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The dollar staged a nice bounce-back from post FOMC lows supported by both safe-haven flows as a result of the Brussels terror attacks, as well as surprisingly hawkish comments from Fed officials in recent days. After US Fed officials hinted that a rise in interest rates remains on the table (potentially in April), the trade-weighted value of the dollar has recovered most of the previous week’s sharp falls that followed the FOMC announcement.
US data started the week on a soft note. Data released on Monday showed that U.S. core PCE deflator (Feb), the Fed’s preferred measure of inflation inched up 0.1%, below expectations for a gain of 0.2% and after rising 0.3% in Jan. The core PCE price index rose at an annualized rate of 1.7%, missing estimates for 1.8% and after a 1.7% gain a month earlier. Personal income, meanwhile, rose by a seasonally adjusted 0.2%, above forecasts for a 0.1% gain and after rising 0.5% a month earlier, while personal spending inched up by a seasonally adjusted 0.1% last month, matching expectations.
"While the data from January and February may overstate any underlying firming, we do think that the trend in core inflation is picking up," said Daniel Silver, an economist at JPMorgan in New York.
The slowdown in the monthly core PCE reading comes after Fed Chair Janet Yellen recently expressed skepticism over the sustainability of the gains in core inflation measures. Yellen told reporters this month that "there may be some transitory factors" behind the run-up in prices. The relatively soft inflation suggests the Fed will continue to gradually raise interest rates this year despite a tightening labor market.
March non-farm payrolls will be the key release this week (Fri), and the ADP survey on Wednesday is the only advance hint on the numbers. Also, Fed Chair Yellen speaks in New York on Tuesday and her comments could be important in setting the tone for market expectations for the April and June FOMC meetings. Fed funds futures now imply a 38% probability of a 25bp June hike but either a more dovish tone from Yellen or renewed equity market jitters this week could reverse some of the recent build up in Fed tightening expectations.
"We expect the Easter effect to have a negative impact on the headline employment figure. We see the pace of hiring slowing to 180k from 242k in February, a flat unemployment rate at 4.9% and a trend-consistent 0.2% m/m gain in average hourly earnings," said BNP Paribas in a report.
The US dollar’s new-found momentum is set for test as markets await Yellen speech and US jobs data, any surprise could see a big reaction in bond and FX markets. EUR/USD was trading at 1.1206, while USD/JPY was at 113.57 at 1000 GMT.
"We remain sceptical of the USD’s recent gains, particularly against G10 current account surplus currencies and continue to expect EURUSD to climb to 1.16 by Q2,” adds BNP Paribas.
