Lee Hardman, Currency Analyst at MUFG, suggests that the US dollar is starting the week on stronger footing following the release late last week of a package of stronger than expected US economic data.
“It was revealed that personal spending rebounded more strongly than expected in January following a weak end to last year. Both personal spending and income increased solidly by 0.5% in January reinforcing expectations that personal consumption will rebound in Q1 after moderating to an expansion of 2.0% annualized in Q4 compared to the average annualized rate of 2.6% in 2015. Economic growth in Q4 was revised marginally higher to an annualized rate of 1.0% driven by smaller drags from inventories and net trade. However, the smaller inventory drag will act as dampener on growth in Q1.
More notable was the sharp acceleration in the Fed’s preferred measure of inflation which repeated the upward surprise which evident in the CPI report. The core PCE deflator increased by a monthly rate of 0.3% in January and the annual rate jumped by 0.2 percentage point to 1.7% reaching its highest rate since February 2013.
The report provides further reassuring evidence to the Fed that actual inflation is returning back towards their goal despite transitory disinflationary pressures from the stronger US dollar and low oil prices. It is consistent with further gradual tightening from the Fed if financial conditions ease and the US economy holds up which will offer support for a stronger US dollar.
In contrast, the release of the latest German inflation report on Friday has increased downside risks ahead of the release today of the euro-zone CPI report for February. The annual rate of headline inflation in Germany fell back into negative territory declining by an annual rate of -0.2% in February which was the lowest reading since January of last year.
It has increased the likelihood that inflation in the euro-zone as a whole will fall back into negative territory as well which would further intensify pressure on the ECB to deliver more aggressive monetary easing next month. The fundamental case for more aggressive ECB easing is now more compelling than in December as economic growth in the euro-zone is also beginning to weaken.”
(Market News Provided by FXstreet)
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