The US dollar came under renewed buying interest yesterday, following the release of the nation’s CPI and retail sales data, both for January. All the figures beat their forecasts, indicating that inflationary pressures are accelerating, and that US consumers continue to spend at a robust pace. Despite the data being strong overall, the greenback gave back all its gains in the following hours, to trade even lower against some of its major counterparts prior and during Chair Yellen’s second testimony before Congress.
USD/JPY surged on the data releases to hit resistance a few pips above 114.80 (R2) before retreating back below the 114.00 (R1) support (now turned into resistance) barrier. Given the inability of the bulls to drive the battle higher for another test near the key 115.50 (R3) zone, we believe that the short-term bias of the pair is back to neutral. We would like to see a clear and decisive break above that level before we assume the continuation of the post-election rally, and trust further bullish advances.
Considering that Chair Yellen’s overall tone was optimistic again, we think that the main catalyst for the correction lower in the greenback may have been the disappointing real weekly earnings growth print that was released alongside the CPI data. It showed that real average weekly earnings declined from December to January, partly due to the surge in the CPI rate, and that they are stagnant from a year before. Although the acceleration in the core CPI supports somewhat the case for a near-term Fed hike, for now we will maintain the view that the FOMC is unlikely to rush into a March hike amid lackluster wage growth, and heightened uncertainty around the direction of fiscal policy. Therefore, we still expect the next rate hike in June. We would like to see some clarity around tax and fiscal reform, some acceleration in wage growth as well as an uptick in the core PCE price index rate, before we reconsider this view.
With regards to USD, we expect the currency to remain supported in the short-term, amid upbeat signals from Chair Yellen, and expectations that President Trump will announce a "phenomenal" tax plan in the next weeks. However, the details of Trump’s tax plan are likely to be what determines whether the post-election USD rally will get a second wind, or whether we are likely to see further downside correction.
Riksbank remains on hold and shifts to an ultra-dovish bias
The Riksbank remained on hold yesterday, as was widely expected. In a surprising turn of events, at least for us, the Bank shifted to a much more dovish bias than previously. The officials indicated that although economic activity is strengthening, there is considerable political uncertainty abroad and the risk of setbacks has risen. Perhaps the most important signals for FX markets was that there is still a greater probability for the repo rate to be cut rather than raised in the near term, and that for inflation to stabilize around the 2% target, a slowdown in the krona’s appreciation is required. The Bank also decided to extend the mandate that allows it to quickly intervene in the FX market, sending hints that excessive strength in SEK will not be tolerated.
USD/SEK surged on the news to break above a longer-term uptrend line taken from the lows of May 2016, before hitting resistance slightly below the 9.0000 (R1) zone. Then, the rate pulled back in the following hours to come back below the aforementioned uptrend line and to find fresh buy orders near 8.8800 (S1). Bearing in mind the Bank’s dovish stance and hints for potential FX intervention, SEK could remain under selling interest for a while. As such, we would expect the bulls to seize control again at some point and aim for another test near the crossroad of that uptrend line and the 9.0000 (R1) level. A clear break above that important area could set the stage for further bullish extensions, towards our next resistance of 9.1300 (R2). What’s more, we would prefer USD/SEK over EUR/SEK as a proxy for any further SEK weakness in the near-term, considering the recent optimistic signals from Chair Yellen that could continue to support USD, and the political risks looming over the Eurozone, which may continue to weigh on EUR.
Today’s highlights:
During the European day, the economic calendar is light. The only noteworthy indicator we get is Sweden’s unemployment rate for January. The forecast is for the rate to have risen significantly, something that could bring SEK under renewed selling pressure.
In Eurozone, the minutes of the ECB’s January policy meeting are coming out. Although these are usually not a major market mover, considering the Bank’s surprisingly dovish stance at that meeting, they could attract some unusual attention. Even though the headline CPI rate surged to a level last seen in 2013 prior to this gathering, President Draghi downplayed the importance of that improvement by pointing out that he sees no convincing upward trend in underlying inflation. He made it clear that the Bank is likely to keep its policy unchanged until there is a notable pick-up in Eurozone’s core CPI, and that speculating on the prospect of "ECB tapering" is entirely premature. Given that the broader message from Draghi was well-communicated, we will go through these minutes for any clues on whether the Governing Council was unanimous in this assessment, and on how the Bank may respond once the core CPI does begin to accelerate.
In the US, the Philly Fed business activity index for February is due out and the forecast is for the figure to decline from the previous month. We also get the nation’s initial jobless claims for the week ended on the 10th of February, and expectations are for an increase in the figure, something that would also raise the 4-week moving average. Considering that both of these indicators are expected to show some softness, we could see a modest negative reaction in USD at these releases. The building permits and housing starts for January are due out as well, though both figures are expected to have remained more or less unchanged.
We have only one speaker scheduled for today: Norges Bank Governor Stefan Ingves.
