Dollar steady ahead of CPI data

Important Calendar Events

• JPY: Annual Producer Price Index
• GBP: RICS House Price Balance, BOE Gov Bailey speech
• EUR: EU Economic Forecasts
• USD: Monthly CPI and Core CPI, Unemployment Claims, 30-y Bond Auction, Natural Gas Storage

USD

US treasury yields were little changed on Wednesday, while the dollar index dropped close to a two-week low, ahead of the US CPI data that are scheduled to be released on Thursday. The dollar index had low volatility this week, as traders await the release of Important financial indicators later in the week to gauge the frequency and aggressiveness of future rate hikes. 

A number of key economic, employment and inflation indicators are scheduled to be released on Thursday for the US. These include: Monthly CPI and Core CPI, Unemployment Claims and 30-y Bond Auction. Consumer Price Indicators are key inflation indicators and their release, as well as that of employment data, might cause high volatility for the USD, as traders will use these data in an attempt to predict the Fed’s future monetary policy.

The Federal Reserve has so far adopted a more cautious approach to changing its monetary policy than anticipated. A more hawkish pivot in its policy was expected in the face of soaring inflation rates in the US. The recent Omicron wave through the US though, has set the US economy back, costing jobs and slowing down many business sectors. In the coming months, the Fed will need to assess financial, inflation and employment conditions, in order to move towards a more hawkish fiscal policy in a way that will be sustainable by the US economy.

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EUR 

Last week the ECB President Christine Lagarde expressed concerns over soaring inflation rates in the EU, leading traders to speculate that the EU Central Bank might finally pivot towards a more hawkish monetary policy, and the Euro gained strength. This week though, Lagarde stated that any move to tackle eurozone inflation would be “gradual”. The ECB is caught between a rock and a hard place, as soaring inflation rates in the Eurozone require an aggressive tightening of the ECB’s monetary policy. The ECB seems hesitant to cut off monetary support and shift towards a more hawkish policy though, as economic data in the Eurozone indicate that the EU economy is still weak. German Balance of Trade data released on Wednesday, were lower than expected, pushing the Euro down.  

More importantly, a new debt crisis is looming in the EU, as Italian and Greek bond yields rose to pre-pandemic heights last week. Bond yields in the Eurozone have been supported since the start of the pandemic by the ECB’s bond-buying program, but if the ECB cuts off the fiscal stimulus abruptly, several countries may face serious borrowing issues. 

The crisis between Russia and Ukraine also threatens to send inflation rates in the Eurozone even higher, as the EU relies on Russia for key commodities and especially energy-related commodities. EU trade sanctions against Russia would likely result to an energy crisis and further increasing inflation rates in the EU. To avert this crisis, the EU is attempting to build a partnership for energy security with the US and other Natural Gas suppliers, in order to mitigate a potential energy crisis and shield EU consumers and households from energy shortages.

The Euro remained steady on Wednesday and EUR/USD continued trading sideways, around 1.142, with very low volatility. If the currency pair goes up, it may encounter resistance at 1.148, while if it falls, support may be found around 1.275 and further down at 1.118. 

The European Commission Economic Forecasts report is scheduled to be released on Thursday, and may cause some volatility for the euro. This report includes economic forecasts for EU member states over the next 2 years, which serve as the European Commission's basis for evaluating economic performance and trends of EU member states. Such reports are especially important at this time, as the ECB is trying to determine the future direction of its fiscal policy.

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GBP 

The uncertain political climate in the UK is putting pressure on the pound, as British PM Boris Johnson is facing opposition even from within his own party and is pressured to resign. Major Tory donor John Armitage stated in an interview on BBC that the British PM is past the point of no-return and should resign. Following the release of the ‘party gate’ report last week, which pointed to ‘failures in leadership’ and overall dysfunction in Downing Street, the British PM vowed to address the issues within his administration. He performed a mini re-shuffle on Tuesday, but his actions came into scrutiny once more, as he promoted mainly MPs who have demonstrated their loyalty to him these past few weeks. The negative climate against the British PM does not seem to abate, on the contrary, last week Boris Johnson falsely accused opposition leader Keir Starmer of failing to prosecute Jimmy Savile over sexual abuse scandal. Starmer was attacked on Monday by an angry mob, which many consider was ignited by Boris Johnson’s claims. Johnson’s allegations were seen as a desperate bid to draw attention from his own failures and backfired against the British PM.

The pound was boosted last week by the Bank of England’s decision to raise its interest rate by 25 basis points, bringing the current rate to 0.5%. The BOE has adopted a more aggressively hawkish policy so far than the Fed and the ECB in an attempt to combat rising inflation rates in the UK. However, the BOE’s decision was widely expected and priced in for the greatest part. The boost that the sterling received from the BOE’s decision has waned, and the pound seems to be buckling under political pressures in the UK.

The GBP/USD rate climbed early on Wednesday, then fell to 1.353. If the GBP/USD rate goes up again, there may be resistance at the 1.375 level, while if it declines, support may be found at 1.332 and further down at 1.317. 

The RICS House Price Balance, is scheduled to be released on Thursday, which is an indicator of inflation and may cause some volatility for the currency. More importantly, BOE Governor Andrew Bailey is due to speak at an online event on Thursday. As the effects of last week’s rate hike have largely been absorbed by markets, traders will scan Bailey’s speech for hints over the BOE’s fiscal policy in the coming months. Many investors expect another back-to-back rate hike at the BOE’s next policy meeting in March.

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JPY 

A number of indicators of employment and economic activity that were released on Tuesday for the Yen were lower than predicted, showing that the economy in Japan is halting and pushing the Yen down. On Wednesday, USD/JPY traded sideways, around the 115.4 level. If the USD/JPY pair gains strength, it may find resistance at 115.6 and at 116, while if it declines, support might be found at 114.8 and further down at 113.48. 

The Yen remains at its lowest levels in decades, creating problems for households, as imported goods, especially food and energy, are becoming increasingly expensive for Japanese households.  The BOJ’s dovish monetary policy is creating a gap in interest rates between other major Central Banks, especially the Fed and the BoE, who are raising their benchmark interest rates and are putting pressure on the currency. 

The annual Producer Price Index is scheduled to be released on Thursday for Japan, which is a leading indicator of consumer inflation and may cause some volatility for the currency.

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Written by:
Myrsini Giannouli

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