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US equities down, yields down, crude down, gold flat, US dollar up. Markets slip into wat-and-see mode ahead of US CPI

Currencies / analysis
US equities down, yields down, crude down, gold flat, US dollar up. Markets slip into wat-and-see mode ahead of US CPI

By Stuart Talman, XE currency strategist

Unsurprisingly, it's been a very muted start to the week as the market awaits the week's headline event, February's US CPI report. Consensus forecasts project annualised headline inflation for the world's largest economy remained steady at 3.1% whilst core (ex-food and energy) declined from 3.9% to 3.7%.

The market has been hypersensitive to the incoming data flow through 1Q, even tier data releases inducing pronounced swings as market participants attempt to predict the timing and magnitude of Fed cuts. Currently, the base case projects the first cut to be delivered at the 12 June FOMC meeting with a further 2 x 25 bps cuts to follow later in the year.

Current market pricing assigns a ~22% probability the Fed cuts in May, climbing to 70% in June. Should this evening's CPI numbers run hotter than expected, May will most certainly be off the table whilst the inflation hawks will question the need to cut at all.

Throw into the mix an election year and the Fed's desire to not be regarded as a political factor, there may be a reluctance to cut during the northern hemisphere summer should CPI and other tier 1 data points fail to trend lower.

On the other side of the CPI equation, should the core rate distance itself further from 4% whilst headline falls below 3%, The Fed may be compelled to cut at the May meeting given a desire to commence the easing cycle well before the election campaign ramps up.

Opening the week near 0.6170, the New Zealand dollar has barely traded beyond a 20-point range. In the G10 most currencies have traded within a +/- 0.3% intraday band.

The CPI data will determine the Kiwi's next key directional move. Having spiked to within a few pips of 0.6220 during Friday's overnight session and failing to end the week above 62 US cents, NZD/USD could be forming a double top with the 22 February swing high, also within proximity to 0.6220.

An upside CPI surprise likely sends the pair back below 61 US cents to once again test the convergence of the 100- and 200-day moving averages and a 0.6070/90 support zone that formed in late FEB./early MAR.

Of course, we could receive inline CPI data points, maintaining the status quo: the market continues to buy into a June cut, but not with absolute conviction. In this scenario, NZD/USD continues to track sideways in the prevailing 0.6050 - 0.6220 seven-week range.

Shifting our attention to the Japanese yen, a weekend report from Jiji Press, a Japanese news service, indicated that the Bank of Japan will drop its yield curve control policy at next week's BoJ meeting, in which a 10-bps hike is also expected. The yen has been one of the strongest performing currencies over the past couple of weeks following comments from multiple BoJ officials that imply an end to the negative interest rate regime that has been in place since 2016.

Declining four-tenths of a percent through Monday, NZD/JPY has fallen in 8 of the past 11 trading days, now over 3% lower from the 23 February 9-year high, marked just shy of 93.50.

Given a BoJ policy tweak is now widely expected on 19 March, JPY likely continues to firm, but could pare March's gains via a buy-the-rumour-sell-the fact response.

We suspect the pair will test sub-90.00 levels in the days ahead, before funding support somewhere in the region 88.50 - 89.50.

Looking to the day ahead, the UK employment report is the other tier 1 data to digest.

Tight range trading the state of play ahead of US CPI, NZD/USD to trade either side of 0.6170 before a potential CPI-induced breakout.

Stuart Talman is Director of Sales at XE. You can contact him here

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