CAPITALDIGEST MARKET REVIEW, 17/4/2023

DOLLAR DROPS AS INFLATION COOLS MORE THAN EXPECTED The dollar fell on Wednesday after data showed U.S. consumer prices rose less than expected in March, raising expectations that the Fed is likely to stop hiking rates after a possible increase in May. The Consumer Price Index (CPI) climbed 0.1% last month, below economists’ expectations for a 0.2% gain, and down from a 0.4% increase in February. In the 12 months through March, the CPI increased 5.0%, the smallest year-on-year gain since May 2021. The CPI rose 6.0% on a year-on-year basis in February. Excluding the volatile food and energy components, the CPI increased 0.4% last month after rising 0.5% in February. Sticky rents continued to drive core CPI. “Headline inflation coming down more than expected is backing the view of the Fed being basically one more and done,” said Joe Manimbo, senior market analyst at Convera in Washington, D.C. “The market was just really cautious ahead of the data, as if it had been hotter than expected it might suggest that June might also be a live meeting. But I think with inflation taking a big step down from 6% to 5%, if that sustains, that could give the Fed leeway to cut rates later this year if we see a sharp slowdown in the economy,” Manimbo added. Economists at Goldman Sachs said after the data that they no longer expect the Fed to raise rates in June. The dollar index fell 0.60% on the day to 101.49 and is down from around 102.11 before the data. The euro reached $1.10005, the highest since Feb. 2, and was last at $1.09930, up 0.73% on the day. The dollar dipped to 133.13 Japanese yen, down 0.47% on the day, from around 133.85 before the data. Fed funds futures traders are pricing in 71% probability that the Fed will raise rates by an additional 25 basis points at its May 2-3 meeting, down from around 76% before the data STERLING STEADY, EYES ON BOE’S BAILEY AND U.S. INFLATION DATA Sterling held steady against the dollar and dipped against the euro on Wednesday as traders waited for key U.S. inflation data as well as comments from Bank of England governor Andrew Bailey. The pound was flat at $1.24155, not far off a 10-month high of $1.2525 hit early last week, as currency markets broadly were quiet ahead of the release of the U.S. consumer price index for March. [FRX/] The data will be a major input for Federal Reserve policy markers as they debate whether to raise U.S. rates further at their meeting in March. More Britain-specifically, Bailey is due to speak later, with traders keeping their eyes out for guidance on whether the BOE is ready to pause its rate hike cycle. Market pricing currently indicates around a 75% chance of one more 25 basis point hike. “GBP/USD can be sensitive to comments from BoE officials on the outlook for inflation and monetary policy because the BoE’s tightening cycle is likely near its end,” said Kristina Clifton, FX strategist at Commonwealth Bank of Australia. However she added that U.S. CPI and its impact on the dollar were likely to be the main driver for the pound against the dollar. Better-than-feared economic data this year has helped the pound be the best G10 performer against the U.S. dollar both simply because of improved econ  omic prospects but also because it means the Bank of England cannot rely on a slowdown to rein in inflation. The euro rose 0.22% against the pound to 88.05 pence, its strongest in just over a week. DOLLAR DROPS TO TWO-MONTH LOW ON COOLING U.S. INFLATION The dollar fell to a two-month low on Thursday after data showed U.S. inflation slowed sharply in March, bolstering speculation the Federal Reserve’s rate hiking campaign is either already finished or will be by May.As the dollar slipped, the euro rose to within a whisker of a one-year high, with traders betting the European Central Bank’s (ECB) fight against inflation still has a way to go. Figures released on Wednesday showed U.S. consumer price index (CPI) inflation came it at 5% year-on-year in March, down from 6% in February. Core inflation – which strips out volatile food and energy prices – picked up to 5.6%, from 5.5% the previous month. The dollar dropped after the data was released and weakened further on Thursday, helping the euro rise to a two-month high of $1.1032 – just off the one-year peak of $1.1034 touched in early February. The euro was last up 0.2% at $1.101. The dollar index, which measures the greenback against six major peers, fell to 101.2, its lowest since the start of February. It was on track for its fifth straight weekly drop and last stood 0.15% lower at 101.33. “We have seen a dramatic swing in interest differentials in favor of the euro,” said Ben Laidler, global markets strategist at eToro. “The combination of falling U.S. inflation and rising recession risks have driven expectations of three Fed interest rate cuts this year compared to further hikes from the still-hawkish ECB. STERLING RISES TO 10-MONTH HIGH, SHAKES OFF WEAK UK ECONOMY Sterling rose to its highest since last June on Thursday, as the dollar hovered at a two-month low after a slowdown in U.S. inflation, while data showed the UK economy essentially stagnated in February. Britain’s economy showed no growth in February as strikes by public workers hit output, but a bounce in January was stronger than first thought, meaning a recession is a bit less likely to be brewing in early 2023. “It’s all a bit of a broad dollar story today”, said Simon Harvey, head of FX analysis at Monex Europe, describing the UK data as “fairly lagged” in terms of any kind of influence on monetary policy. The pound was 0.2% higher against the dollar at $1.2507 by 1040 GMT. The pound, meanwhile, was 0.1% lower against the euro at 88.10 pence. The upward revision to January’s growth to 0.4% from 0.3% means Britain is likely to avoid the first-quarter contraction that the Bank of England predicted last month, but data due next week is seen as more important for monetary policy. “Data next week on inflation and retail sales, but especially jobs data for February, will be crucial because the PMI for the month suggested maybe demand has picked back up again,” said Harvey. The BoE has raised interest rates 11 times in a row in its battle to bring down inflation, which rose to 10.4% in February. Markets are pricing in a 64% chance of a further 25 basis point hike in May, and a lesser chance of no change.“We don’t think they’re going to hike again,” said Harvey, “but there is a non-negligible risk that they would if the data comes in quite strong.” A murky economic backdrop also remains in focus. A BoE survey on Thursday showed British lenders expect to rein in the supply of mortgage loans in the coming quarter, but increase the supply of consumer credit and corporate loans. DOLLAR SET FOR LONGEST STRETCH OF WEEKLY LOSSES SINCE 2020 The dollar headed for its longest stretch of weekly losses in almost three years on Friday, as traders ramped up expectations of an imminent end to the U.S. Federal Reserve’s rate-hike cycle following signs inflation may be cooling. Data on Thursday showed U.S. wholesale prices, as measured by the producer price index (PPI), fell by the most in nearly three years last month, a day after data showed the consumer index – CPI – was also softening as expected. The dollar index =USD, which measures the performance of the U.S. currency against six others, slid to a roughly one-year low of 100.78. It was last down 0.1% at 100.90, and was headed for a weekly decline of more than 1%, its steepest drop since January. This would mark a fifth straight weekly loss, the longest such stretch since July 2020. “The CPI rise was close to expectations, so it’s a significant market reaction for what was a fairly consensus outcome and I think that is a measure of how negative sentiment is on the dollar at the moment,” RBC Capital Markets chief currency strategist Adam Cole said. “It’s kind of hard to fight that, even if you don’t really agree with it, which we don’t,” he said. RBC Capital Markets have a year-end target of $1.03 for the euro/dollar pair, which on Friday, was trading around $1.1058, up 0.1% on the day and at one-year highs. EUR=EBS Out of the G10 currencies, investors hold the largest bearish position in the dollar against the euro. Weekly data from the Commodity Futures Trading Commission shows money managers held a $19.631 billion long position in the euro, while holding short positions against the yen, sterling, the Canadian, Australian and New Zealand dollars, and the Swiss franc. 0#NETUSDFX=”The easiest way to express a dollar-negative view has been with the euro,” Ray Attrill, head of FX strategy at National Australia Bank, said.Similarly, the pound GBP=D3 hit a 10-month high of $1.2545 earlier in the day, and was flat at $1.2512. Against the euro EURGBP=D3, it was down 0.2% at 88.39 pence.