Forex Trading Library

US Key Data, And the Dollar’s Future

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The dollar will have a pretty active week, with several key data points being released starting with Durable Goods Orders later today. The next event is Thursday’s release of the Fed’s preferred inflation measure, PCE (the last before the next meeting). Depending on how that goes, US personal income and spending could also end up riling up markets.

The main issue is that traders seem to have become quite comfortable in expecting that the US will have its vaunted “soft landing”. The relatively strong economic growth – the US has the best economic performance among advanced economies – will keep up inflationary pressures. That would imply the Fed would have to keep rates high.

The Dwindling Rate Cut Hopes

Keeping rates high doesn’t necessarily mean no cuts. The Fed could adjust the reference rate down a couple of times during the year, and interest rates would still be much higher than they were pre-pandemic. That is the scenario that the Fed has advanced, and the market so far has rejected. Traders are betting on the Fed cutting much more than that, though now the consensus is for five cuts this year, instead of the six originally priced in at the end of last year.

That explains why the dollar has remained relatively strong so far this year, and what it will take to keep the greenback from weakening. The US economy would have to continue to show signs of growth, which would keep inflationary pressures in place. That would give the Fed the room and the incentive to keep rates high. A sudden disappointment in key indicators of economic health (such as durable goods or PMI), or drop in inflation (such as PCE), could quickly bring back market hopes for more rate cuts.

What to Look Out For

First up: Some worrying signs. US Durable goods are expected to show a -4.0% drop compared to flat growth in the prior month. This indicator is important for the economy, because it shows many businesses are investing in the long term, expecting the economy to grow. But that sudden drop has an explanation: A large number of aviation orders that were booked previously. Excluding that, core durable goods are expected to grow at a relatively modest 0.2% rate, down from 0.6% prior.

The US will offer a second look at its GDP growth rate for the final quarter of last year, which is expected to come in at 3.3%. Though we should remember that for the third quarter, there was a revision upwards, then downwards, that shook up markets a little bit. Revisions of this figure, however, tend to be rare.

The Key Inflation Figures

On Thursday is the release of the Core PCE price index, which is closely tracked by the Fed ahead of its next rate decision in early March. That is expected to come in at 2.9%, unchanged from 2.9% prior, implying that the same inflation situation that led to the Fed to hold rates steady has persisted for another month.

Depending on whether PCE misses or beats, the market will want to look into exactly why that happened. The concurrent release of personal income and spending could provide some insight. A miss that comes with a surprise drop in personal spending might be interpreted as a sign of weakening consumer demand and could hurt the dollar. Inflation was lower than expected, but personal income and spending beating expectations could indicate to markets that the PCE figure is an outlier. That could reduce the reaction to the data.

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