US CPI fails to signal concern

CAD

While the BoC cut rates by 25bps yesterday, it was Governor Macklem’s mention of a “new crisis” that really caught the eye. He was, of course, referring to the ongoing US-Canada trade conflict. But even so, this was an unusual level of candour from a central banker, albeit one that appears to have done the trick of convincing markets that the BoC is treating developments with an appropriate degree of seriousness. That is perhaps fortunate, as there was very little certainty otherwise on show from the Governing Council. For now, however, it has been sufficient to take USDCAD back below 1.44, despite the greenback’s gains against other G10 currencies.

USD

As we see it, February’s CPI report published yesterday, was notable not for what it showed, but for what it didn’t. Granted, headline readings undershot expectations, with core CPI growth coming in at 0.2% MoM and 3.1% YoY. This, however, was almost entirely attributable to the typically volatile airfares component. The big takeaway for us stemmed from the lack of visible impact of the new Trump administration’s policies. There was no evidence of firms moving to increase prices ahead of tariffs being implemented. But there were also no signs of softening across consumer demand-sensitive items, something that would be expected if US households were pulling back on spending in light of economic uncertainty. This last factor suggests that worries around US growth are likely overstated, a dynamic that has weighed heavily on the dollar in recent weeks. Meanwhile, tariffs should mechanically push up prices moving forward, even if the February data came a little too early for this to be seen. With this in mind, we continue to think that fading growth worries and rising inflation pressures should offer a positive greenback mix moving forward, albeit a sustained change in market tone may take some time to play out. Indeed, today’s PPI and initial jobless claims are unlikely to be a significant upside catalyst – with next week’s FOMC meeting the most immediate candidate event for triggering a sustained dollar turnaround. We would note though that the DXY index closed yesterday up 0.15pp, and is on the front foot again this morning, suggesting that absent any further downside surprises, peak dollar bearishness may now be behind us.

EUR

After charging higher on Tuesday, yesterday marked a turnaround for EURUSD with the pair slipping 0.25%. In large part, this reflected a move higher for the broad dollar, with the greenback making gains against much of the G10 complex. But this also looks indicative of a euro rally that now appears to be running out of steam, with the single currency having gained 5.25% versus the dollar between the end of February and March 11th. Moreover, given a light data calendar and limited scope for a change in ECB tone, we see the balance of risks skewed in favour of a slow grind lower for EURUSD through the rest of the week, though political developments remain a two-sided risk, and a major source of uncertainty.

GBP

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With the euro struggling to make headway on Wednesday, GBPEUR managed to unwind recent losses. The cross rose 0.35pp on the day – now trading back above 1.19, albeit we suspect this bout of upside could be short-lived when considering the headwinds facing sterling in the coming weeks. Most notable on this score is the mini-budget on March 26th, where we see growing risks that the Chancellor will underwhelm markets once again. Given the UK’s challenging fiscal position, a degree of radicalism is needed. Current reporting, however, suggests a more measured approach, and that is likely to disappoint sterling traders on balance.

This content was originally published by our partners at Monex Canada .

Written By: Monex