US Dollar Targets 104 Ahead of CPI Release

US Dollar Targets 104 Ahead of CPI Release

On Tuesday, the US dollar rebounded from its multi-week low as traders feared an even more serious systemic crisis following the collapse of SVB and shutdown of Signature Bank located in New York. This caused investors to speculate that Federal Reserve may wind up its rate-hiking plans in order to avoid more turbulences in the aching financial sector. 

Following another day of market instability sparked by the abrupt collapse of Silicon Valley Bank and Signature Bank, some sense of serenity was restored when President Biden declared his plans to guarantee a secure banking system.

In a joint statement released on Monday by the U.S. Treasury, Federal Reserve, and FDIC, the government tried to reassure markets that “The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.

This gave the U.S. dollar a chance to recuperate from its sharp pullback in the prior session, but it stayed close to its multi-week lows against major rivals.

The Federal Reserve’s rate hikes, along with speculation of how much further U.S. rates would surge have been a major catalyst behind the dollar’s remarkable appreciation over the last few weeks.

US Dollar Muted Ahead of Data

As investors attempt to uncover how the Fed’ policies will be impacted by Silicon Valley Bank’s (SVB) failure, markets remain subdued on Tuesday. This recent collapse has highlighted strong weaknesses in the financial sector, leaving markets unsure of what actions may follow.

Ahead of US Consumer Price Index (CPI) February figures, the US Dollar Index is clinging to its recovery gains close to 104.00 and the 10-year Treasury bond yield looks like it will stay near 3.5%.

Following three successive pullbacks – accompanied by a four-week low near 103.50 on Monday – the DXY index has regained focus towards 104.00, further aided by minor improvement witnessed in the US yields curve and an abrupt change in risk appetite.

The USD has been under pressure, as market participants are anticipating the Federal Reserve may make a shift in policy soon. However, stubbornly high inflation and an economy that remains robust continue to support the greenback.

US Dollar Index DXY, which gauges the greenback’s against six major currencies, is 0.38% up during the day approaching the 104 threshold. 

Monday saw a hectic trading on Wall Street, but futures contracts for major stock indexes were trading modestly up during European morning hours.

Goldman Sachs has revised their Fed rate hike expectations, now assuming there will be no rate increase at the March 22 meeting. Conversely, JP Morgan is advocating for a 25 bps hike.

US CPI Inflation in Focus

The upcoming US CPI inflation figures will be a pivot point for markets in anticipating the next policy moves from the Federal Reserve next week. The Consumer Price Index will be released at 12:30 GMT.

US annual inflation is expected to ease to 6% in February, from 6.4% recorded in January. Core index, excluding volatile food and energy prices, is seen to print a smaller decrease from 5.6% to 5.5%.

Higher-than-expected inflation reading would confirm expectation of a 25bps rate hike in Fed’s meeting next week. But in case the reading showed that inflation eased more than expected, speculations about rising rates might sharply slump. Thus, signaling the end of the Federal Reserve’s tightening cycle. 

Analysts believe that the Federal Reserve is likely to keep interest rates unchanged at their upcoming policy meeting, with rate cuts expected through H2 2023.

A week earlier, markets were pricing in by over 70% a 50 bps rate hike in March meeting. But the recent US economic updates trimmed the case for an aggressive hike for now. A half-percentage point hike is no longer on table.

February inflation figures scheduled for later today will have the biggest impact on interest rate outlook for the short-term.

As the Federal Reserve remains committed to bringing inflation down to their 2.0% target, US CPI data will take precedence in terms of its implications for monetary policy. With a ‘blackout period’ ahead of the March 22 meeting, this critical market indicator will have an especially strong impact on markets and the US Dollar as it will direct upcoming rate decision.

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