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Soft Landing Bets Remain Dominant Ahead of Inflation Data

The trade-weighted dollar is coming under renewed selling pressure this morning after last week’s events helped fortify expectations for a “soft landing” in the US economy. On Thursday, Federal Reserve chair Jerome Powell told Congress that the Federal Reserve was “not far” from the level of confidence needed to cut rates. Friday’s jobs report showed headline job growth topping expectations, but revisions to the prior two months pointed to cooling momentum, and average hourly earnings saw their smallest month-on-month rise in two years.

The pound and euro are defending last week’s advances in tight trading ranges. Sterling’s rally is losing momentum ahead of tomorrow’s jobs report and Thursday’s gross domestic product print, but the currency is still sitting on a circa-1-percent year-to-date gain against the dollar, making it this year’s best performing major currency. The euro is holding just below the 1.10 threshold after Christine Lagarde firmly telegraphed a June rate cut during last week’s meeting, but could undergo reversals in the week ahead as other officials, including Robert Holzmann, Isabel Schnabel, Luis de Guindos, and Philip Lane make scheduled appearances.

Tomorrow’s US consumer price report could trigger renewed turbulence in currency markets. With many investors suffering from post-traumatic stress syndrome after February’s experience, inflation expectations have crept higher, but few are prepared for several months of hotter-than-expected data. Alternatively, if underlying disinflationary trends reassert themselves in earnest, the dollar could suffer a deeper sell-off, with global asset prices and high-beta currencies outperforming on a wider basis.

Markets have become more confident the Bank of Japan will lift interest rates at its March 19 meeting. After weeks of leaks and supportive comments from policymakers, odds on a move are hovering above the 60-percent mark, and this morning’s upward revision in last year’s gross domestic product data is adding to the level of conviction. Wage data this week could help clinch the deal, with Toyota set to release the results of its annual wage negotiations on Wednesday, and the Rengo labour union federation’s first pay growth estimate due on Friday. The yen is gaining altitude, but remains capped on demand for carry trades, in which speculators borrow (and sell) low-yielding currencies to buy higher-yielding ones elsewhere.

Today looks like a quiet one, with the Federal Reserve in purdah ahead of next week’s policy meeting, and no major data releases on the agenda.


Still Ahead

TUESDAY

A rapid easing in British wage pressures probably lost momentum in the three months to January, complicating the Bank of England’s policy trajectory. Consensus estimates suggest that a modest rebound in economic activity translated into a stabilisation in the annual change in average ex-bonus weekly earnings at around 6.2 percent, with the unemployment rate remaining unchanged. On one hand, a softer than anticipated print could bring easing expectations into closer alignment with the Fed and ECB, but on the other signs of acceleration could move the timing of the first expected rate cut deeper into the autumn months. (03:00 EDT)

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)

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