 0.3% – the most in four months and beating expectations, which sent US yields and the US dollar higher. The new inflation figures will provide further updates on how the disinflation path is progressing, ahead of the Federal Reserve’s (Fed) monetary policy decision next week. Bets for a 25-basis point rate cut by the Fed in June currently stand at 57%, and total easing for 2024 stands at 95 basis points, up from around 75 basis points a couple of weeks ago.
The US dollar has appreciated against just 6% of 50 global currencies we’re tracking, a huge contrast to the 43% in February and 73% in January that it appreciated against. The dollar’s recent weakness is a clear example of what happens when data endorses rate cut expectations. The opposite, therefore, is also true, so if inflation surprises to the upside again, it will provide more of a challenge to market expectations, and likely support the dollar.
Pound slips after data shows cooling UK labour market
George Vessey – Lead FX Strategist
The British pound is just holding afloat the $1.28 handle this morning following the UK jobs report. The unemployment rate unexpectedly ticked up from 3.8% to 3.9% in January and the number of payrolled employees in February rose 20k, below the forecast of 25k. The pace of average weekly earnings came in lower than expected as well, which is good news for the Bank of England (BoE) but more progress needs to be made before rate cuts are delivered.
On Monday, sterling was hovering not far from the 7-month high it touched on Friday, with investors beefing up their bullish positions in the currency to close to 16-year highs. GBP/USD then dipped after data showed Britain’s labour market slowed sharply in February as recruitment firms reported the biggest drop in demand for staff from employers since the coronavirus lockdown of early 2021. Today’s labour market figures from the ONS support the notion of a cooling UK labour market as the unemployment rate rose for the first time since July last year whilst vacancies also fell to 908,000 – the lowest since 2021. Meanwhile, growth in total pay has now slowed for six straight months from a peak of 8.5% last summer to 5.6% in the three months to the end of January. Wages excluding bonuses grew by 6.1%, a tick lower than the 6.2% expected. More importantly for the BoE, annual private sector wage growth dipped from 6.2% to 6.0%,
Although moving in the right direction for the BoE, weekly earnings growth data remain above levels consistent with the central bank’s 2% inflation target but alternative wage growth data does suggest more progress is being made, which supports the notion of a BoE rate cut this summer. Markers are currently pricing a 50% probability of a cut in June and for three 25-basis point cuts in total for 2024, compared to the four priced in for the Fed and ECB, giving the pound a slight edge over its major peers.
Euro pulls back ahead of US CPI
Ruta Prieskienyte – FX Strategist
In the absence of market moving data from both sides of the Atlantic, EUR/USD retreated from its 7-week high as US dollar firmed ahead of CPI report later today. The pair failed to sustain above the elusive $1.0950 threshold as the common currency weakened on last week’s reports that ECB’s key policymakers Villeroy and Nagel are leaning towards spring rate cuts.
The ECB is due to hold a non-policy meeting on Wednesday discussing the revamp of the central bank’s framework for implying monetary policy. The most hotly contested item on the agenda: changes to the Minimum Reserve Requirements (MRR), which require credit institutions established in the euro area to hold deposits on accounts with their national central bank, currently set at 1%. The latest news indicates officials are leanings against any immediate change, despite several hawks pushing for a raise to 2% or even 3%. Some officials want to force banks to hold more cash at the ECB, arguing that this would reduce still-abundant liquidity in the financial system and reduce losses incurred from the higher interest that the ECB and its 20 national central banks now pay on deposits. A higher MRR would have several negative implications for the banking system such as reduce banks’ profitability, negatively impact banks’ liquidity positions and influence the flow of credit to the euro area.
Given an otherwise sleepy domestic backdrop, this week euro will be trading at the whim of US dollar sentiment. With US CPI report due later today, any decline in inflation will be enough for markets to bring back forward the heavily anticipated rate cuts from the Fed and could see EUR/USD take another shot at $1.0950 handle. For now, EUR/USD tests support at 1.0900 – 1.0920 as traders continue to take profits after the rebound from February lows. In other EUR-crosses, EUR/NOK advanced by 0.2% as Norway’s underlying inflation rate declined to its lowest level in 18 months, reviving expectations that Norges Bank could begin cutting interest rates earlier than planned.
CAD rally on pauses
Ruta Prieskienyte – FX Strategist
The Canadian dollar weakened against the greenback on Monday amid cautious undertone among investors ahead of today’s US CPI report. Canadian stocks started the week with modest gains, holding near 2-year highs, and Canadian government 10-year bond yield rose 25bps to 3.35%, in line with US 10-year Treasury note yield movements.
WTI crude futures have been trading in a tight range of $76.8 – $80.6/barrel, providing limited support for the Canadian dollar, as investors continued to weigh conflicting demand and supply factors while awaiting further clues on the timeline for Federal Reserve interest rate cuts. On the supply side, OPEC+ extended the voluntary production cuts through to the end of June, which has helped put a floor under prices. However, supply constraints are being offset by rising supply from non-OPEC countries and signs of weak demand from top crude importer China. Data released last week showed that oil imports in China fell approximately 5.7% to 10.8 million barrels per day in the first two months of the year, compared to 11.44 million bpd in December. Meanwhile, the US is producing crude at record levels, which is limiting further crude oil gains.
With no top tier Canadian economic reports due today, sole focus shifts to US CPI print later this morning. We expect a spike in realised volatility in today’s trading, with USD/CAD overnight ATM option trading at a 5-month high. A stronger-expected decline in US inflation would cement markets’ conviction for a Fed June cut and could see USD/CAD extend its recent bearish streak towards $1.3400. For now, the pair is supported by 50 DMA at $1.3470.
JPY up over 1% since last week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 11-15
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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