The Dollar Rises Ahead of US Retail Market
The US dollar continues to show signs of a possible bottom. The release of hotter-than-expected US inflation data on Tuesday, combined with weaker CPI data from the UK and a drop in Eurozone industrial production today, have all contributed to the US dollar's appeal over the euro and pound. The USD/JPY has also broken through the 133.00 resistance level, while gold and silver have been trending lower due to rising bond yields.
But whether the dollar's recovery will last remains to be seen. The dollar has taken in a lot of hawkish Fed talk and better-than-expected US data. Nonetheless, it has only slightly recovered from its lows. Investors' preference for riskier equities has repeatedly weighed on the appetite for the safe-haven US dollar. Is the tide, however, turning? Will the dollar index resume its upward trend? The immediate focus will be on US retail sales, which will be released soon.
This morning support for the dollar came from weakening foreign currencies.
The drop in EZ industrial production has weakened the EUR/USD
After a two-day recovery, the EUR/USD fell back to 1.07 this morning. Traders expect the Fed to raise rates by 25 basis points in March and possibly again at the next meeting before pausing after US inflation fell less than expected to 6.4% year on year in January, which was followed by even more hawkish comments from the Fed, this time from Lorie Logan. Meanwhile, while the Eurozone economy has narrowly avoided a recession, today's release of industrial output, which showed a larger-than-expected 1.1% m/m drop, points to continued weakness.
Nonetheless, the EUR/GBP has recovered, and Eurozone indices are holding their own relatively well, as economists have been impressed with the Eurozone economy's resilience. Indeed, the European Commission now expects the eurozone to avoid a recession this year.
The UK CPI falls but remains in the double digits
In the United Kingdom, annual CPI remained above 10% for the seventh consecutive month in January, though it fell more than expected (10.3%) from 10.5% the previous month to 10.1%. Core inflation fell even further to 5.8% from 6.3% previously, giving the Bank of England some breathing room after raising borrowing costs for the tenth time in a row earlier this month.
However, the BoE still cannot relax, and BoE Governor Bailey has expressed concerns about the persistence of inflation: "I am very uncertain, particularly about price-setting and wage-setting in this country. We have the largest upside skew in our inflation forecasts that we have ever had." The slight easing in CPI follows hot employment and wage data released the day before.
Stronger UK wages and double-digit CPI data suggest that more needs to be done to return inflation to the 2% target. If CPI remains elevated around current levels of 10% or so, it will encourage workers to bid up wages, and companies may have to keep raising prices to cover their costs.
As a result, labour market tightness may continue to be a major source of domestic inflationary pressure for some time. As a result, the Bank of England may be forced to raise interest rates one or two more times before taking a break.