USD consolidation phase likely to extend – BTMU

FXStreet (Barcelona) - Lee Hardman, Currency Analyst at Bank of Tokyo-Mitsubishi UFJ, notes that with USD’s price action coinciding with the sharp drop in forex volatility in February, the consolidation phase of USD will likely extend, but modest downside risks might be seen in the dollar on a weaker than anticipated US CPI reading.

Key Quotes

“The recent loss of upward momentum for the US dollar has also coincided with drop in foreign exchange market volatility during February. Key events including the agreement to extend financial support to Greece have passed without disrupting financial market stability.”

“More stable financial market conditions may encourage the tentative re-establishment of carry trade strategies in the near-term, although investors will still have to remain wary that the Fed could begin to raise rates as early as in the middle of the year. As a result the drop in foreign exchange market volatility could prove relatively short-lived.”

“The highest yielding G10 currency, the New Zealand has been one of the best performing currencies this month.”

“The main event today will be the release of the latest CPI report from the US. The report is expected to reveal a sharp temporary drop in headline inflation into negative territory in January driven by the collapse in energy prices.”

“Market attention is likely to focus more on core inflation to assess the spill-over impact from lower energy prices. Core inflation is expected to remain more stable at 1.6% in January.”

“A weaker than expected core inflation reading could pose some modest downside risk for the US dollar today by encouraging the market to push back Fed rate hike expectations until later this year.”