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Currency Volatility Flattens In Run-Up To Fed Meeting

Happy Pi Day, one of the days on which markets behave irrationally. The other days are… all of them. The dollar is holding steady ahead of the last pieces of data that could sway policymakers at next week’s Federal Reserve meeting. Treasury yields are essentially unchanged, with the ten-year yield up roughly 11 basis points this week, equity futures are setting up for modest gains at the open, and most major currencies remain caught within almost-invisible trading ranges.

Numbers due for release this morning should show strong consumer demand keeping inflation pressures at a low simmer. Consensus estimates suggest that headline retail sales fully reversed the prior month’s -0.8 percent weather-induced contraction in February, with vehicle purchases rebounding and higher gasoline costs lifting ticket prices. “Control group” sales, which often deliver more clarity on underlying trends, should stage a more modest rebound, climbing 0.3 percent after dropping -0.4 percent in the previous month. Producer prices are seen accelerating somewhat from January’s 0.3-percent increase as energy inputs climbed.

Hawkish tail risks exist for the dollar ahead of the March Fed decision. We don’t expect a material change in the updated “dot plot” summary of economic projections – policymakers are well aware of the dangers involved in extrapolating hot early-year data across longer time periods. But the risk of an upward move in the dots is nonetheless non-negligible, given that it would take just two officials turning more hawkish to push the median year-end rate projection to levels that imply just two rate cuts in 2024 – and we think fear of such an outcome could be enough to keep a bid under the greenback through next Wednesday.

The euro is trading with a negative bias after some sharply dovish words from a European Central Bank Governing Council member. Yannis Stournaras, head of the Greek central bank, agreed with President Lagarde’s earlier comments, saying “We will have only a little new information before the April meeting, especially on wages at the start of 2024 – but we will get a lot more data before the June meeting”. But he cautioned, “We need to start cutting rates soon so that our monetary policy does not become too restrictive,” adding “It is appropriate to do two rate cuts before the summer break, and four moves throughout the year seem reasonable”. Implied market pricing suggests that investors agree.

Odds on next week’s Bank of Japan decision are sitting at coin toss levels. A series of media reports have suggested that officials could move to end the central bank’s long-standing negative-rates experiment, and Prime Minister Fumio Kishida yesterday lent some support, noting that wage increases negotiated during this year’s “shuntō” round were likely to significantly exceed last year’s. “I think we can confirm a positive trend is in place to shift the economy from a cost-cutting model to the next stage”. Japan’s largest union federation, Rengō, could tip the balance when it releases its first tally of pay deal results tomorrow.

But markets are growing more sceptical on the prospects for sharp currency gains. Consensus forecasts for the dollar-yen pair at year end, which ended last year in the 130 to 135 range, have now climbed above 140, moving into closer alignment with our own views. Views on the Japanese economy have improved, but major structural issues and the central bank’s ongoing efforts to keep yields tamped down are seen keeping rate differentials tilted in the dollar’s favour.

Today’s calendar looks quiet. Beyond this morning’s retail sales and producer price reports, the latest weekly jobless claims number will land at 8:30, business inventories will be out at 10:00, and the People’s Bank of China should report any changes in its Medium Term Lending Facility rate this evening.

Still Ahead


Economists expect a rebound in US retail sales for February, with unusual weather conditions and seasonal adjustment factors explaining the bulk of January’s surprise decline. Headline receipts are seen rising +0.8 percent month-over-month, reversing a -0.8-percent loss, and “control group” sales – which exclude gas, vehicles, and building materials – are expected to hit +0.3 percent, up from the -0.4 percent loss recorded in the prior month. We think risks are slightly skewed to the upside, given that the wage growth and hours-worked numbers embedded in Friday’s non-farm payrolls report pointed to healthy growth in aggregate consumer incomes. (08:30 EDT)

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