Market Brief: Currency Market Focus Turns Toward Fed Dot Plot

CalendarMarch 13, 2024

The greenback remains modestly stronger after yesterday’s data showed inflation running too hot for the Federal Reserve’s comfort. Equity investors - largely prepared for a repeat of January’s stronger-than-expected print - shrugged and kept bidding indices higher. But with core price growth topping expectations for a second month in a row, currency traders doubled down on bets interest rate differentials would remain tilted in the dollar’s favour, temporarily snapping a month-long slide in the DXY index.

The “dot plot” presented after next week’s Fed meeting could prove more important than the decision itself. A material change seems unlikely, but remarkably-loose financial conditions, stubbornly strong underlying inflation pressures, and signs of a re-acceleration in growth across the real economy - potentially reinforced in tomorrow’s retail sales report - could persuade several policymakers to take back one of the three rate cuts that were projected back in December. Odds on a hike at the June meeting, as implied in futures markets, are now at 58 percent, essentially unchanged relative to Monday’s levels - but the picture could change fairly dramatically if officials sound more hawkish than expected.

The British pound is little changed after data showed the economy rebounding as expected in January. Gross domestic product rose 0.2 percent after a -0.1-percent contraction in December, according to the Office for National Statistics. The retail sales and construction sectors staged solid recoveries, even as industrial production remained depressed. Markets expect the Bank of England’s first rate cut to come after similar moves from the Federal Reserve and European Central Bank this summer, particularly after chief economist Huw Pill warned in an early-March speech “I’m not convinced that weakness in activity is really creating disinflationary forces”. “In my baseline scenario, the time for cutting the Bank Rate remains some way off”.

The Japanese yen continues to strengthen on growing confidence in a hike from the Bank of Japan in March or April. Toyota Motor Corp. last night said it had met labour union wage demands in its annual round of negotiations, with reports suggesting that the increase was the biggest in 25 years. Rengo, the country’s biggest labour federation, is expected to announce pay increases exceeding 5 percent when it delivers its initial tally on Friday.

There are tumbleweeds blowing across today’s data calendar, with no major releases scheduled on either side of the 49th Parallel, and no meaningful policy speeches on the agenda. Moves in equity markets - which powered to record highs during yesterday’s session - are likely to set the tone, especially for high-beta currencies like the Canadian dollar.

Political risk premia remain subdued, even after President Biden and former President Donald Trump won enough delegates to become the presumptive nominees of their parties. With the outcome well understood in advance, yesterday’s round of primary voting left implied volatility levels in the Mexican peso, Canadian dollar, and Chinese renminbi around the election date essentially unmoved, suggesting that market participants are waiting to see how trade rhetoric evolves during the campaign. We doubt this sense of calm will last beyond the party conventions in July and August.

Still Ahead


Economists expect a rebound in US retail sales for February, with unusual weather conditions and seasonal adjustment factors explaining the bulk of January’s surprise decline. Headline receipts are seen rising +0.8 percent month-over-month, reversing a -0.8-percent loss, and “control group” sales - which exclude gas, vehicles, and building materials - are expected to hit +0.3 percent, up from the -0.4 percent loss recorded in the prior month. We think risks are slightly skewed to the upside, given that the wage growth and hours-worked numbers embedded in Friday’s non-farm payrolls report pointed to healthy growth in aggregate consumer incomes. (08:30 EDT)

See our Economic Calendar for a complete listing of upcoming data releases.


Karl Schamotta

Karl Schamotta

Chief Market Strategist

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