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The DXY Index retreated to 104 last week after failing to break above 105 on 13-14 February. The Fed has successfully pushed back the market’s aggressive rate cut bets for 2024. As of last Friday, interest rate futures discounted 3-4 cuts this year, fewer than the 7 reductions in December. They also see the Fed delivering its first cut in June instead of March.
However, last Thursday, DXY bounced off 103.4, the floor of a price channel. Fed officials are determined that the market does not deviate from the 3 cuts projected in December’s dot plot. They have also rallied around Fed Chair Jerome Powell’s guidance that a rate cut was not the base scenario at the next FOMC meeting on 20 March. At his semi-annual congressional testimonies on 6-7 March, Powell will likely warn that excessive easing amid a resilient US economy could lead to a stalling or reversal in the progress achieved so far to restore price stability. On 29 February, look for the PCE deflators to mirror the surprises in CPI. Consensus sees headline inflation rising to 0.3% MoM in January from 0.2% in December and core inflation to 0.4% from 0.2%. With initial jobless claims declining a third week to 201k for the 17 February week, those looking for nonfarm payrolls (on 8 March) to fall below 200k in February may be disappointed again.
EUR/USD rose into a higher 1.08-1.09 range last week vs. 1.07-1.08 the previous fortnight. This week, a fall in the Eurozone’s CPI inflation will not lead the European Central Bank to lower rates at next week’s governing council meeting. Today, ECB President Christine Lagarde will tell the EU Parliament that the spring wage negotiations need to affirm the sustainability of disinflation for an interest rate cut this summer. However, EUR/USD could slip below 1.08 again. Interest rate futures see the ECB lowering rates by the same 75-100 bps as the Fed this year. The risks could tilt in the USD’s favour if the CPI estimate on 1 March affirms the ECB’s expectation to reach the 2% target by summer or autumn. Consensus expects headline inflation to slow to 2.5% YoY in February from 2.8% in January and core inflation to 2.9% from 3.3%.
NZD/USD’s rise to 0.62 last week is as tenuous as the fragile New Zealand economy. With inflation expectations above the 1-3% target, we expect inflation the Reserve Bank of New Zealand to keep rates unchanged at 5.50% on 28 February. However, interest rate futures have gotten ahead of themselves in their mild bets for a hike at the April or May meetings. After contracting QoQ sa in three of the four quarters through 3Q23, real GDP looks weak in 4Q23. Apart from retail sales ex inflation contracting by a deeper 1.9% QoQ sa in 4Q23 vs. the 0.8% decline in 3Q23, the jobless rate increased to 4% in 4Q23 for the first time since 2Q21. Despite its concern about high rates weighing on the economy, the Treasury Department hinted at spending cuts in the May budget announcement.
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