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Trading Ranges Shrink Ahead of US Inflation Data

Price action is slowing and the dollar is holding steady against its counterparts in the foreign exchange markets as investors brace for the biggest US consumer price index print since… well, since the last one. Economists surveyed by the major data providers expect the Bureau of Labor Statistics to report a 0.3-percent rise in both headline and core price measures for the month of March – a result which would indicate that January and February’s hotter-than-expected prints were temporary aberrations in a longer-term cooling process.

Some risk has likely been taken off the table: Equity indices and risk-sensitive currencies swooned yesterday afternoon without an obvious proximate trigger, suggesting that a small contingent of investors attempted to rebalance away from momentum stocks and top-tick dollar-supportive yield differentials. This might help reduce volatility after the release, but rates and currencies could nonetheless move violently if price growth fails to slow and comfortable market assumptions begin to fall apart.

The Canadian dollar is also headed into turbulence as the Bank of Canada prepares to deliver its latest rate decision. Although market-implied odds on a cut are holding near the 20-percent mark, most economists think officials will more clearly telegraph a move in June. The economy is showing clear signs of stagnation, job creation is slowing, and modest improvements in the Bank’s latest set of business and consumer surveys left much to be desired.

But we’re also wary of upside risks in the Canadian dollar. US demand is propping up the country’s exports, easier financial conditions are translating into a melt-up in housing markets, and inflation expectations remain stubbornly elevated. If policymakers preserve optionality by avoiding providing clear easing signals, the loonie could recover some ground.

Mexico’s peso is gradually recovering after a softer-than-anticipated inflation print triggered a selloff during yesterday’s session. Price growth undershot market estimates with the all-items basket generating a 4.42 percent year over year print in March, while the core measure slowed to 4.55 percent, potentially putting another rate cut on the table for the Banxico’s May decision. Minutes taken during the central bank’s last meeting suggested that policymakers were wary of triggering a re-acceleration in inflation – making back-to-back cuts less likely – but more evidence of easing price pressures could provide a compelling reason to begin reducing the currency’s extraordinarily-wide rate differential relative to the US dollar and yen.

Minutes taken during the Federal Reserve’s March meeting will be released at 14:00 EDT this afternoon, shedding light on how dramatically the balance of opinion on the rate-setting committee is shifting toward fewer cuts in 2024. The meeting record will be somewhat stale, given that a series of first-tier data releases have hit the wires in intervening weeks, but might nonetheless help market participants assess whether stronger than expected economic momentum could truly slow – or just calibrate – the Fed’s easing plans.

Still Ahead

European Central Bank officials have clearly telegraphed a summer rate cut for months, creating the conditions for an uneventful market reaction to this week’s decision. No new forecasts will be provided, but with markets assigning 97 percent odds to a move at the June meeting, and three more cuts expected by year end, we suspect investors might react negatively to signs of gradualism in Madame Lagarde’s comments. European core inflation prints have begun surprising to the upside, and oil prices are soaring, suggesting – to us, at least – that policymakers might want to begin walking autumn easing expectations back a bit. (08:15 EDT)

Producer prices – which form part of the basis for the Federal Reserve’s preferred personal consumption expenditures measure – are seen slowing to 0.3 percent in March from the overheated 0.6-percent month-over-month pace set in February, but higher commodity costs could deliver a surprising overshoot. Market reaction could be significant either way. (08:30 EDT)

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