The dollar index fell 0.22%, erasing gains made after recent U.S. jobs and CPI reports lifted Treasury yields, ahead of important data on Thursday that could signal whether the Fed next week will trim its dot plot projection for rate cuts this year from three to two.
Futures have already reduced expected Fed rate cuts to closer to three from four before the CPI report, but if the median dot plot fell to just two after the March 19-20 Fed meeting, it could lift Treasury yields and the dollar.
Thursday’s retail sales, PPI and jobless claims are the last top-tier releases before the Fed meeting.
Overall and core PPI are forecast up 0.3% and 0.2% month-on-month versus January’s 0.3% and 0.5% increases. Retail sales are forecast rising 0.8% to reverse the odd 0.8% January drop, with the control group erasing its 0.4% January fall. Claims are seen little changed at relatively low levels.
A first Fed rate cut in June has dwindled to a 66% probability, with 82bp of cuts for the year.
EUR/USD rose 0.3% with a 4bp tightening in 2-year bund-Treasury yield spreads, after Tuesday’s post-U.S. CPI dip held exactly at 1.0900 on EBS.
The ECB is priced as a 78% probability to begin cutting rates in June, with 91bp of cuts this year.
Risk-on ex-U.S. flows also aided EUR/USD versus the haven dollar, but also as the gap between BTP and bund yields fell to a 26-month low.
USD/JPY was flat awaiting Thursday’s U.S. data, the BoJ’s tightening response next Tuesday, and beyond, to strong Japanese wage increases and the Fed events the day after, as Fed-BoJ rates convergence risk is weighed against Japan’s seasonally USD/JPY bullish fiscal year-end.
Sterling rose 0.12% after an as-forecast 0.2% rise in UK January GDP was somewhat of a relief after December’s 0.1% fall and the modest Q3-Q4 recession.
But sticky UK inflation has a June rate cut priced as a coin toss, with 67bp of cuts this year. The more gradual BoE easing path versus the Fed and ECB has supported the pound, with sterling not far from 2023’s highs.
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