USD Rebounds Ahead of Inflation Data
- Mar 12
- 3 min read
GBP : Sterling declines but maintains its optimistic position
GBP/USD corrects lower and trades around 1.2950 in the European session on Wednesday after hitting a new multi-month high on Tuesday around 1.2970. However, the pair may be able to maintain its position in the short future thanks to the positive change in risk sentiment.
On Wednesday, the Trump administration imposed 25% global tariffs on imports of steel and aluminum. UK Trade Minister Jonathan Reynolds announced that they are discussing a broader economic accord to remove more tariffs in response to this development. "We will keep all options on the table and won't hesitate to respond in the national interest," said Reynolds.
Market players will examine US inflation data for February later in the session. After rising 0.4% in January, the core Consumer Price Index (CPI), which does not include volatile food and energy prices, is predicted to increase by 0.3% on a monthly basis. The US Dollar (USD) may remain strong versus its competitors if investors refrain from pricing in a rate cut in May due to a core monthly inflation reading that is greater than anticipated. Conversely, a reading of 0.2% or less in this data would lead to a further decline in the USD and pave the way for further GBP/USD gains.
US stock index futures, however, were last observed increasing by 0.4% to 0.7%. After Monday and Tuesday bearish activity, a strong recovery in Wall Street's major indexes may make it harder for the USD to find demand.
EUR : Euro looking pricey
The news that Ukraine agreed to a 30-day truce with Russia gave EUR/USD some additional support yesterday, but as the dollar began to recover and the EU declared €26 billion in retaliatory tariffs on the US, the currency pulled back from its highs of 1.095 to slightly under 1.090. While a further step higher in EUR/USD may be expected if and when Russia agrees to the terms of the truce, markets had already priced in a peace accord between Ukraine and Russia. However the pair may encounter more upside resistance on the back of stretched technicals.
Our short-term fair value model indicates that EUR/USD is still about 1.5% overpriced despite the overnight dip. Additionally, positioning has returned to the neutral area, according to the most recent CFTC data. As of March 4, only 1.5% of open interest was made up of speculative net-shorts, compared to 11% at the end of February. The two-year EUR:USD swap rate gap may find it difficult to close past the -140bp barrier (now -144bp), and may instead experience some rewidening that would make EUR/USD even more costly at current levels, as the US core CPI may limit dovish attitude on the Fed today. Additionally, there's a chance that following the EU's declaration of retaliatory tariffs, ECB President Christine Lagarde or any of the numerous other ECB speakers today will sound a little more dovish. At this point, we believe that a decline to 1.080 is more likely than a rise to 1.10 in the EUR/USD exchange rate.
USD : Risk sentiment sours but USD rebounds
President Trump's announcement yesterday that he would increase tariffs on Canadian steel and aluminum to 50% and then withdraw the threat when Ontario delayed a 25% tax on power exports further soured global risk sentiment. Markets have been hoping for a break from the tariff story, but there aren't many indications that stock market volatility will force Trump to reduce his rhetoric about protectionism just yet.
In addition, the Fed has not yet made a compelling enough improvement in the inflation picture to lower rates once again. In the event that our prediction of a 0.3% core CPI MoM print is accurate, today's February CPI data could lead to a rise in the dollar. The dollar should be asymmetrically more responsive to hawkish news even if it is also the general consensus.
Important political developments have also occurred both inside and outside of the United States. Regarding the latter, Ukraine accepted a US-mediated ceasefire agreement that lasted 30 days. Russia now needs to ratify that. On the home front, the US House on Saturday passed legislation to prevent a government shutdown. Markets are not yet prepared to price out the shutdown risk, and a few moderate Democratic votes are required to gain Senate approval.
