- The US Dollar trades around a three-month high.
- Market are writing off the recent US CPI report as a one-off outlier in the disinflationary pathway.
- The US Dollar Index seems to be stalling ahead of 105 and seeing some profit taking.
The US Dollar (USD) has thrown a few good punches at the markets with a substantial rally midweek, though does not look to be continuing this Wednesday ahead of the US opening bell. The move came on the back of surprise upticks in US monthly inflation (both headline and core). This in turn is triggering an earthquake in markets, which has sent equities nosediving, yields soaring and the US Dollar rallying against every major currency peer.
On the economic data front, a very light calendar offers room for markets to digest and recalibrate. Do not expect much from any single economic data point ahead this Wednesday with the Mortgage Applications Survey. Rather look for clues from US Federal Reserve members Austan Goolsbee and Michael Barr, who are speaking today and could soften the current inflation print with a nuanced message.
Daily digest market movers: Goolsbee sees housing being an issue
- Several more analysts and banks are writing off the data from Tuesday as a one-off with the disinflationary path still in tact and no substantial uprising in inflation expected.
- Goldman Sachs was quite quick to come out with a report in the US Consumer Price Index (CPI) aftermath saying that the February numbers will be substantially lower and writing off the current knee jerk reaction in CPI numbers due to the intensive seasonal holiday period over December and January. A mere drop on a hot plate thus, according to Goldman Sachs.
- North Korea has fired multiple cruise missiles off the East Coast.
- The weekly Mortgage Applications Index went into contraction by 2.3%, coming from a positive 3.7% previous week.
- Two US Federal Reserve speakers are set to make comments this Wednesday: Around 14:30 GMTChicago Fed Austan Gooldsbee already spoke and pointed out housing as the last castle of inflation. That needs to addressed before jobs data will start to turn negative under these elevated rates. Later near 21:00, Fed’s Vice Chairman Michael Barr will speak.
- Equity markets are trying to recover with European equities mildly in the green. US equity futures are even more up than European ones, with the Nasdaq leading the charge, up 0.60%.
- The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 91.5%, while 8.5% for a rate cut. In terms of overweight expectations for a rate cut, the dial has moved from May/June now into summer towards July.
- The benchmark 10-year US Treasury Note trades near 4.29%, a touch softer from its peak on tuesday at 4.33%.
US Dollar Index Technical Analysis: Fed has one last thing to do before starting to cut
The US Dollar Index (DXY) soared to a near 105 after US CPI data. Although it looks very logical that the DXY could jump above that level now, markets have already incorporated the data after pushing back rate-cut expectations for the Fed from June to July. It is possible, therefore, that in the coming days this up move will start to fade back in search of support.
The road is now open for a jump to 105.00 with 105.12 as key levels to keep an eye on. One step beyond there comes in at 105.88, the high of November 2023. Ultimately, 107.20 – the high of 2023 – could even come back into scope, but that would be when several inflation measures are coming in higher than expected for several weeks in a row.
Support should now be provided by the high of last week Monday near 104.59. Further down that 100-day Simple Moving Average looks rather doubtful, near 104.24, so the 200-day SMA near 103.67 looks more solid. Should that give way, look for support from the 55-day SMA near 103.08.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.
Source: https://www.fxstreet.com/news/us-dollar-steady-as-dust-settles-over-recent-cpi-shocker-202402141226