Dollar stays on the backfoot ahead of key data, yen enjoys CPI lift

Markets calm ahead of data flurry as dollar struggles 

The US dollar was headed for its seventh straight session of losses against a basket of currencies on Tuesday even as investors continued to scale back their rate cut expectations for the Fed. There’s been no change to the soft landing narrative for the US economy but in the absence of fresh drivers since the CPI and PPI reports, the dollar has taken a bit of a backseat, allowing its peers to shine.

That could all change this week, however, as markets brace for a data dump out of the US as well as for a slew of inflation reports globally. Durable goods orders and the Conference Board’s consumer confidence gauge will kick things off today. The main focus, though, will be Thursday’s core PCE price index.

Are dovish Fed bets in a losing battle? 

With Fed officials seemingly not in a hurry to cut rates, any upside surprises in the Fed’s preferred inflation metric could see easing bets being reduced to three cuts – in line with the FOMC dot plot – or even less. Recently appointed Kansas City Fed President, Jeffrey Schmid, was the latest to warn against cutting rates pre-emptively in his debut speech on Monday.

Unless there’s a significant deterioration in the inflation or employment outlook over the coming weeks, there’s a real danger that even June might be deemed too early for the Fed to begin slashing rates. Whilst there’s no sense of panic just yet, at least not in equity markets, Treasury yields have been creeping higher lately, suggesting increased caution over the interest rate outlook.

The two-year yield, in particular, is back near December levels, boosted in part by yesterday’s auction, which also included five-year notes. The Treasury auction continues on Tuesday with the sale of seven-year notes.

A much-needed boost for the yen 

Japan’s two-year government bond yield is also in the spotlight today as it hit the highest since 2011 following some strong inflation figures. The core CPI rate fell less than expected in January to 2.0% from 2.3% y/y, versus forecasts of 1.8%. Japan seems to be displaying some signs of persistent inflationary pressures and this has brought a March rate hike back on the table for the Bank of Japan.

The yen gained across the board on the back of the CPI beat, firming to around 150.20 to the dollar.

Euro stays bullish, aussie eyes CPI data, kiwi awaits RBNZ decision 

The euro, meanwhile, remained buoyant around $1.0850, as investors re-assessed rate cut bets for the European Central Bank following last week’s stronger-than-expected services PMIs out of the Eurozone. Although the German economy is unlikely to come out of the doldrums anytime soon, faster growth in other member states would give the ECB less reason to act hastily when it comes to rate cuts. However, much will depend on Friday’s flash CPI estimates, which could show inflation easing further in February and potentially weighing on the euro.

The Australian dollar was one of today’s better performers ahead of monthly CPI readings due early on Wednesday, but the New Zealand dollar extended its slide amid doubts about the possibility of rate hikes by the RBNZ. New Zealand’s central bank is expected to hold rates when it announces its decision at 01:00 GMT tomorrow but is likely to maintain a tightening bias.

Wall Street rally stalls but Bitcoin powers ahead 

In equity markets, US futures were slightly positive following the first loss for the S&P 500 on Monday after three days of gains. That didn’t deter Japan’s Nikkei 225 index, however, to close at yet another record high today.

Cryptocurrencies also rallied, led by Bitcoin, which briefly topped $57,000 earlier today for the first time since December 2021. Demand for Bitcoin has soared following the approval of spot ETFs, with the pre-halving effect also contributing to its recent gains. However, yesterday’s jump appears to have been triggered by reports that MicroStrategy, a business intelligence firm, has bought up to $155 million worth of Bitcoin, with investors interpreting that as another vote of confidence in the popular crypto.