After a few days of solid gains, the US dollar pulled back from its strongest level in over two months as treasuries rallied dropping yields across the curve. The dollar index slipped a touch after posting gains following solid US data at the end of last week with the 2-year and 10-year yields dropping by around 7bps. With markets and the Fed continuing to data watch, Fed speak remains a key driver and we heard from two officials yesterday, who both urged caution, pushing back on early cuts. Cleveland Fed President Loretta Mester said that policymakers will probably gain confidence to cut interest rates “later this year” if the economy evolves as expected but added that she doesn’t see a need to rush. Separately, Minneapolis Fed President Neel Kashkari celebrated the improving inflation outlook saying, “we’re not all the way there yet, but we’ve made a lot of progress on inflation.” The FOMC has kept rates on hold since last July and continue to suggest that the next move will be a cut, with markets previously expecting a March move. The recent strong data and comments from the last policy meeting now suggest the first move in May or June, with three cuts pencilled in this year.
EURUSD continues to consolidate in the mid 1.07 area, well supported by the recent low around 1.0725 – a level that needs to break before a further test lower. Ahead this morning we look forward to German Industrial Production data, where markets will look for more clues on the outlook for the industry sector of the euro-area’s largest economy.
The only MPC member to vote for a cut at the last policy meeting, yesterday said that policymakers are underestimating “downside risks” to the economy. Swati Dhingra was the first member of the nine-member panel to vote for a cut since the outset of the pandemic almost four years ago and added, “I’m not fully convinced there’s some kind of really sharp excess demand in the economy coming from the consumption side.” Her comments did little to shift cable which continues to tread water in the mid 1.26 area, whilst EURGBP remains locked between 0.85 and 0.8550.
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