US Dollar Struggles To Rebound To Start The Week

Key data tests for the strong Pound

The Pound’s strong momentum is set to face a key challenge tomorrow as the UK releases its jobs report. Wage growth figures – especially in the private sector – will be watched very closely as they now represent the second most important input for the Bank of England after services inflation. Later in the week, we’ll also see the UK’s January GDP report, February’s retail sales and the BoE's inflation attitude survey.

Pound Sterling could hit fresh multi-month highs against the Dollar this week, underpinned by positive technicals. However, any undershoot in UK wage data - or overshoot U.S. inflation data - could prompt a sharp pullback.

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Eyes on post-ECB comments

This will be a quiet week for Eurozone data. The only highlight is January’s industrial production data, which should not move the market much. We’ll be more interested to hear what ECB members have to say after Thursday’s meeting, especially on whether June is indeed a reasonable target for the first rate cut and the conditions that need to be met on the wage and inflation side. Austria’s Robert Holzmann (a hawk) is speaking today. We’ll hear from Isabel Schnabel, Pablo Hernández de Cos, Luis de Guindos, Philip Lane and others later this week.

EUR/USD is trading around the top of the range that is consistent with a still depressed short-term rate differential. The EUR:USD 2-year swap rate gap has not moved much since the start of March, staying around 125bp, and we need to see a clearer convergence of USD and EUR rates to justify continued support beyond $1.1000.

There are some downside risks this week for EUR/USD, and a correction could take it back to the $1.0850-1.0900 area. However, ING Bank's call for a first rate cut in June by both the ECB and the Fed can still argue for a higher EUR/USD, as the Fed should ultimately deliver a larger easing package.

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Inconclusive payrolls, focus turns to CPI

Fed Chair Jerome Powell’s Congress testimony last week left markets with a dovish aftertaste. Reiterated (albeit cautious) optimism about the disinflation path and claims that the Fed is “not far” from cutting rates wrong-footed most investors who were likely bracing for a more hawkish tone on the back of resilient data. The resulting shift in FX positioning against the Dollar was an example of what we’ll see once data eventually endorses rate cut expectations.

The inconclusiveness of payrolls puts more emphasis on February CPI figures, which will be released tomorrow. ING Bank expect a 0.3% MoM core print, which remains inconsistent with the Fed’s inflation targets and suggests easing is not imminent. They expect inflation figures to put a stop to the Dollar decline this week. The shifts in FX positioning last week no longer justify an exacerbation in USD downward pressure unless key data starts to turn in favour of Fed easing. There is a non-negligible risk that part of the USD losses driven by Powell’s testimony are unwound this week.

No Major Data