The dollar’s selloff is slowing ahead of inflation numbers that could have a direct bearing on the policy outlook presented during next week’s Federal Reserve meeting. Equity futures are trending upward, but Treasury yields are holding flat, and high-beta currencies like the Canadian dollar are coming under modest selling pressure as traders cut risk.

February’s consumer price index is expected to show headline prices accelerating while the core measure slows – but considerable uncertainty remains around whether January’s hotter-than-expected numbers marked the beginning of a trend. If price growth remains stubbornly high, officials could reduce the number of expected rate cuts depicted in the “dot plot” summary of economic projections presented at the March 19-20 policy meeting – a change that would almost certainly lift yields and power the dollar higher against its rivals. In contrast, a drop in inflation pressures would suggest that the January data was an aberration, putting the central bank back on a path toward easing policy at least three times through the course of 2024. Options traders are preparing for volatility in the immediate aftermath of the print, with the major equity indices (which influence currency markets profoundly) seen swinging almost a full percentage point in either direction.

Investor-driven inflation breakevens have moved higher, but consumer views have barely budged. Survey data released by the New York Fed yesterday showed US consumer expectations for year-ahead inflation remained unchanged at 3 percent in February, with price increases over the next three years seen hitting 2.7 percent, only marginally above the record low hit in January. To us, this suggests that market fears of a re-acceleration in may be overwrought – and fits with our longstanding belief that US perceptions of inflation are largely driven by changes in gasoline prices, not the more complex measures used by economists.

Markets are back to expecting three rate cuts from the Bank of England this year, with some observers seeing the first move coming in May. Data released by the Office for National Statistics this morning showed labour markets cooling, with the unemployment rate rising to 3.9 percent in the three months through January, while average earnings growth excluding bonuses grew at a less-than-forecast annual 6.1 percent in the same period, down from 6.2 percent previously. The pound is losing altitude as the country’s expected policy trajectory moves into closer alignment with the US and euro area, but remains the best-performing major currency against the dollar on a year-to-date basis.

The Japanese yen is on the defensive after Bank of Japan Governor Ueda sent mixed messages during a parliamentary appearance, slightly lowering market confidence in a rate hike at next week’s meeting. “Although there’s weakness in some household spending data,” he said, “my view is that the gradual recovery continues”. Wire reports overnight suggested that his counterparts on the central bank’s policy board are split on whether to deliver a hike in March or April, with strong wage growth data expected to clinch the timing. A number of private-sector unions should provide updates on their annual salary negotiations this week, with the Rengo federation set to announce its “first round” results on Friday.

 
Still Ahead

TUESDAY

Headline inflation may have edged up in the United States last month, but the core measure should slow as shelter cost increases revert to normal. Markets are positioned for a 0.4 percent month-over-month increase in the consumer price index, up from 0.3 percent previously. Core price growth is seen slowing to 0.3 percent from 0.4 percent – a level that is unlikely to give Federal Reserve officials the confidence needed to begin telegraphing easier policy ahead, but one that should provide reassurance that January’s spectacularly-hot print was an aberration. (08:30 EDT)

WEDNESDAY

Sharp improvements in consumer and business sentiment surveys suggest that the British economy is inching its way out of last year’s technical recession. Markets think the economy expanded +0.1 percent in January after shrinking -0.1 percent in December – but a stronger recovery is possible, and the pound could gain altitude if growth comes in at +0.2 percent or higher. (03:00 EDT)

THURSDAY

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)