Last week, the beleaguered dollar index suddenly has begun to look like a port in a storm after alleged beggar-thy-neighbour rhetoric from Treasury Secretary Mnuchin saw it tumble as low as 88.42 in January before reviving to the 90.50 area. The move was provided by the jump in average hourly earnings in the January employment report, which rekindled Fed tightening concerns and swift stock market introspection, though key inflation data releases this week may not yet confirm the markets’ worst fears.
U.S. equities have charged higher out of the gate this week to reclaim some lost ground after extreme selling and volatility last week ended the largely uninterrupted rally since the election as the major indices surrendered to an over 10% correction. Global bourses have since been relatively mixed after U.S. stocks rebounded into the green Friday. Meanwhile, the dollar mostly recovered moderate losses seen in Asia, where conditions were thin today in the absence of Tokyo markets. The narrow trade-weighted USD index is presently down 0.2% at 90.17, up from the day’s low at 89.94, which is a two-session low. EURUSD backed off after logging a high of 1.2297, with the pair meeting decent selling interest into 1.2300, settling back in the mid 1.2200s.
Therefore the major focus this week is on US Market and specifically on the CPI release on Wednesday. The rising inflation stateside could put the Powell Fed in a defensive crouch if that data gets out of the bottle. But Fedspeak since the wage jump has been mostly along typical dovish-hawkish lines, raising doubts among some and confirming inflation trends for others, though in the end the earnings strength may have been more weather-related. Collectively the Fed won’t hang its policy hat on a single data point, but will look for corroboration elsewhere such as this week’s timely CPI/PPI inflation duo. On a core y/y basis CPI has been inching up toward 1.8%, while PPI has hit 2.3%, though they are expected to temper to 1.6% and 2.2% respectively in January compared to the Fed’s 2.0% target.
Inflation worries should continue to weigh on Treasuries. Hence if the January CPI figure on Wednesday, ratifies that inflation is back and therefore a restriction on inflation is necessary, hence the concern of up to 4 tightenings this year might be reasonable enough. Based on this scenario, US equities could spike lower and thus USDIndex could be seen moving higher. Conversely, soft inflation outcome could provide some positive momentum for US equities and thus a downwards momentum on USDIndex.
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