US Dollar Weakness Persists as Inflation Continues to Moderate

Talking Points:

• Dovish Fed repricing and a slowdown in consumer price growth could keep the US Dollar on the backfoot in the short-term.

• Turbulence in the banking sector has intensified bets that the Fed will pause its hiking cycle sooner-than-expected.

The US Dollar continued its slide lower against most of its peers overnight as investors bet on a smaller 25-basis point interest rate increase at the Federal Reserve’s upcoming meeting in response to turbulence in the US banking sector and a sustained slowdown in consumer price growth. The annual inflation rate in the world’s largest economy continued its downward trajectory in February, slowing to 6% – 0.4% lower than January and the lowest level since September of 2021. Falling energy and food prices were the primary drivers of the slowdown while electricity and shelter costs continued to climb. Concerningly, core CPI edged up to 0.5% on a monthly basis topping consensus estimates and signalling that the Federal Reserve still has work to do in its battle against inflation.

US Inflation Rate

Nevertheless, the pace of monetary policy tightening from the US central bank will likely slow over the coming months as the collapse of Silicon Valley Bank stokes contagion fears. Indeed, since the collapse of SVB on Friday the yield on US 2-year Treasuries recorded its largest three-day decline since the 1987 flash crash known infamously coined Black Monday. This marked decline comes as investors seek the safety of safe-haven Treasuries and also discount further rate hikes from the Fed. Current market pricing points to an 80% chance that Chair Jerome Powell and co will raise the Fed Funds rate by a quarter-of-a-percentage point on March 22. Just one week ago the market was pricing in a 70% probability of a much larger 50-basis point hike. This marked unwinding and sustained uncertainty on the path forward from the Fed will probably keep the US Dollar on the backfoot in the short-term and open the door for the Euro in particular to gain ground against it.  

US 2-Year Treasury Yield Drops Just Under 60-Basis Points

EUR/USD Daily Price Chart – October Uptrend Steering Price Higher

From a technical perspective, the outlook for the EUR/USD exchange rate remains bullishly skewed as prices continue to respect the uptrend extending from the October 2022 lows.

The recent push to higher highs above the key pivot point at 1.0700 suggests that the path of least resistance is higher.

A daily close above the February 14 high is needed to validate bullish potential and carve a path for price to challenge the yearly high.

However, if sellers can force price back below short-term support at 1.0680, a pullback to the monthly low can’t be ruled out.

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