Dollar Flat Ahead of CPI Data

March 12, 2024
  • February inflation data take center stage; risks are asymmetric from this week’s data; inflation expectations remain elevated; Brazil reports February IPCA inflation
  • U.K. labor market data came in soft; BOE MPC member Mann remains hawkish; CNB Vice Governor Zamrazilova sounded cautious
  • Reports suggest the BOJ will hike rates this month if the early results of wage negotiations show significant increases; BOJ Governor Ueda sounded more cautious; Japan Q1 BSI survey came in soft; RBA Assistant Governor Hunter sounded cautious

The dollar is trading flat ahead of CPI data. DXY is trading flat near 102.863 vs. Friday’s low near 102.358. Clean break below 102.282 sets up a test of the late December low near 100.617. The euro is trading modestly higher near $1.0935. Clean break above $1.0970 sets up a test of the December 28 high near $1.1140. Sterling is trading back below $1.28 after U.K. labor market data came in soft (see below). Cable may find it difficult to break above the late July 2023 high near $1.30. USD/JPY has been volatile, trading as low as 146.60 on reports of March BOJ liftoff but recovering to trade as high as 147.60 on subsequent cautious comments from Governor Ueda (see below). We remain frustrated by the current dollar weakness. The U.S. data continue to come in mostly firmer and despite Powell’s dovish comments last week, most Fed officials remain very cautious about easing too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should recover after this current period of weakness. This week’s inflation and retail sales data may be a spark for that move.


February inflation data take center stage. CPI will be reported today. Headline is expected to remain steady at 3.1% y/y, while core is expected to fall two ticks to 3.7% y/y. Of note, the Cleveland Fed’s inflation nowcast model shows February headline and core at 3.1% and 3.7%, respectively. For March, the model shows headline and core at 3.3% and 3.7%, respectively. PPI will be reported Thursday. Headline is expected at 1.2% y/y vs. 0.9% in January, while core is expected to fall a tick to 1.9% y/y.

Risks are asymmetric from this week’s data. Weaker than expected inflation or retail sales readings will simply reinforce the case for a Fed rate cut in June and so the market reaction should be relatively contained. However, stronger than expected data prints would likely trigger a sharp upward adjustment to Fed expectations in favor of a firmer USD and higher Treasury yields, similar to what we saw February 13 after the higher-than-expected January CPI print.

Inflation expectations remain elevated. The New York Fed’s survey for February saw 1-year expectations remain steady at 3.0%, but longer-term expectations picked up. 3-year expectations rose to 2.7% vs. 2.4% in January, the highest since November, while 5-year expectations rose to 2.9% vs. 2.5% in January, the highest since August. Looking ahead, University of Michigan reports March consumer sentiment Friday. 1-year inflation expectations are expected to pick up a tick to 3.1%, while 5- to 10-year expectations are expected to pick up a tick to 3.0%. The Fed won't be happy to see inflation expectations moving further above its 2% target.

Brazil reports February IPCA inflation. Headline is expected at 4.45% y/y vs. 4.51% in January. If so, it would be the lowest since July 2023 and back within this year’s 1.5-4.5% target range. At the last COPOM meeting January 31, the central bank cut rates 50 bp to 11.25% and said that this pace of easing would be maintained over the next meetings. The next meeting is March 20 and another 50 bp cut to 10.75% is expected. Of note, the swaps market is pricing in 175 bp of total easing over the next six months that would see the policy rate bottom near 9.5%.


U.K. labor market data came in soft. The unemployment rate unexpectedly rose a tick to 3.9% for the three months ending in January. This was the first rise since the three months ending in July, but it remains below the Bank of England’s medium-term equilibrium level of around 4.5%. Average weekly earnings (ex-bonuses) fell a tick to 6.1% y/y, while total earnings fell two ticks to 5.6% y/y. Lastly, vacancies fell 43k in the three months ending in February to stand at 908k, down from the 1.3 mln peak recorded in 2022. Labor market conditions continue to ease to some degree and support the case for looser policy settings beginning in Q3. The market still sees 75 bp of rate cuts in 2024 starting in August. We see more upside for GBP versus EUR as the U.K. growth outlook remains more encouraging than the eurozone’s.

Bank of England MPC member Mann remains hawkish. Mann noted that “If this historical relationship between services inflation running at about 3.25% to 3.5%, and goods inflation...then looking at the year over year, we’re nowhere near the historical kind relationship between core and goods that’s consistent with headline at 2%.” She noted that “We have a significant gap between goods surfaces and headline inflation in all economies, but in the UK it’s relatively larger. The deceleration in services has to continue throughout the forecast horizon at a much faster pace than what we already see.” Mann speaks again today. Recall that she continued to dissent (along with Haskel) at the February 1 meeting in favor of a 25 bp hike. Governor Bailey also takes part in a panel discussion later today.

Czech National Bank Vice Governor Zamrazilova sounded cautious. She said “The pace of monetary easing that we have adopted is reasonable. Both 25 and 50 bp steps are acceptable for me. I’m not considering any jumbo cuts.” Her comments come a day after February CPI came in a tick lower than expected at 2.0% y/y, the lowest since December 2018 and right at the center of the 1-3% target range. At the last policy meeting February 8, the bank delivered a dovish surprise and cut rates 50 bp to 6.25% vs. 25 bp expected. Next policy meeting is March 20, and the size of the cut will depend in large part on how the koruna is trading. Of note, the swaps market is pricing in 250 bp of total easing over the next 12 months followed by another 75 bp over the subsequent 12 months that would see the policy rate bottom near 3.0%.


Reports suggest the Bank of Japan will hike rates this month if the early results of wage negotiations show significant increases. Specifically, the Trade Union Confederation known as Rengo will provide its first read this Friday and the bank will move if wage growth “significantly” exceeds the 3.8% increase last year. Japanese newswire also reported that support is growing within the BOJ for ending the bank’s negative rate policy this month but added that some would prefer to analyze wage increases at small- and medium-sized businesses and decide whether to end the policy in April. Another newswire said the bank is currently split on March or April liftoff.

BOJ Governor Ueda sounded more cautious. He said “We will consider adjusting the negative rate policy, the yield curve control, and other various easing measures if the goal is within sight. Actual steps and content will depend on economic and price conditions at that time.” He added that “Although there’s weakness in some household spending data, my view is that the gradual recovery continues.” The yen had been trading like a BOJ hike next week was a done deal, with USD/JPY trading as low as 146.50 yesterday. However, the pair quickly traded near 147.60 after Ueda’s comments. Of note, the market still sees nearly 65% odds of a hike next week, but we think that's too high given recent softness in the data. If the BOJ stands pat, look for a quick pop higher in USD/JPY.

Japan Q1 BSI survey came in soft. Large all industry business conditions came in at 0.0 vs. 4.8 in Q4. Large manufacturing came in at -6.7 vs. 5.7 in Q4, while large non-manufacturing came in at 3.2 vs. 4.4 in Q4. Despite recent softness in the hard and soft data, the market is expecting Bank of Japan liftoff in June, though odds of a March move remain elevated near 65%.

RBA Assistant Governor Hunter sounded cautious. She warned that “For some households, interest rate hikes are also challenging and difficult, but inflation is the single biggest drag.” Of note, household spending’s contribution to Q4 GDP growth was flat after subtracting -0.1 ppt in Q3. Hunter added that “Data are actually broadly in line with what we were anticipating. That’s not to say we’re not monitoring and looking, and we’ll obviously be reviewing and updating our forecasts and publishing those in May.” Bottom line: The RBA is in no rush to cut rates, but weak consumer spending activity justifies markets continuing to price in roughly 50 bp of rate cuts this year starting in August.

Australia February NAB business survey was reported. Business conditions rose to 10 in February vs. 7 in January, back above the long-run average that’s indicative of resilient economic activity. Labor costs, purchase costs, and the price of final products all rose, suggesting progress on inflation will be slow. Meanwhile, business confidence fell to 0 from 1 in January, as forward orders dipped a point to -3 in February.  

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