Down n’out Dollar snaps 7-day losing streak

• EU and Canada retaliate against US tariffs as trade war escalates
• US annual inflation rate in February remains relatively stable at 2.8%
• S&P 500 rises after soft inflation data, rebound in tech stocks
• US dollar holds steady as markets weigh competing data and politics

FX: USD closed marginally higher on the day after more Trump headlines and tariffs, plus weaker than expected CPI data. The latter was essentially due to cooler airfares and the market looked through the release. We repeat what we said recently there is a lot of negative news in the dollar, especially with regard to a recession due to tariffs. These slowdown calls have often been misplaced regarding the US. We note the greenback is moving slightly more in line with equity sentiment at the moment. Normally, a buoyant stock market is inversely related to USD.

EUR traded around 1.09 for most of the day, after posting a near five-month high at 1.0946 on Tuesday. That came after the ceasefire talks between the US and Ukraine. A Russian response is expected any time soon. The EU issued retaliatory tariffs, mainly on Republican states, in tactics very similar to those in 2018. The euro is overvalued on various indicators while CFTC positioning data has seen a big reduction in net shorts – now only 1.5% of open interest, versus 11% at the end of last month.

GBP pushed higher as the UK didn’t respond immediately to US steel tariffs. The aim is for broader talks on trade to avoid additional measures. The main data point is GDP on Friday. EUR/GBP has come into resistance below the January year-to-date high at 0.8473.

USD/JPY tapped the midpoint of the September/January rally at just above 149 before paring gains. The major retracement level of that rally (61.8%) sits at 146.94. The better risk mood saw the 10-year Treasury yield move higher, though the major remains in a long-term downtrend.

AUD moved modestly higher and is trading right on the 50-day SMA, now at 0.6311. There was no steel tariff exemption. USD/CAD moved lower as the loonie outperformed after the expected 25bps BoC rate cut. The bank has a delicate balance to manage between managing inflation expectations, with the ongoing tariff war and growth dampening issues.

US stocks: The S&P 500 added 0.49% to settle at 5,59. The tech-laden Nasdaq finished up 1.13% at 19,596. The Dow fell 0.2% to close at 41,350. Yesterday, we erroneously stated that the S&P 500 hadn’t quite reached correction territory – that’s down 10% from the record high. But that did happen intraday so that could mean some stabilisation in stocks going forward. Tech led the gains with Intel up over 8% on reports TSMC pitched a joint venture to Nvidia, AMD and Broadcom about taking a stake in Intel to operate their chip factories. Goldman Sachs lowered its year-end target for the S&P 500 while JP Morgan sees increasing odds of a US recession.

Asian stocks: Futures are mixed. APAC stocks were mixed on Wednesday following the choppy price action on Wall Street. The ASX 200 underperformed with losses in financials and industrials as Australia failed to get an exemption from looming tariffs. The Nikkei 225 closed in the green but below 37,000 after mixed data. The Hang Seng and Shanghai Composite were mixed amid the ongoing trade frictions.

Gold pushed up and could be trying to break to the upside. Yields did go higher, but the dollar was steady.

Day Ahead –US PPI

After core CPI came in softer than expected, we get another reading released today which the Fed will look out for. Yesterday’s cooler CPI was driven largely by a big drop in airfares. The core rate of producer prices is predicted to rise 0.3% m/m, matching the January figure. Both CPI and this reading will inform expectations for the FOMC’s preferred PCE inflation measure that is released at month-end. That is after the March 19 Fed policy decision.

Of course, the market is super wary about tariffs and their potentially inflationary impact. Firms are likely pre-emptively raising prices as long-term contracts have to take into account possible input cost increases now. This has been seen already in the Fed’s Beige Book and the recent NFIB survey. That is probably why the market was unchanged after an initial spike on the CPI release. Traders are thinking core inflation may reverse and move higher again in the coming months. That said, housing data which accounts for 40% of the core inflation basket, looks to be falling later in the year. This could offset price pressure fears.

Chart of the Day – Gold bullish breakout in play?

Concerns that tariffs might intensify inflation risks as economic growth slows are boosting demand for safe-haven assets. With trade war concerns likely to linger, gold will continue to benefit from heightened uncertainty. President Trump’s return is also triggering something of a gold rush in the US, too. Though he hasn’t specifically targeted gold with levies, traders worry the precious metal could be hit by any potential blanket tariffs.

Meanwhile, central banks will continue to buy gold as geopolitical tensions and a difficult economic environment increase demand for haven assets. For example, the People’s Bank of China (PBoC) increased gold reserves for a third consecutive month. Gold is already up around 11.5% year-to-date, establishing a series of consecutive record highs along the way in a long-term ascending channel. Prices have been relatively quiet recently, having found support at the first minor Fib retracement level at $2856. They are currently pushing above the 21-day SMA at $2911. This could be the start of a bullish break from consoldiation ahead of a move to the record high at $2956 and then the key physchological $3000 mark.

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