USD softening as the March FOMC comes onto the horizon

UST yields falling, but close to the ‘range’ base. USD dip buyers coming in, but 2 more 2 way action ahead. EU politics to continue weighing on the EUR. With March comes focus on Article 50.

The focus is currently very much on whether the Fed will hike as early as March, and maintaining the familiar line of normalisation at a ‘gradual pace’, the latest minutes released midweek have further underlined this. As we get closer to the next FOMC meeting – still a little over 2 weeks away – the data will prove a little more volatile, and with the US payrolls release not until 10 March, we look to the PCE data midweek as much as the 2nd reading Q4 GDP, personal income and spending and ISM manufacturing PMIs. In the absence of US payrolls on the Friday it is worth noting that Fed chair Yellen is due to speak, though president Trump’s address to Congress headlines the speaker schedule. Concerns (at the Fed) over inflation are relatively relaxed – as they purportedly are at the ECB – but Yellen and Co do not feel they are falling behind the curve in terms of nominal and real yields.

This has led to a slow trickle lower in UST yields across the curve, and late in the day Friday we saw 2yr close to 1.15%, 5yr now eyeing 1.80% and the 10yr approaching the near term range base at 2.30%. This has pressed USD/JPY into the 112.00 level again, with the added weight of a downturn in stocks. Key levels to watch for here lie at 111.70, below which we see 111.35-40 as notable as through this area will bring 110.00 clearly into focus.

EUR drivers this week have been primarily political, with Le Pen’s gains in the polls unnerving the market before centrist’s Bayrou’s stand-down and backing of Macron steadied the ship. Inflation concerns have been raising an eyebrow or 2 in Germany, while the domestic data has been solid. Next week offers up Feb CPI across the EU, as well as the latest PMIs, with German unemployment and retail sales also down on the slate. The Dutch and French elections will still be the focal point however, and has been largely instrumental in taking the focus away from Brexit jitters.

This led to some strong selling of EUR/GBP through the week, but all inside established ranges, with 0.8400 tested on the downside. Cable received some support accordingly, though we are yet to break out of the 1.2350-1.2600 range here. Manufacturing and services PMIs will be focused on in light of the drop in business investment reported in Q4 this week, but with the onset of March comes talk of triggering Article 50.

Some key data fro the Antipodean currencies to contend with, not least of all Australian Q4 GDP. This will be accompanied by the trade stats for Jan, and will put fresh colour on the whether the RBA are justified in their cautious optimism going forward. AUD has been on the front foot as a result, but has slipped against the NZD after hitting a wall of resistance in the mid 1.0700’s – this prompted by the drop in CAPEX for Q4. NZ also gets some top tier data for measurement, in the form of trade and business confidence, and will put NZD/USD to the test after the latest foray into the mid 0.7200’s – not too far off levels seen just before the RBNZ cited exchange rate levels causing potential headwinds to growth.

The BoC rate decision in Canada is not expected to see any change in policy, but their rhetoric could provide some catalyst for a more out of the near term range inside 1.3000-1.3200. Friday’s CPI numbers were pretty healthy, but was expected to turn around – to a degree – at some point, as well as USD bulls having yield advantage on their side – for now.