USD Edges Higher after UoM Report

"The outcome seems rather binary but a positive CPI surprise would be a much bigger pain trade now that the broad USD has broken downtrend resistance" - TD Securities.

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The Pound to Dollar exchange rate was nudged lower and left trading near 1.21 ahead of the weekend after University of Michigan (UoM) surveys told of an improvement in consumers' sentiment about the current economic situation and an uptick in year-ahead inflation expectations.

Dollars were bought against most currencies throughout the Friday trading session in Europe though the greenback appeared to draw further support when the University of Michigan measure of consumers' expectations for inflation ticked higher from 3.9% to 4.2%.

Long-term inflation expectations were stable within the 2.9% to 3.1% range that has confined them over the last 18-months while there was divergence between consumers' assessments of the current and future economic situation.

The index of consumer sentiment about current economic conditions climbed from 64.9 to 66.4 for the month of February while the index of consumers' expectations for the economy in the year-ahead dipped lower.

"We are looking for core prices to stay strong on a m/m basis in January as the recent relief from goods deflation is likely coming to an end. Indeed, we forecast a still firm 0.4% m/m gain in the core CPI series, which would match December's increase," says Mazen Issa, a senior FX strategist at TD Securities.

Above: Pound to Dollar rate shown at 15-minute intervals alongside EUR/USD. Click image for closer inspection. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

"The outcome seems rather binary but a positive CPI surprise would be a much bigger pain trade now that the broad USD has broken downtrend resistance. Breadth of the inflation numbers will also be important in this release," Issa writes in a Friday research briefing. 

Friday's survey data comes barely days away from the release of January inflation figures in the U.S. and after Federal Reserve (Fed) Chairman Jerome Powell and other Federal Open Market Committee members acknowledged that recent declines marked the beginning of a disinflation process. 

That process is expected to take time, however, and there is risk of setbacks along the way that could lift expectations for interest rates and lead to a less supportive environment for other currencies including the likes of Sterling. 

"It's a good thing that inflation has started to come down without it [inaudible] happening at a cost of the strong labor market," Fed Chairman Jerome Powell told David Rubenstein at the Economic Club of Washington on Tuesday. 

"If the data were to continue to come in stronger than we forecast. And we were to conclude that we needed to raise rates more than is priced into the markets or than we wrote down at our last group forecast in December, then we would certainly do that. We would certainly raise rates more," he also later said. 

Returning inflation to the 2% target is the work of the Fed's interest rate policy and the most recent assessment was that doing this might take as little as "a couple" more increases in the Fed Funds interest rates, which would lift the top end of it into a 5% to 5.25% range. 

Above: Pound to Dollar rate shown at hourly intervals alongside EUR/USD. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

December's Federal Open Market Committee forecasts were echoed on Tuesday this week when Chairman Powell said it would likely take until some time in 2024 for inflation to fall back near to the two percent target and next Tuesday's data for January will be key to how that view evolves.

The Fed’s focus on core PCE services ex-housing inflation is understandable, up to a point, given that it accounts for some 56% of the overall core measure and has proved sticky even as goods inflation has dropped sharply and leading indicators of rent inflation have rolled over," says Ian Shepherdson, chief economist at Pantheon Macroeconomics.

"If core PCE services inflation ex-housing remains elevated, even as margin re-compression pushes core goods inflation below zero, it will be much more difficult for overall core PCE inflation to return to the 2% target," Shepherdson writes in a Monday research briefing.

The most important detail in next week's Consumer Price Index inflation report will be the pace and change of inflation in the remainder of the services sector once the housing services part of it is overlooked.

This is the equivalent to the Personal Consumption Expenditures Price Index, which has been identified by the Fed as the biggest upside risk to its inflation target in the years ahead and something that is being closely watched by interest rate setters. 

Above: Pound to Dollar rate shown at daily intervals alongside EUR/USD. Click image for closer inspection. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)