News & Analysis

Given a number of EM markets closed for the Lunar New Year holiday this week, with Chinese markets notably absent, the focus for FX traders was left squarely on developments across G10 currencies. In particular, it was data out of the US that once again stole the show, and left the broad dollar index to finish the week up by 0.4%. Key to this outperformance was Tuesday’s CPI data, where core inflation numbers showed price growth of 0.4%MoM. Not only was this hot in isolation, but with other details of the inflation report also scanning as strong, this saw markets further paring back Fed rate cuts expectations. Our view on that data was a little more benign. Given this we think pricing of the Fed’s easing path now looks too conservative and is prime for a retracement in the coming weeks, a view supported by January’s weak retail sales data. However, perhaps the biggest surprise of the week came from Swiss inflation data which fell to just 1.3%. In our view this should see the SNB easing in March, and set EURCHF on a path back to parity by year end. UK data was also a notable theme, not least because a fluke of scheduling meant that all major official economic data series were set for publication. As predicted, sterling sold off this week on alarmist recession headlines. But this now leaves GBP looking cheap to us heading into next week’s flash PMI release, especially compared to the euro. Looking forward, realised volatility is likely to remain around 6-month averages next week, having been lifted already by US data this month. On this point, the reopening of Chinese markets and their response to this week’s move in US rates will likely keep volatility high at the start of the week, before attention turns to Swiss sight deposit data to determine whether the SNB intervened in markets. This is then set to be followed up by potential PBoC easing and Canadian core inflation data, both of which should keep markets busy. But the week’s marquee event is likely to be the release of flash PMI data for February, which we think holds the firepower to send EURUSD back below 1.07.

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Authors: 

Simon Harvey, Head of FX Analysis

María Marcos, FX Market Analyst

Nick Rees, FX Market Analyst

 

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