US Dollar Slides as Markets React to February Inflation Report and Tillerson's Departure

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“The Trump firing of Tillerson is giving GBP a further boost on the back of a general US Dollar sell off,” says Neil Jones, Head of Corporates & FIG at Mizuho Bank.

The US Dollar reversed earlier gains and slipped lower during noon trading in London as markets responded to the latest volley of US inflation figures and the departure of another key member of the Trump administration in Washington.

Headline US inflation rose 0.2% in February, down from the 0.5% seen in January, but making for an annual rate of 2.2%. This was in line with the market consensus.

Core inflation, which removes volatile food and energy prices from the goods basket and so is seen as more representative of domestically generated inflation pressure, also rose by 0.2% in February.

This makes for an annual rate of 1.8% core-inflation, which is also in line with the market consensus.

Inflation figures matter for markets because it is consumer price pressures that central banks are attempting to manipulate when they tinker with interest rates.

February’s numbers will have done little to support speculation the Federal Reserve will raise US interest rates four times in 2018 rather than the three times it managed last year, but shouldn’t have undermined it either.

“This report seals another interest rate hike from the Fed at next week’s FOMC meeting and we continue to expect four hikes in total this year,” says Paul Ashworth, chief North American economist at Capital Economics.

The Pound-to-Dollar rate was quoted down 0.34% higher at 1.3951 following the release Tuesday, after reversing an earlier loss, while the Euro-to-Dollar rate was 0.25% higher at 1.2367. The USD/CAD rate was 0.07% higher at 1.2851 after scaling back a previously larger gain.

Given the broadly neutral outcome of the February inflation report, the Dollar’s reaction is curious and could be the result of the White House having announced the departure of another high level official at the same time as the price data were released.

“The Trump firing of Tillerson is giving GBP a further boost on the back of a general US Dollar sell off,” says Neil Jones, Head of Corporates & FIG at Mizuho Bank.

President Donald Trump announced on Twitter Tuesday that Secretary of State Rex Tillerson has been replaced by Central Intelligence Agency head Mike Pompeo, marking the second high level departure from the President’s administration in the last week.

Mike Pompeo, Director of the CIA, will become our new Secretary of State. He will do a fantastic job! Thank you to Rex Tillerson for his service! Gina Haspel will become the new Director of the CIA, and the first woman so chosen. Congratulations to all!

— Donald J. Trump (@realDonaldTrump) 13 March 2018

Last week, National Economic Council director Gary Cohn left the White House in the wake of President Trump’s decision to impose new tariffs on imports of aluminium and steel from the rest of the world. High levels of turnover in the White House may have prompted concerns by the market about the stability of the US administration.

Federal Reserve in Focus

The Federal Reserve is widely expected to announce its first 2018 interest rate rise next Wednesday, which will take the top end of the Federal Funds rate to 1.75%.

Pricing in interest rate derivatives markets, which enable investors to protect themselves against changes in interest rates and provide insight into expectations for monetary policy, implies more than a 100% probability of a rate hike next week.

Those same markets imply the top end of the Federal Funds rate range will be just less than 2.25% on Wednesday December 19, suggesting they are less convinced about the prospect of the Federal Reserve managing four rate hikes this year rather than the three it announced in 2017.

“The comments over the past few weeks have given rise to the impression of a slightly more hawkish Fed, with the market likely to be looking for confirmation of this view in the statement. A positive outlook for the economy and inflation is likely to provide support for the dollar. But today’s inflation data might already provide the foundation for more dollar strength,” says Antje Praefcke, an analyst at Commerzbank.

Markets will scrutinise the Federal Reserve’s interest rate statement closely next week for changes in its members projections of rates over the coming years, as well as for new commentary on inflation. February’s price data will make an important contribution to policymakers’ views on the outlook.

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