11/03/2021

Dollar falls on soft inflation reading


USD

The dollar fell on Wednesday as February’s inflation data failed to reach expectations. U.S. inflation rose at a month-on-month pace of 0.4%, in line with market expectations, which lifted the annual rate of inflation from 1.4% to 1.7% and left it sitting just shy of the 2% target set by the Federal reserve. However the more important rate of core inflation rose by only 0.1% from January and not enough to prevent the annual rate falling from 1.4% to 1.3%. The forecast had favoured a 0.2% increase.

Core inflation ignores volatile energy and food goods as well as regulated price items like alcohol and tobacco, so is thought by central bankers to provide a more accurate reflection of true underlying inflation trends in the economy.

Furthermore the US has ramped up its vaccination program and this has bolstered expectations that the US economy is likely to grow this year going into next. Also investors believe that a brief period of runaway inflation could lead the central bank to increase interest rates a lot earlier than expected.

EUR

The European Central Bank is set to decide whether rising bond yields are such a threat to the region’s weak economy that they need to come up with a stronger response. The jump in global yields has triggered reactions among policy makers ranging from reassurance to warning signs. The euro-zone economy may not be ready to cope with higher borrowing costs, as it is lagging far behind the U.S., where a faster vaccine rollout and $1.9 trillion fiscal stimulus package are aiding the US recovery a lot quicker.

The ECB are unlikely to change its bond purchasing program and are likely to keep their deposit rate of -0.5% unchanged too. Investors however will focus on any hint that the ECB plans to deploy the much-touted flexibility of its bond program to contain yields. Furthermore the ECB will reveal updated economic projections, the first since December and a crucial justification for the assessment of whether bond yields are unwarranted or not.

Economic calendar

12:45 – EUR – Monetary policy statement
12:45 – EUR – Interest rate decision – Expected to remain unchanged at 0%
13:30 – EUR – ECB press conference
13:30 – USD – Unemployment claims – Forecast 730k from 745k


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