Dollar weighed down by jobs data

Important calendar events

• JPY: Household Spending, Annual PPI, BOJ Policy Rate, Monetary Policy Statement, BOJ Press Conference
• EUR: German Final CPI, German WPI, German WPI
• GBP: Monthly GDP, Construction Output, Goods Trade Balance, Index of Services, Industrial Production, Manufacturing Production, NIESR GDP Estimate
• Average Hourly Earnings, Non-Farm Employment Change, Unemployment Rate, Federal Budget Balance

USD

The dollar dipped on Thursday, with the dollar index dropping to 105.3. US Treasury yields also edged lower, with the US 10-year bond yielding 3.95%. 

Labor data this week has been mixed. Positive labor data on Wednesday boosted the dollar. Job openings remained elevated, with JOLTS job openings at 10.82M in January, beating expectations of 10.58M. Private payrolls increased, rising to 242K in February from 119K in January. On the other hand, unemployment claims on Thursday were less optimistic than expected, putting pressure on the dollar. Unemployment claims this week rose to 211K against expectations of 195K.

Fed rhetoric was one of the main drivers of the dollar this week. Fed Chair Powell testified before the Senate Banking Committee on Tuesday and his speech was more hawkish than anticipated, boosting the dollar. Powell stated that although inflation has cooled somewhat, the process of getting back to the Fed’s 2% target rate will “likely be bumpy”. Powell warned that the US central bank is prepared to accelerate the pace of tightening if price pressures remain high. Powell also indicated that the Fed’s terminal rate will likely be higher than initially anticipated.

Powell’s second testimony on Wednesday was slightly less hawkish, emphasizing that, although inflation had been more resilient than anticipated, any decision to hike rates more aggressively would be data-based. 

The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. In light of Powel’s testimonies, however, markets have adjusted rate hike expectations from a 25-bp raise to a 50-bp increase in March. Market expectations of the Fed’s peak rate have also increased, moving to a range of 5.5%-5.75%.

US inflation data showed that price pressures in the US remain high and are not easing at the pace anticipated. Core PCE, which is the Fed’s primary inflation gauge, came in hotter than expected, rising by 0.6% in January against predictions of a 0.4% raise. 

US headline inflation in January dropped to 6.4% year-on-year versus the 6.2% expected. PPI data also surprised markets to the upside, rising by 0.7% in January against expectations of a 0.4% raise and a 0.2% drop in December. Recent US inflation data highlight the risk of inflation becoming entrenched. Sticky inflation may induce the Fed to rethink its recent dovish pivot.

Preliminary GDP for the final quarter of 2022 was disappointing, showing that the US economy expanded by 2.7% against expectations of a 2.9% growth. 

Important labor data are due on Friday including Average Hourly Earnings, Non-Farm Employment Change, and Unemployment Rate, and are expected to affect dollar prices.

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EUR 

The Euro benefitted from the dollar’s weakness on Thursday and EUR/USD climbed above 1.058. If the currency pair goes up, it may encounter resistance near 1.070. If the EUR/USD pair declines, it may find support at 1.053. The dollar’s ascent on Tuesday put pressure on competing currencies, as Fed rate hike expectations increased.

Revised GDP data on Wednesday painted a grim picture of the Eurozone economy. The GDP print for the final quarter of 2022 was zero, indicating that the EU economy is stagnating and recession looms.

Headline inflation in the Eurozone eased to 8.5% on an annual basis in February from 8.65 in January. Markets were predicting that inflation would cool to 8.2%. Even though February’s inflation print was higher than expected, the Euro dropped on Thursday, as national readings in recent days pointed to an even higher print. Core CPI, which excludes food and energy, went up by 0.8% in February and core inflation hit a record high of 5.6% year-on-year. Sticky price pressures in the Eurozone are likely to affect ECB policy, forcing the EU Central Bank to continue raising interest rates. 

The ECB raised interest rates by another 50 bp at its February meeting, bringing its main refinancing rate to 3.0%. ECB President Christine Lagarde has emphasized that the central bank aims to bring inflation down to its 2% target. Lagarde confirmed that another 50-bp rate hike would follow at the next monetary policy meeting in March, after which the ECB would re-evaluate its policy. Market odds are currently favoring an increase of the ECB refinancing rate to 4.0% by June.

ECB rhetoric is expected to affect the Euro significantly this week. ECB's Lane stated this week that the central bank is likely to increase rates further to rein in Eurozone inflation, even if there are some signs that price pressures are easing.

German inflation data are due on Friday and may have some impact on the Euro as Germany is the EU’s leading economy.

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GBP 

The Sterling gained strength against the dollar on Thursday, and GBP/USD plummeted to the 1.195 level. If the GBP/USD rate goes up, it may encounter resistance near 1.214, while support may be found near 1.180. 

BOE members continue to be divided on the central bank’s future policy direction and market expectations on the outcome of the next policy meeting fluctuate. The BOE raised interest rates by 50 bp at its February meeting, bringing the official bank rate to 4.0%. Markets are currently pricing in a 25-bp rate at the next BOE policy meeting. Several market participants though believe that the British central bank will pause rate hikes completely. 

UK headline inflation cooled at a higher pace than anticipated, dropping to 10.1% year-on-year in January from 10.5% in December. Cooling inflation rates remove some of the pressure on the BOE to continue its economic tightening. 

Recent GDP data showed that the British economy is slowing down. The British economy contracted by 0.5% in December, which was more pessimistic than the 0.3% expected. Preliminary GDP for the final quarter of 2022 showed stagnation, while GDP for 2022 came in at 4.1%. The IMF downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year, which is also consistent with BOE forecasts.

The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.

UK GDP data on Friday will attract market attention and may affect the Sterling's price. If the GDP print is in the negative, recessionary fears for the UK will be intensified dragging the pound down. 

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JPY

The Yen gained strength on Thursday as the dollar retreated, and USD/JPY dropped to 136. If the USD/JPY pair declines, it may find support near 134. If the pair climbs, it may find resistance at 138.2. 

Final GDP data for Q4 of 2022 on Thursday showed that the Japanese economy has reached stagnation. Although preliminary GDP data indicated a small expansion of 0.2%, the final GDP print was zero. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy. The final GDP Price Index printed slightly higher than expected, with a 1.2% annual expansion, versus the 1.1% predicted.

This week all eyes are going to be on the Bank of Japan and the monetary policy meeting on Friday. Incumbent BOJ Governor Haruhiko Kuroda’s term is ending on April 9th, and this is going to be the last policy meeting he is going to preside over after remaining at the helm of the BOJ for a decade. Departing BOJ Governor Kuroda has been persistently dovish throughout all this time and is expected to defend the central bank’s ultra-easy policy till the very end. Japanese policymakers maintained ultra-low interest rates at the BOJ’s January meeting, keeping the central bank’s refinancing rate at -0.10%.

The Yen has been exhibiting high volatility over the past couple of weeks as developments on the succession of the BOJ Governor are front and center in the news. Incumbent BOJ Governor Kuroda is a staunch supporter of an ultra-loose monetary policy and his term in office expires in April. Kuroda’s successor, Kazuo Ueda, has attracted the market’s attention in the past couple of weeks.

Most market analysts consider that Ueda will likely not be in a hurry to unwind the BOJ’s ultra-easy policy, but as yet his intentions remain unclear. Ueda has already appeared twice before the Japanese government's lower house known as the Diet. Markets eagerly awaited his testimony for signs of a pivot in BOJ policy but as yet Ueda remains non-committal. Upcoming BOJ Governor Ueda hinted at the possibility of tweaking the central bank’s bond yield curve control in the future. However, he cautioned against sudden changes in monetary policy.

Headline inflation in Japan has gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households. Increased price pressures and wages, raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy. Tokyo Core CPI for February slowed for the first time since January 2022, dropping to 3.3% against expectations of a  4.5% print.

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Written by:
Myrsini Giannouli

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