Forex Weekly Analyses

Central bank rate hikes are also being massively repriced. This is the other cause of the big moves in markets today. The moves are huge (as can be best seen in bond markets), with investors now expecting again the Fed to be cutting rates by the end of the year. What a week it has been. During Powell’s testimony last Tuesday, the market repriced higher for the Fed to hike by 50bp on March 22. Three days later, the consensus market expectations for the March 22 meeting are for the Fed to hike by 25bp or hold rates unchanged!

The previous stellar NFP report and the high inflation prints in February (both CPI and PCE) clearly set the stage for a sizable dollar rebound. The events this week will determine whether this rebound will extend just as sharply higher still, or rather some bigger correction or consolidation will come. The near-term sentiment has shifted to USD bullish, which should favour further dollar upside, barring significant disappointments in this week’s US events.

The core and headline PCE inflation reports were higher than the previous month and also significantly higher than consensus expectations. Naturally, market pricing for Fed rate hikes sharply adjusted higher, with at least three further 25bp hikes (in March, May, and June) now becoming a consensus forecast. This would bring the Fed policy rate at 5.25% - 5.50%, up from 4.75%, which was the consensus forecast only a few weeks ago. This adjustment in Fed rate hike forecasts is moving the markets now and pushing the USD dollar higher.

The US CPI report last week printed figures almost entirely in line with expectations. It seems this was a bullish surprise to the market, which seemingly got used to inflation reports coming below forecasts in the past few months. That trend might now be over, and a slower decline in inflation could be the new trend. This may provide a bullish USD impetus over the coming months.The highlights on the calendar for the week ahead are the FOMC minutes (Wed) and the PCE inflation report (Fri). Some hawkish remarks in the FOMC minutes report are possible, and that could be enough to lift the dollar higher still. The PCE inflation report on Friday will be more important, and although it is not usually a big market mover (since the very correlated CPI report is released a week earlier), some firm figures in the PCE data could certainly boost the dollar across the board this week.

The NFP printed a giant 517K jobs figure vs forecasts of only 193K. The unemployment rate fell to the lowest in 54 years at 3.4%, while wage growth also surprised higher. The ISM Services PMI also delivered a massive surprise late on Friday, coming in at 55.2 compared to forecasts of 50.5. Obviously, the US economy is still far from encountering any big setbacks or slowdown in activity. All of this was a massive surprise for the Fx market, which has been lately positioning for a weakening dollar. It looks like a squeeze on those short USD positions has now been triggered, which means the dollar can rebound further in the near term.

The Fed meets on Wednesday and is expected to deliver a 25bp rate hike and signal another 25bp hike in March. Market expectations (pricing) are less hawkish than this, so there is some scope for the Fed to deliver a hawkish message. However, the now rapidly falling inflation has weakened the Fed’s case for hawkish policy, which is why the dollar is in a steep downtrend. Thus, it may be hard for the Fed to deliver a big boost to the greenback at this meeting. But, equally, further losses don’t seem likely from current levels. Given that the Fed has communicated their planned actions well in advance, the Nonfarm payrolls and other economic data this week may have a bigger impact on the USD. The NFP and other job reports should show the US labor market is still strong. The forecasts are 190K for NFP and 3.6% for the unemployment rate. These are numbers that are consistent with a strong economy.

The dollar is stabilizing this week near the lows, a week ahead of the next Fed meeting on February 1 and the Nonfarm payrolls release two days after (Feb 3). In addition, several other central banks meet next week (including the ECB and BOE), which could add to the overall mood of sideways action as traders cut back positions ahead of a volatile trading week.

The US dollar is weaker again in what now seems like a strongly determined market to short the dollar no matter the specifics of day-to-day news. For instance, last week’s CPI report was close to the forecasts, and the market reaction was still bearish USD. The driver was a further reduction of Fed rate hike expectations, with the market now expecting only a 25bp rate hike at the next meeting, down from a 50bp hike two weeks ago. In effect, this additional pricing out of Fed rate hikes is the reason for the further USD decline last week. This week’s calendar is much lighter, which could help stabilize the Fx market a little, particularly now as traders will begin focusing on the Fed meeting in two weeks. The fact that the Fed is still “priced in” to deliver two more 25bp rate hikes is a reminder that the “hawkish mode” may be toning down but is still on. This could help to provide some much-needed stabilization to the embattled USD now.

The Friday Fx market action has confused many traders. The US dollar finally had a good week, having risen versus most currency peers well into late Friday trading. Then (at 4 pm CET, 10 am ET), the ISM services PMI index was released, printing a massive negative surprise of 49.6 against consensus expectations of 55.00. This mattered hugely for the Fx market because the ISM PMI reports are the leading indicators for US GDP and growth. Readings below 50.00 indicate economic contraction (recession). In addition to the massive 5.4 points miss of expectations, this was the first ISM services print below 50 since the Covid crisis in 2020.