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Monday, February 26, 2024

Markets await US inflation data

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Investors don’t make sudden decisions. Markets are awaiting the release of US consumer inflation data on Tuesday.

Since the publication of the NFP report, stagnation has been observed in the foreign exchange market. After falling to 1.0720 at the beginning of last week, the EURUSD rate recovered to 1.08. The market is waiting for the next impulse. It looks like it could be tomorrow’s US inflation data. There is still a lot of optimism on Wall Street, which has led to new highs for the major stock indexes. The VIX – an indicator commonly referred to as the fear index – is still at the bottom of the swing bands and is not yet sending any warning signals. The market currently assumes that the Fed will cut interest rates in June. The probability of such a scenario is estimated to be slightly above 80%.

Exchange rates. The dollar has increased slightly

The US Dollar Index fell slightly over the past week, reversing the recent wave of appreciation that occurred on the day of the NFP report (February 2) and Monday, February 5. Let us remember that the labor market data turned out to be extremely good, which to some extent postponed the chances of an earlier easing of monetary policy by the Fed.

This week, or rather tomorrow, we will learn the publication of the US Consumer Price Index for January. This data may (but does not necessarily) become a new catalyst for major changes in positioning in the foreign exchange market.

Bloomberg forecasts indicate a further decline in inflation. The CPI is expected to decline from 3.4% year on year. to 2.9 percent in January. The benchmark index is expected to decline 3.9%. up to 3.7 percent. Monthly dynamics are expected at 0.2 percent, respectively. and 0.3 percent and be similar to what it was a month earlier. Data that meets expectations may not evoke emotion. In turn, surprise in both directions should trigger a slightly larger move. Tomorrow’s numbers may indicate further direction for the US dollar’s strength.

Interest rates. What will the Fed do?

Retail sales this week (Thursday) could also influence market expectations regarding the future trajectory of Federal Reserve interest rates, although the importance of these data will be incomparably lower than those planned for Tuesday. Today the macro calendar is practically empty. We’ll only get appearances from Fed’s Michelle Bowman, Thomas Barkin and Neel Kashkari. It is unlikely that they will bring anything new that the market does not know, and we most likely will not see a serious reaction from quotes.

Continued labor market strength and a slowdown in deflation should stem the dollar sell-off, and for now I see greater risk of further dollar appreciation, at least in the short to medium term.

Returning to the Old Continent, the ECB’s comments have been mixed lately. Fabio Panetta – the most dovish voice on the Governing Council – echoed expectations of a rate cut, saying the time for monetary easing was “fast approaching.” In turn, Isabela Schnabel (a “hawk” on the Governing Council) warned against easing monetary conditions too early. Mario Centeneo (president of the Central Bank of Portugal) and Pablo Hernandez de Cos (president of the Bank of Spain) prefer a cautious approach and do not give peaceful advice.

The consensus among policymakers appears to be in favor of keeping interest rates unchanged, at least until European wage statistics in April, which will shed light on where inflation is headed next. The market assumes that the start of easing will occur at the June meeting, and they are beginning to believe in it more and more.

Source: TMS Brokers / Lukasz Zembik
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Source: Wprost

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