The USD is consolidating against major peers following its nearly two-month low last week. Investors are anticipating a series of US economic data releases today ahead of the Federal Reserve's monetary policy meeting next week, which might inject some volatility into the otherwise calm financial markets.

Key US data today, featuring retail sales, producer price inflation, and initial jobless claims.  US Treasury yields have climbed for three consecutive days ahead of these releases, fuelled by persistent inflation data surpassing expectations.  Following Tuesday's higher-than-anticipated CPI figure, attention now turns to the producer price index, considered a robust leading indicator for the Fed's preferred inflation measure (PCE). Forecasts anticipate the PPI to mirror its 0.3% monthly increase from January, alongside expectations of a positive 0.8% retail sales growth in February.

Concurrently, with jobless claims projected to remain subdued around 218 thousand, market consensus leans toward a favourable outlook for the USD from today's macroeconomic data.  Nevertheless, any downside surprises could dampen the Greenback's performance, particularly since today's releases encompass all three crucial data categories currently monitored by the Fed and markets to assess economic trajectory: inflation, labour market dynamics, and consumer expenditure.  Recent data trends have marginally influenced rate expectations. While the Fed is expected to maintain rates next week, focus will shift to the bank's updated economic forecasts, likely to have more significant implications for the market.

The EUR strengthened against other G10 currencies despite hotter-than-anticipated US inflation data, as market sentiment remained unfazed regarding potential Fed interest rate reductions in the near future.  European equities reached new record peaks, while the spread between Italian and German bond yields, indicative of the risk premium investors demand for holding bonds from the eurozone's most heavily indebted nations, reached its lowest level in 26 months.  Favourable returns and a growing appetite for riskier investments bolstered demand for Italian government bonds, providing support for the EUR/USD pair.

The EUR/USD saw a dip into the lower $1.0900s following the release of higher-than-expected US CPI inflation figures for February. Despite this, the impact of elevated inflation, particularly driven by gasoline and energy prices, tempered the decline, resulting in the pair closing unchanged for the day at $1.0924.

There seems to be a growing consensus among members of the ECB Governing Council regarding the timing of potential rate cuts, with June emerging as the most probable window for initiating a policy easing cycle, though not before. In a recent interview, Robert Holzman, known for his hawkish stance on rates, indicated a higher likelihood of a rate cut in June rather than April, but emphasized that it's not yet a certainty. Holzman cautioned against cutting rates before the Fed, citing potential negative repercussions on the euro and investor sentiment. While the ECB maintains optimism about inflation progress, there are lingering doubts regarding the convergence to the 2% target by 2025, as indicated by the latest ECB staff projections. Given past misinterpretations of projections, the ECB advocates for a data-dependent approach, remaining open to action when necessary but avoiding premature decisions. Currently, the likelihood of June rate cuts stands at 83% across G3 central banks.

Today's economic calendar appears relatively light, with the release of EZ Feb industrial production figures imminent. Historically, the EUR/USD overnight ATM option price ahead of such releases hasn't deviated significantly from its average, suggesting investors tend to overlook these reports. With the latest option price at 4.57, expectations are low for increased volatility or substantial market reaction to the upcoming industrial production report. Forecasts anticipate EUR/USD to remain within a range of $1.0870 to $1.0920.

This morning, GBP is maintaining its position near the $1.28 mark, following the release of the UK jobs report. Unexpectedly, the unemployment rate in January increased from 3.8% to 3.9%, while the number of pay-rolled employees in February rose by 20k, falling short of the anticipated 25k. Average weekly earnings also came in below expectations, providing a positive outlook for the Bank of England (BoE). However, further advancements are necessary before any rate cuts are implemented.

On Monday, the sterling was close to its 7-month high reached on Friday, as investors strengthened their bullish positions in the currency, nearing 16-year highs. Subsequently, GBP/USD experienced a dip after data revealed a significant slowdown in Britain's labour market in February, marked by the largest decrease in demand for staff by employers reported by recruitment firms since the early 2021 coronavirus lockdown. Today's labour market figures from the ONS support the idea of a cooling UK labour market, with the unemployment rate increasing for the first time since July last year and vacancies dropping to 908,000 – the lowest since 2021. Additionally, total pay growth has slowed for six consecutive months, declining from a peak of 8.5% last summer to 5.6% in the three months ending January. Wages excluding bonuses grew by 6.1%, slightly below the expected 6.2%. Of particular importance to the BoE, annual private sector wage growth decreased from 6.2% to 6.0%.

While the BoE acknowledges positive movement, weekly earnings growth data still exceed levels consistent with the central bank's 2% inflation target. However, alternative wage growth data suggests ongoing progress, supporting the possibility of a BoE rate cut this summer. Presently, market indicators assign a 50% probability of a cut in June and anticipate three 25-basis point cuts in total for 2024. This stands in contrast to the four cuts priced in for the Fed and ECB, providing GBP with a slight advantage over its major counterparts.

The headlines were dominated by the UK budget, where the chancellor sought to strike a balance between fiscal responsibility and the impending election. Reactions varied, but monetary policy forecasts have seen little change. The market anticipates an initial rate cut in August, with rates potentially reaching 4.50% by year-end.

Meanwhile, in the US, Federal Reserve Chair Powell reiterated the Fed's cautious approach, emphasizing that there's no rush to cut rates given the strong economy. Confidence in inflation returning to the 2% target on a sustainable basis is deemed essential. Although the market leans towards an initial rate cut in June, it anticipates a cumulative 0.85% cut throughout the year.

Friday’s release of the crucial US payrolls numbers is expected to significantly influence monetary policy decisions, likely leading to increased market volatility.

As anticipated, the European Central Bank maintained its policy, but downgraded short-term growth and inflation forecasts. A bold rate-cutting cycle is expected in June, with up to 1% of cuts already factored into the market.

On the currency exchanges, GBP/USD is trading at its year-to-date high, influenced by weaker US data and the interest rate outlook. Simultaneously, GBP/EUR remains close to the upper limit of its well-established range.

Key data releases this week include updates on the UK jobs market and US inflation.