Date: 13 Mar 2018

Perhaps the most intriguing aspect of the currency market’s reaction on Friday to the 313,000 rise in US nonfarm payrolls (NFP), a print that was far above prior expectations of a 200,000 increase, was how muted it was. The explanation may lie in the fact that while the NFP figure was unequivocally strong, the average hourly earnings (AHE) data, which had so spooked the market when January showed a 2.9 per cent year-on-year rise, underwhelmed. While more clement weather in February (in contrast to malign conditions in January) had left open the prospect that Friday’s AHE figure could come in below market expectations, the combination of a downward revision to 2.8 per cent to the January data, along with a 2.6 per cent year-on-year print for February, arguably stole the NFP’s thunder. That may mean today’s US Consumer Price Index (CPI) data at 1330GMT assumes even more importance. Economists polled by Reuters expect the US Labour Department to reveal that seasonally adjusted CPI rose 0.2 per cent month-on-month (m/m) in February, compared with a 0.5 per cent gain in January. Excluding food and energy, the CPI is forecast to increase by 0.2 per cent m/m in February after a January rise of 0.3 per cent.

Traders might find it more interesting to note that the same poll showed economists expecting US CPI to have advanced 2.2 per cent year-on-year (y/y) in February compared to the 2.1 percent y/y increase in January and core CPI to have risen by 1.9 per cent y/y up from 1.8 per cent in January. If core CPI does come in at 1.9 per cent y/y (especially against the backdrop of Friday’s 313,000 NFP print) the market might rationally conclude that not only is another Federal Reserve rate rise a certainty this month but that the pace of Fed hikes will also increase. The issue then would be whether fears of rising trade tensions (as a consequence of the US’ unveiling of steel and aluminium tariffs) which initially saw risk aversion, particularly evidenced in a (since-unwound) move lower in USDJPY, would be trumped (pardon the pun) by USD-positive sentiment occasioned by the prospect of a faster pace of Fed tightening. Traders may wish to keep a close eye on Tuesday’s US CPI data. It could be a game-changer.

Written by Neal Kimberley, External Currency Analyst.