FX Insights 3/12

FX sentiment will likely find itself driven by U.S. dollar risks this week as scarce data is released for the Eurozone, UK, and Canada while trade tensions remain in focus. President Trump’s statement that the U.S. is going to be “very flexible” accompanying his decision to exempt Canada and Mexico from steel and aluminum tariffs has helped abate fears of a full blown trade war. Notwithstanding, Trump hinted that new restrictions on Chinese exports may be considered, soliciting counter rhetoric from Chinese trade officials and stoking new concerns of escalation. Should trade risks materialize, safe haven currencies could benefit as emerging market currencies see demand soften.

The U.S. dollar sees many material drivers from economic releases throughout the week as well with headline inflation, retail sales, and producer inflation leading the data. New Fed Chair, Jerome Powell, received early validation in his outlook of the economy with a strong jobs report last Friday, however, inflationary surprises have proven more elusive and February’s Consumer Price Index will be expected to slow on a monthly basis.

As expected, the European Central Bank, Bank of Canada, Bank of Japan, and Reserve Bank of Australia each left monetary policy settings unchanged. In somewhat of a surprise to markets however the ECB omitted a key statement from its official policy statement which essentially removes the Bank’s easing bias. While the shift may be subtle and the Bank lowered inflation forecasts for next year, investors nonetheless saw the shift as a first step towards the end of the Bank’s asset purchase program. Core inflation released for the Eurozone this week is unlikely to provide any upside surprises but should prices remain subdued too long, the effect could be a dilution of the ECB’s forward guidance.

Outside of U.S. economic data, data in China and India will be closely scrutinized by markets. China releases data on industrial production, consumption, and fixed asset investment this week, all of interest to its trading partners given global trade tensions. In India, February CPI printed at 4.4% annualized, below expectations and January’s print. Although the Reserve Bank of India adopted a cautious tone in its February meeting, the trend in inflation may give the Bank some comfort that price pressures remain contained, thus increasing the likelihood that policy rates hold in the near future.

Sources: Bloomberg, Wall Street Journal, Reuters, Barclays, Bank of America, Econoday, 4cast

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