Written by Convera’s Market Insights team
Dollar gains, but so do stocks, after hot US CPI
Boris Kovacevic – Global Macro Strategist
The US dollar index has risen for two days on the bounce, in line with US Treasury yields, which touched 1-week highs yesterday after a hot US CPI print sparked a modest hawkish repricing of Federal Reserve (Fed) policy expectations. However, stock markets brushed the news off, with the S&P500 and Nasdaq rising over 1% in a sign that investors were fearing a larger upside surprise.
Still, US inflation came in hotter than expected once again in February, confirming the increase in consumer prices from the month prior. The main surprise came from core inflation posting a second consecutive monthly print of 0.4%, putting the annual growth rate at 3.8%. While still down from the 3.9% posted in January, the fall of underlying inflation continues to lose momentum as shelter inflation remains stubbornly high at 5.7%. This will most likely confirm the Fed’s cautiousness to start the easing cycle before June, given that the 1- and 3-month annualised core inflation rates increased to twice the central bank’s target at 4.4% and 4.2%. Markets remained calm though despite the recent inflation surprises because the overarching theme of easier monetary policy ahead remains in place.
Flying under the radar, but arguably more important, was the NFIB survey of small businesses, which offered investors some relief as the compensation plans of companies – a leading indicator for wage growth and therefore inflation – ticked down to its lowest since the beginning of 2022 in February. While the Q1 reflation has dampened hopes of a March or May rate cut, June is still seen as the beginning of the easing cycle.
UK economy rebounds, pound crowded
George Vessey – Lead FX Strategist
Growth returned to the UK economy in January as data this morning revealed UK GDP rose 0.2% m/m, bang in line with expectations. Although it doesn’t signal an end to the technical recession seen in the UK late last year, it’s certainly a sign of improvement, which could help persuade investors that the Bank of England (BoE) will still have to keep interest rates higher for longer than its peers. The immediate market reaction has been somewhat negative for sterling though.
GBP/USD lost its grip of the $1.28 handle yesterday, triggered by UK data hinting at a cooling labour market and easing wage growth. But it was the above-forecast US inflation data which accelerated the decline towards $1.27, as markets dialled back Fed rate cut expectations. This caused UK-US rate spreads to narrow and sapped the pound of its relative rate advantage. However, weaker US wage indicators muddied the rates outlook once again, sending GBP/USD back towards $1.28. The toing and froing on a daily basis in FX markets reflects the uncertainty surrounding the timing and degree of monetary policy easing by central banks. But given the expected path isn’t too dissimilar amongst the G3 central banks, we think the overall extent of monetary easing is more important now. The more rate cuts are being priced in, the better the growth prospects for high beta currencies, like the British pound, versus the US dollar.
That said, crowded positioning is still a key headwind for sterling, with net long GBP bets more than 1 standard deviation higher than their historical mean. It could be said, therefore, that risks lean unevenly towards a weaker pound in the short-term, especially if UK data starts surprises more on the downside.
Euro puts up a good fight
Ruta Prieskienyte – FX Strategist
EUR/USD declined to the lower $1.0900s after the release of US CPI inflation showed inflationary pressures were higher than expected in February. The fact that gasoline and energy prices were two of the biggest contributors to elevated inflation limited EUR/USD decline, with the pair closing unchanged on the day at $1.0924.
A consensus appears to be emerging among Governing Council members on the timing of the ECB rate cuts with June emerging as the most likely contender to kickstart policy easing cycle, no earlier. In an interview yesterday, Robert Holzman – among the most hawkish rate setters – confirmed that a rate cut is more likely in June, than April, but does not remain a done deal. The policymaker cautioned that cutting interest rates before the Fed could cause an investor reaction and would be euro negative. While the ECB remains optimistic about the inflation progress thus far, “there are some residual doubt” about the convergence to 2% in 2025 as per latest ECB staff projections. The central bank has been misled by projections before, so staying data-dependent and open to acting when needed, but also not prematurely, remains the best course of action for now. As it stands, it seems June rate cuts are 1/1 for all G3 central banks, with probability of an ECB rate cut now at 83%.
Today’s calendar is looking light yet again, with EZ Feb industrial production print due shortly. Historically, EUR/USD overnight ATM option price ahead of the print does not statistically differ from its historical average, meaning the print goes largely ignored by investors. With the latest option price at 4.57, we are not expecting an increase in volatility or a significant market reaction on the back of the report this time round either. Expectations is for EUR/USD to be largely range bound $1.0870 – $1.0920.
Global stocks up almost 2% 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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