US inflation figures continue to veer unfavourably from the Federal Reserve's perspective, with the fifth consecutive inflation report surpassing expectations. January witnessed CPI, PPI, and PCE inflation outperforming forecasts, which dampened expectations for easing in 2024. February appears to mirror the trend of elevated figures from the previous month, with both consumer and producer prices once again surpassing consensus estimates this week. Producer prices increased by 0.6% for the month, elevating the annualized growth rate from 1.0% to 1.6%. Another report indicated that initial jobless claims remained at historically low levels (209k), suggesting that the easing of labour market tightness, as indicated by other indicators, is progressing moderately. Despite retail sales experiencing a lower-than-expected rise in February (0.6% vs. 0.8% expected), the market ultimately leaned towards trusting the inflation outperformance over the disappointment in sales, leading to a rise in the USD.
Market pricing has now realigned with the Federal Open Market Committee's (FOMC) own rate projections, indicating three rate cuts for 2024. As government bond yields continue to rise amid inflation surprises for the fourth consecutive day, discussions have surfaced regarding the upcoming dot plot next week, which may suggest only two rate cuts for the year. This poses a threat to risk-sensitive assets anticipating a swift shift from the Fed.
In the UK, data this week revealed that the economy had resumed growth in January after a slight recession in the latter half of 2023. However, the GDP report has not significantly altered the outlook for UK rate cuts this year, especially after Tuesday's jobs report showed a deceleration in wage growth rates. It is anticipated that the majority of the Monetary Policy Committee will vote to maintain the Bank Rate at 5.25% next Thursday. Nevertheless, persistent wage growth in the private sector and recent comments from MPC members suggest a potential three-way split in the vote.
The EUR is poised to finish the week stronger than most of its G10 counterparts, particularly against the NOK and SEK pairs amid inflation disappointments. Meanwhile, EUR/USD is expected to decline by approximately 0.6% on a weekly basis, marking its first weekly loss since mid-February. EUR/USD is currently consolidating near a support level around $1.0880 (14-day SMA). With market sentiment turning negative overnight following disappointment from the People's Bank of China's (PBOC) lack of additional stimulus measures, the upcoming central bank meeting week is likely to commence with softer momentum across risk assets.
