Viraj Patel, Research Analyst at ING, explains that the dollar has started this week pretty much where it left off before the equity market sell-off – on a fast-sliding trend, with global investors showing little love towards it.
“While today's US inflation report is getting touted as being key for the short-term direction of travel for global markets, we're a bit more sceptical on whether it can actually have a material impact. Even in the event of a strong US inflation print, it's difficult to make a clear-cut case for the $ to rally:
- While one would expect a positive US CPI surprise to enact a similar market reaction to that seen after the strong wage growth print in the Jan US jobs report – which saw bond yields higher, stocks lower and the $ up across the board – one could equally argue that higher inflation is merely confirmation of a late-cycle, and slowing, US economy. For a structurally weak USD, we would argue that sentiment over the latter would far outweigh any subtle re-pricing of Fed tightening at this stage of the normalisation cycle. Moreover, higher near-term inflation – absent any fresh positive demand shocks – may bring forward the Fed's rate hike intentions, but do little to change the end-level to which rates will gravitate towards (which matters more for the $).
- Statistically, we also note that it's a pretty tall order for the US inflation data to ‘positively surprise’ markets today. While consensus for the headline print is +0.3% MoM, 30 of the 74 analysts polled on Bloomberg are in fact looking for a +0.4% MoM – meaning that we might need to a see a bigger print than this (say +0.5% MoM) to truly surprise markets. Given that this is unlikely, we prefer to focus on core inflation. But here we note that out of the last 20 releases – core CPI has surprised just once.”
“The bottom line is that we think it'll be a tall order for US inflation data today to steer markets away from the USD bear trend story – and even in the event of a positive release, it remains ambiguous as to how investors would react. The latter suggests any $ gains may be quickly faded – while it’s worth noting that our house view for a CPI miss could see USD/JPY extend its slide towards 105.”
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