US Dollar Forecast: Inflation Data May Revive Rally but SVB Meltdown Poses Risks – DailyFX

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site. See our updated Privacy Policy here.
Recent Market News Headlines
Free Guide
Introduction to Forex News Trading
Recent Trading Strategies Headlines
Free Guide
The Fundamentals of Range Trading
Recent Currencies Headlines
Recent Commodities Headlines
Recent Stocks Headlines
Recent Cryptocurrencies Headlines
Free Guide
How to Use IG Client Sentiment in Your Trading
Trading Tools
Live forex rates at a glance
Earnings Calendar
Keep track of companies that are about to announce their earnings
Discover who is going long and short
Check what kind of trader you are
Economic Calendar
Explore key global events on the horizon
Live Chart
Latest price data across forex and major assets
Support & Resistance
View S&R levels for forex, commodities and indices
View All Tools
Economic Calendar
Free Trading Guides
Forex for Beginners
Traits of Successful Traders
Cryptocurrency Trading
Notify me about

Note: Low and High figures are for the trading day.
Note: Low and High figures are for the trading day.
Note: Low and High figures are for the trading day.
Note: Low and High figures are for the trading day.
Note: Low and High figures are for the trading day.
Note: Low and High figures are for the trading day.
Most Read: Euro Week Ahead Forecast – Will ECB Hawks Gain the Upper Hand on Rate Hikes?
The U.S. dollar, as measured by the DXY index was on track for a positive week following Powell’s hawkish comments on Tuesday and Wednesday, but a steep decline in Treasury rates on Thursday and Friday turned the tables, leading the currency benchmark to give up gains and end about flat in the five-session span.
Heading into the weekend, government bond yields dropped like a rock, plunging the most since 2008, as traders repriced lower the Fed’s hiking path despite the solid February U.S. employment results. For context, the U.S. economy added 311,000 jobs in February, well above consensus estimates, but average hourly earnings were slightly weaker than anticipated, clocking in at 0.2% m-o-m and 4.6% y-o-y, a tenth of a percent below Wall Street forecasts.
Softening wage growth is encouraging, but this metric has been very volatile and subject the frequent revisions in recent months, signaling that it may not be reliable as a turnaround signal or as an indicator of less tightness in the labor market. So why have expectations about the monetary policy outlook shifted in a more dovish direction over the past 48 hours, as shown in the chart below, which points to an FOMC terminal rate of 5.28 % versus 5.70% on Wednesday?
Source: TradingView
Recent bond market dynamics may be related to banking sector stress sparked by the Silicon Valley Bank (SVB) meltdown. The collapse of this institution, which was shut down on Friday by regulators to protect depositors, has increased fears of broad financial contagion, bringing to the surface hidden risks in the industry and its vulnerability to the current environment of rapidly rising borrowing costs.
Although liquidity concerns have been rising in the wake of the FOMC’s forceful tightening campaign, most large banks remain well capitalized despite losses in their long-term investment portfolios, suggesting that the SVB’s troubles have not yet reached a systemic level. This means that the downward correction in yields may be exaggerated and therefore transitory.
Focusing on next week’s CPI report, the annual headline index is seen downshifting to 6.0% from 6.4%, while the core gauge is forecast to ease to 5.5% from 5.6%. In terms of possible scenarios, softer-than-anticipated data could ease wagers on a half-point FOMC rate rise in March, tilting expectations more firmly in favor of a quarter-point hike. On the flip side, hotter-than-forecast results could set the stage for faster monetary tightening, leading to a higher terminal rate. The latter case appears more plausible at this time.
As for the US dollar, its recent decline may be short-lived. If rates reprice higher again on the back of hot data, the greenback is likely to resume its recovery in short order. If turbulence intensifies, risk aversion and the flight to safety may be a source of support. Only if the Fed blinks will the U.S. dollar weaken on a sustained basis, but recent comments from Chairman Powell suggest that policymakers have no intention of letting up just yet.
Written by Diego Colman, Contributing Strategist
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances. Forex trading involves risk. Losses can exceed deposits. We recommend that you seek independent advice and ensure you fully understand the risks involved before trading.

FX Publications Inc., abbreviated herein as FXP, (d.b.a DailyFX) is no longer a registered Introducing Broker with the Commodity Futures Trading Commission and is no longer a Member of the National Futures Association in the U.S. Any and all information provided by FXP is not intended for use by U.S. residents or individuals domiciled in the U.S. Information presented by FXP should be construed as market commentary, merely observing economical, political and market conditions. This information is made available for informational purposes only. It is not a solicitation or a recommendation to trade derivatives contracts or securities and should not be construed or interpreted as financial advice. Any examples given are provided for illustrative purposes only and no representation is being made that any person will, or is likely to, achieve profits or losses similar to those examples. FXP is not responsible for any trading decisions taken by persons not intended to view this material. Registered Address: 251 Little Falls Drive, Wilmington, DE 19808. FX Publications Inc is a subsidiary of IG US Holdings, Inc (a company registered in Delaware under number 4456365).
From December 19th, 2022, this website is no longer intended for residents of the United States.
Content on this site is not a solicitation to trade or open an account with any US-based brokerage or trading firm


Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top