Federal Reserve Chairman Jerome Powell's testimony to Congress last week left a dovish tone in the market. Repeatedly optimistic (albeit cautiously) about the path to eliminating inflation and insisting that the Fed is “not far off” from cutting rates, most investors seemed poised for a more hawkish tone given the solid data. misled investors. The resulting change in the currency position versus the dollar was an example of what we will see once the data finally supports rate cut expectations.
We recently discussed how sticky US economic data gave markets no sense of direction and reduced currency volatility. Ultimately, improving currency volatility on a sustainable basis will require divergence in the Fed's or other advanced economies' interest rate expectations. Prudent, inflation-focused central bankers need conclusive data evidence before they can start cutting rates. So even though a cautiously dovish Mr. Powell and European Central Bank President Christine Lagarde opened the door to a June interest rate cut last week, data remains overwhelmingly central to currency markets.
Friday's U.S. jobs report probably raised more questions about the quality of the data than it provided answers about the actual state of the job market. It's understandable that the market wasn't fooled by the strong headline (275,000), as US economists discuss here. Over the past two months, he's had a downward revision of 167,000 jobs, which means he's actually added just over 100,000 jobs. This is another example of how unreliable data is these days. Incidentally, job gains were largely concentrated in industries not normally associated with booming economies, such as retail, manufacturing and construction. There are many signs that the job market is cooling from other surveys, such as the Household Survey, which is used to calculate the unemployment rate.
As the employment data is inconclusive, more weight will be placed on February's CPI data, which will be released tomorrow. We expect core print to be 0.3% month over month, which remains out of line with the Fed's inflation target and suggests easing is not imminent. This week's US calendar also includes February retail sales and industrial production, as well as a University of Michigan study. The Fed is already in a blackout period ahead of its March 20th meeting.
We expect inflation data to put an end to the dollar's decline this week. Last week's change in currency positioning no longer justifies an intensification of downward pressure on the USD unless key data starts to shift in favor of Fed easing. There is a non-negligible risk that some of the US dollar losses caused by Powell's testimony will be undone this week.
Francesco Pesole