The dollar index rose 0.55%, with EUR/USD off 0.54% and USD/JPY up 0.39 after U.S. PPI and claims data sent Treasury yields higher and Fed rate cut expectations lower before the March 19-20 FOMC meeting.
EUR/USD fell to its lowest in five days amid a 4bp widening of the two-year bund-Treasury yield spreads to -1.66%.
There’s some risk the Fed’s December dot plot median for three 2024 cuts will fall to two on Wednesday, further supporting Treasury yields and the dollar. At present, a June rate cut is priced as only a 60% probability.
Normally hawkish Dutch central bank governor Klaas Knot said on Thursday the ECB could cut interest rates at least three times from June, with ECB’s Yannis Stournaras also eyeing likely June and July cuts. Futures favor those cuts and 90bp by year-end.
USD/JPY eked out new highs for the week as 2- and 10-year Treasury yields rose 7bp and 11bp, respectively, due to yet another above-forecast inflation report and below-forecast and downwardly revised jobless claims. The reports dimmed expectations of labor market loosening and more than the three 2024 Fed rate cuts that are currently priced in, well down from four earlier this year.
Regardless of widespread reporting on a likely 10bp BoJ rate hike on Tuesday, only 4bp of tightening is now priced in, despite strong union wage increases the BoJ has predicated a rate hike on. Only 20% of Japanese workers are in unions and nationwide negative real income has hurt domestic consumption.
An earthquake in Fukushima had little impact.
Sterling fell 0.34%, having earlier eclipsed Wednesday’s high following some positive news on the UK housing front. But the rise in GILTS yields fell shy of Treasury yield gains and created risk-off flows that hurt risk-sensitive currencies such as the pound and Aussie.
WTI’s 2% surge Thursday to its highest since November added to inflation concerns.
U.S. industrial production and Michigan sentiment on Friday are the last interesting releases before the Fed meeting.
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