News & Analysis


Perhaps the biggest surprise coming out of yesterday’s inflation undershoot was the muted reaction from traders. After initially spiking three tenths of a percent to hit a three-month high, USDCAD quickly erased those gains, despite the data providing another significant downside miss. Indeed, yesterday’s data indicated that Canadian price growth hasn’t just slowed, but on some metrics had entirely disappeared. Almost all measures of inflation are trending down, and most now lie within the BoC’s tolerance band on a YoY basis. Granted, this does not yet include the BoC’s preferred measures of core median and core trim inflation which printed at 3.1% and 3.2% respectively. But if the current rate of disinflation persists, then next month it will. Moreover, looking at timelier readings, 3mma CPI landed at 2.9%, and CVIX delivered a donut on the same basis. In fact, after slicing and dicing the data, the only notable expectation to this cooling trend we could find was the proportion of the inflation basket rising by more than 3%. Even then, while the measure rose from 46% to 55% in February, this was attributable to just a single volatile aggregate, with this uptick disappearing when using more granular data. All told, we think this should cast serious doubt on the wisdom of the BoC keeping rates unchanged next month. Arguably the only thing weighing against this is Macklem’s guidance that this is exactly what he intends to do regardless. Given this, we now see significant emphasis landing on today’s summary of deliberations, and whether or not Macklem’s view is shared by the Governing Council more broadly. If it is, this should already be priced in by FX markets. If it is not, then a reacceleration of April easing bets should weigh heavily on the loonie. Indeed, for USDCAD risks look skewed asymmetrically to the upside today, with the potential for dovish BoC minutes and a hawkish Fed meeting contrasting starkly to trigger a notable upside break for the pair.


The dollar’s bullish bias remained intact yesterday, even as equities firmed and 2-year Treasury yields fell from their year-to-date peak. While cross-asset conditions proved unfavourable for the dollar, the greenback was propped up by dovish developments elsewhere at a time when concerns over fewer rate cuts remain rife in the US rates space. As we noted yesterday, the Bank of Japan “dovishly hiked” and the RBA removed their tightening bias in favour of more neutral forward guidance, but shortly after our morning note was published, eurozone labour costs for Q4 printed considerably lower as did Canada’s February inflation data. Both data points confirmed our view that April cuts from both the ECB and BoC can’t be completely taken off the table. The realisation of this in markets saw EURUSD continue to post losses on the day and CAD fall to a fresh 3-month low on an intraday basis before halving its losses. In combination with weakness in the yen, this kept the dollar supported in the high 103 region.

Today, the focus for markets is on the other side of the equation in terms of interest rate differentials, as markets will finally find out whether the Fed is also concerned by the recent strength in the inflation data or whether Powell’s projected confidence earlier in the month is shared amongst the Committee. As we noted in our preview, the focus for tonight’s meeting is on forward guidance, both in terms of the updated SEPs and Chair Powell’s tone in the press conference. Looking first at the SEPs, there is a credible risk that the median dot for this year shifts higher to imply two rather than three cuts as a base case, seeing as it would only take two FOMC members to revise up their expectations. While this is the main risk for markets at tonight’s meeting seeing as 73bps of cuts are currently priced into short-term interest rate markets this year, how hawkish this ultimately ends up being for markets will depend on how the distribution of dots around the 2024 median evolves as well as any adjustments in 2025. Should the median dot rise to imply just two cuts but the distribution skew more dovish this year and the  projections signal more rate cuts in 2025 as a result of the higher for longer stance this year, the shift in the 2024 dot may not be as impactful on US rates and the dollar. Second, the tone Chair Powell takes at this evening’s press conference relative to his semiannual testimony in Congress early this month will be key. Markets will be focusing on whether he continues to have the same amount of confidence or whether he too found the latest inflation report somewhat concerning. All told, we think tonight’s Fed meeting should skew as bullish for US yields and the dollar and expect the DXY index to close above 104.


Wage data for Q4 threw the cat amongst the pigeons for the ECB yesterday. The index fell from a downwardly revised level of 5.2% in Q3 to just 3.4% in the fourth quarter. This considerably undershot alternative measures of wage growth such as unit labour costs and compensation-per-employee, which landed at 4.6% and 5.8% for Q4 respectively. The concerning details didn’t end there for the ECB either, as the Q4 reading was split between a 3.1% increase in hourly wage costs and a 4.2% rise in other wage costs. The former reading, which is a more structural measure of wage growth, should give the doves a basis to launch another attack on the ECB hawks come April, and could even tip the balance to shift the ECB in their direction should alternative measures of wage growth that policymakers are paying considerable attention to behind the scenes also show similar levels of improvement. While the odds of an April cut remain low, although higher than 4% implied by markets in our view, the realisation in markets yesterday that the ECB has a weaker economic basis than the Fed to cast a hawkish stance saw EURUSD  continue to trade under pressure. While this saw EURUSD track in the right direction for our forecasts, the next 24 hours are key for the success of our month-end 1.07 projection. For this to be realised, the Fed would need to project less confidence in easing rates at tonight’s meeting and tomorrow’s release of eurozone PMIs would need to show growth and inflation conditions remain weak in the euro area.


February’s CPI release, published this morning, should offer no reason for a change in thinking at the Bank of England, even with a policy decision due to be delivered tomorrow. Admittedly both headline and core inflation cooled  by fractionally more than expected, with the readings now at 3.4% YoY and 4.5% respectively. But this still leaves price outturns tracking broadly in line with the February MPR forecasts, with services inflation similarly evolving as predicted by Bank staff. This latter measure, however, remains elevated at 6.1% YoY, and is expected to fall much more slowly than headline readings, a dynamic that warrants a degree of caution from policymakers. This is particularly true given the upcoming rise in the national living wage, which poses a risk of reigniting price pressures in wage sensitive components of the consumption basket. All told, this should set the scene for the MPC to reiterate February’s guidance tomorrow, an outcome that should be seen as marginally hawkish by markets in light of continued disinflation. Indeed, we continue to expect no change in Bank Rate until August, the earliest meeting by our estimation that the MPC will feel comfortable that rising wages have not sparked upside inflation pressures. With markets currently pricing the odds of a June rate cut at 60%, this would be a more hawkish outcome than currently priced. Further alignment with this view should see markets pushing the pound modestly higher in time . For now though, today’s broadly on expectations prints have been taken in stride by FX markets, an outcome that leaves the pound trading modestly softer this morning.


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