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Inflation, Labor Data Help Sustain US Dollar Strength

Matt Eidinger February 13, 2020

The US dollar’s rise against most major currencies continued this morning, although at a slower pace, amid supportive consumer inflation and labor data.

According to the trade-weighted dollar index (DXY), the dollar has strengthened nearly a full percent to 99.04 over the course of the past week and is now at the highest levels since October 2019.

In the minutes after the 8:30 data release, the big dollar strengthened 30 pips against the euro – breaking through resistance levels and moving the spot rate to levels not seen in nearly three years. In the meantime, US dollar was largely unchanged against its northern peer the loonie.

According to the report from the Bureau of Labor Statistics (BLS), consumer inflation advanced 0.1% during January 2020 – disappointing market expectations hoping for a reading closer to 0.2%. Compared to this point one year ago, headline consumer prices rose 2.5% – right on target with consensus.

Core inflation rose 0.2% during January and 2.3% on a year over year basis. The gap between headline and core inflation is largely due to differences in the volatile energy and food price indexes, which advanced at yearly rates of 6.2% and 1.8%, respectively. Both the energy and food indexes are excluded from core inflation numbers due to their volatile nature.

The January inflation data represents the 23rd month in a row where CPI has registered a reading over the 2% mark and will certainly lend credence to the Federal Reserve pausing its mid-cycle downward adjustments to interest rates. Currently, overnight indexed swap rates indicate the Fed will likely move to cut interest rates by 0.25% as of July.

Separately, the Department of Labor’s reported weekly unemployment insurance claims rose slightly from last week’s lows of 203,000 to 205,000. At the same time, the more reliable four-week moving average was unchanged at 212,000.

Fears of the Chinese coronavirus continue to dominate headlines, both economic and political. The general fear is that the virus could lead to slower economic growth in China and spell trouble for the economic détente recently reached in the Sino-American trade conflict. Overnight, US equity futures moved sharply lower after a report indicated original estimates of coronavirus cases were severely underreported. The Volatility Index (VIX) spiked nearly 10% overnight upon the report hitting the wire.

Currency markets will now turn their attention to tomorrow’s US retail trade data and today’s Congressional hearings for President Trump’s nominee to the US Federal Reserve, Judy Shelton. Shelton has become a controversial nominee as a result of her advocating a return to the gold standard as well as lower interest rates despite the current economic expansion in the US.

Although the Fed would benefit from diversity of opinion, her nomination will likely encounter some difficulty due to her political association with President Trump’s 2016 election campaign. Accordingly, financial markets will be paying close attention to today’s hearings.

Matthew Eidinger
Fintech Specialist, Dealing Operations

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