Now is a Data Game

Now is a Data Game, as I’ve mention before!

USD: Data in the Driver’s SeatUSD: A key takeaway from the recent fluctuations in major G10 pairs is that, at this stage, data matters much more than central bank communication. The mass of hawkish comments - ranging from modest to aggressive - seems rather predictable considering the markets’ early-February dovish run and strong jobs data in the US.

However, more than providing direction to the market in terms of the next central bank moves, recent communication merely offered some tools to assess central bankers’ reaction function to data, and reinforced the notion that data-dependency is still the name of the game.

Arguably, February’s price action so far has been mostly a reaction to strong nonfarm payrolls data in the US rather than to Federal Reserve and European Central Bank meetings: as long as central banks remain data-dependent in the short term, it's really up to the data to drive trends in FX. At this stage, this should be especially true for the Fed and the dollar.

This week sees the release of US inflation, retail sales and industrial production figures. A note of warning: US data in January should be strong throughout, largely thanks to greatly improved weather conditions compared to December.

The big jump in hiring seen in the latest jobs report also suggests increased demand. Indeed, the most important piece of data will be inflation (tomorrow at 00:30am). My projections are in line with the market consensus for a month-on-month rise of 0.5% and 0.4% for headline and core rates, respectively.

Auto sales and shelter should contribute to put a floor under core inflation for now, but I think these two components will start declining more sharply from mid-second quarter, which should fuel a more sustained downward trend in inflation.

In other words, I don’t expect this setback in the deflationary path to suggest the trend is inverting. Still, this - with the aid of strong retail sales and industrial production figures - will likely be enough to allow markets and FOMC hawks to fully expect a 25bp rate hike in May after the one in March.

Any upside surprise may push the peak rate pricing towards the 5.50% mark. From an FX perspective, the dollar appears in a position to at least hang on to recent gains this week. We could see a return to 105.00 in DXY soon.

Today’s price action may follow a wait-and-see approach given there are no data releases, but I have observed a tendency of markets to move closer to defensive long-dollar positions into key risk events. The balance of risks appears skewed to the upside for the dollar today.

EUR: Lacking the Domestic PushIn the midst of the dollar's upward correction, the Euro has also lost its idiosyncratic bullish momentum.

Hawkish comments by ECB members seem to have only offset the communication hiccups on the day of the ECB meeting but have failed to lift the Euro as rate differentials swung back in favour of the dollar.

The EUR-USD 2-year swap rate spread is back to 145-150bp in favour of USD, around the lowest this year after having shrunk to the 110bp area in the aftermath of the Fed meeting.

My medium-term view is still one of EUR/USD appreciation over the course of 2023, but I don’t see clear drivers for a EUR/USD rebound this week, especially from the Eurozone side. It would probably require a rather low US CPI figure to send the pair sustainably back above 1.0800-1.0850.

I see a greater chance of the pair coming under some additional pressure, and a strong US CPI read could mean the 1.0500 support (1.0490 is the 2023 low) is tested. This week does not include key data releases in the Eurozone, but just a few more ECB speakers. President Christine Lagarde will speak on Thursday: expect another attempt to build market expectations around more tightening, although other ECB members have already gone a long way communication-wise and we don’t see her speech as a big risk event for the Euro.

I’ve talked more about EUR on this post at Finlogix have a look! Go to: https://www.finlogix.com/analysis/20230213/ideally-another-dip-before-buying-again

GBP: Some key data for the BoE this weekThe UK dodged a technical recession according to last week’s fourth quarter figures, but that was hardly the key data point the Bank of England was focused on.

This week sees the release of jobs, wages, CPI and retail sales.

Among those, tomorrow’s wages should be the most important release for the BoE's next policy moves. I think markets will be given reasons to consolidate their view around a 25bp hike in March, but expectations of further tightening may ultimately prove unfunded.

The EUR/GBP drop could extend to 0.8800 but I think markets are running out of reasons to stay bearish on the pair for longer. I continue to see Euro outperformance from the second quarter and 0.9000 is my target level in EUR/GBP in the second half of 2023.

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