On Wednesday, March 12th, data released by the U.S. Bureau of Labor Statistics showed that the U.S. Consumer Price Index (CPI) increased by 2.4% year-on-year in February, matching expectations and the previous reading of 2.4%. On a monthly basis, CPI rose 0.3%, in line with forecasts, compared to a 0.2% increase previously. The core CPI, which excludes food and energy, increased by 2.5% year-on-year, aligning with expectations and the prior figure of 2.5%, marking its slowest pace in nearly five years. Month-over-month, core CPI rose 0.2%, as expected, following a 0.3% gain in the previous month. One sign of tariff effects was seen in household goods prices, a broad category including items like furniture and appliances, which increased 3.9% over the past 12 months, the largest rise since May 2023. The slowdown in core inflation in February indicated that price pressures had eased before the outbreak of the Iran conflict. However, the Iran war has reignited inflation concerns, as the conflict is driving up costs for oil, gasoline, and fertilizers, potentially increasing cost-of-living pressures for American households ahead of the midterm elections. Economists suggest that the current year-on-year inflation reading is artificially suppressed due to missing data for October's housing cost increases caused by last year's government shutdown. This downward bias is expected to disappear in April's inflation report, at which point the calculated inflation rate should rebound accordingly.
Furthermore, according to Governing Council member Klaas Knot, the Russia-Ukraine conflict and its impact on inflation could force the European Central Bank (ECB) to raise interest rates sooner than anticipated. While the ECB currently remains in a "favorable position" and does not need to act at next week's meeting, Knot expressed concern that the inflation shock experienced by the region in 2022 has lowered the threshold for businesses to raise prices and for consumers to demand wage increases. He pointed out that upside risks clearly dominate the economic outlook. Knot stated in an interview on Tuesday, "We need to stay calm for now, but I think the ECB's reaction could be closer than many think. I don't want to speculate about April or June, but we will be ready to act if needed." He added, "If necessary, we can react more quickly. We must remain flexible, and we have learned our lessons." He argued that the ECB's quarterly forecasts, to be published this month and in June, are not a precondition for rate hikes. He made clear that he would have no objection to raising rates even without new forecasts. It is evident that further rate cuts are absolutely not under consideration at this time.
Key data to watch today include the U.S. Trade Balance for January, U.S. Initial Jobless Claims for the week ending March 7th, Canada's Trade Balance for January, the U.S. preliminary Building Permits monthly rate for January, and the U.S. Housing Starts annualized monthly rate for January.
**USD Index** The USD Index moved higher yesterday, breaking above the 99.00 level, and is currently trading around 99.40. Continued diminished expectations for Federal Reserve interest rate cuts provided underlying support for the dollar. Additionally, the well-performing U.S. economic data released during the session offered further support. Persistent market risk aversion also contributed to the index's strength. Today, focus is on resistance near 99.80, with support around 99.00.
**EUR/USD** The euro declined yesterday, falling below the 1.1600 level, and is currently trading near 1.1550. The primary factor pressuring the euro lower was the strengthening U.S. dollar, which gained support from reduced Fed rate cut expectations and positive economic data. However, better-than-expected economic data from Germany and hawkish comments from an ECB official during the session limited the pair's downside. Today, resistance near 1.1650 is worth watching, with support around 1.1450.
**GBP/USD** The British pound consolidated yesterday, closing slightly lower on the daily chart, and is currently trading around 1.3390. Profit-taking exerted some downward pressure on the pair. The stronger U.S. dollar, bolstered by fading Fed rate cut expectations and robust economic data, was also a significant factor weighing on the pound. Nevertheless, expectations that the Bank of England will maintain its current policy stance in March limited the currency pair's losses. Today, attention is on resistance near 1.3500, with support around 1.3300.
Comments