Investors across different asset classes are no longer waiting for clarity from the U.S. administration to base their decisions, at least in the short run. The significant rally in U.S. equities and the U.S. dollar last week occurred without any new fresh fiscal signals, in fact, President Trump’s speech on Tuesday left many questions unanswered, and still investors reacted as if tax cuts and stimulus plans will be implemented regardless.
Interestingly, last week was the repricing of interest rates expectations, which was the main reason behind the strong greenback’s performance. Per CME’s Fedwatch tool, the probability of a 0.25% interest rate increase rose from 30% to more than 80%, reflecting the sharp shift in market’s sentiments. With only 10 days left for the next FOMC decision, there’s nothing likely to reverse that, unless a terrible NFP report release on Friday.
The U.S. jobs reports is expected to show the economy has added 190,000 jobs in February, compared to 227,000 in January. If the figure matches the estimates this shows that the U.S. economy added an average of 185,000 jobs in the past 6 months, strong enough to consider reducing monetary support. However, wage growth is the key figure that matters most. Given that U.S. PCE index, the preferred inflation measure for the Fed hit its highest level since 2012 in January, there’s a risk of the economy overheating, especially if oil prices continued to rise. Wage growth have been disappointing analysts, coming in well below expectations for the past three month. However, if February figures buck this trend, not only this will strengthen the case for a March move, but even accelerates the expected pace of tightening policy, leading to a stronger dollar.
On the other side of the Atlantic, investors would like to know if the ECB is becoming worried after inflation in the Eurozone hit the magical 2% benchmark. This might provide ECB hawks, especially from Germany, the ammunition to call for adjusting the ECB’s loose monetary policy. Still, most of the governing council may view the recent spike in prices as temporary and no need to rush to exit from current measures. EUR traders should focus instead on the communicated language on Thursday and decide whether it suggests a possible near term shift in policy to scale down purchases of monthly assets. Any indication of such a shift will likely to provide the EUR a boost.