As US exceptionalism and the strength of the world’s biggest economy continues to confound many, focus this week will be on the US inflation data. Numerous upside surprises in many of the recent economic releases have seen Fed officials pour cold water on early rate cuts. This has lifted Treasury yields and boosted the dollar, with the chances of even a May reduction now also being questioned. Any signs that price pressures are exceeding expectations and gaining momentum would push these bets further into the second half of the year.
Strength in the US economy generally results in strength in the greenback. That means we have has seen four consecutive weeks of gains and three-month highs. It seems logical that Fed officials do not want to loosen policy too soon, as this would potentially inflame price pressures. Its favoured measure of inflation, the core PCE deflator, is much closer to target, but it wants to see CPI more consistent with a return to 2%.
Interestingly, investors are still not holding a net bullish position in USD, which means continued economic strength could get a fresh tailwind from position readjustment. The most recent weekly candlestick pattern looked quite bearish with a long wick and prices closing nears its lows. But prices on the DXY remain above its 200-day simple moving average at 103.61.
It’s the middle of the month so that means we get a deluge of UK data. The two most important releases will be the wage growth figures on Tuesday and inflation numbers the following day, and especially services inflation. The Bank of England reckons CPI will return to its 2% target this year but has warned the road will be bumpy and could rise in the third quarter. Sticky price data this week would boost GBP which has held up relatively well this year against the dollar.
Here are the main events for this week:
