USD Analysis – 24th of February

USD remains the strongest currency fundamentally, and recent inflation data has only served to reinforce the Fed’s plan to tighten policy throughout the year. However the path of hikes is likely to be gradual given the inadvertent tightening of financial conditions which has occurred in recent months, such as lower equities and a higher USD exchange rate. We continue to see the USD as a prime currency to hold against weaker currencies.

USD Analysis

Interest Rate

Fed Funds Target Rate: 0.50%

Last Change: December 16, 2015 (0.25%)

Expected Future Change: Fed Fund futures imply a 6% probability of a rate increase

Next Release: March 16

Inflation

Inflation Target: 2%

Period: Year ending January 31

CPI: 1.4% Prior: 0.7%

Core CPI: 2.2% Prior: 2.1%

Next Release: March 16

PCE: 0.6% Prior: 0.4%

Core PCE: 1.4% Prior: 1.3%

Next Release: February 26

Employment

Month: December

Non-Farm Employment Change: 151,000 Expected: 190,000

Unemployment Rate: 4.9% Expected: 5.0%

Average Hourly Earnings: 0.5% Expected: 0.3%

Next Release: March 4

Growth

Period: Q4 (annualised)

Advanced GDP: 0.7% Expectation: 0.8%

Next Release (Preliminary GDP Q4): February 26

The USD has traded mixed since the turn of the year – appreciating against the pound and depreciating against the yen. During the second half of February the buck has also begun to strengthen against the euro and, to a lesser degree, commodity-linked currencies. Data has been positive of late, and the most important metrics – inflation – beat estimates for the January CPI readings. In addition, Producer Prices and Retail Sales saw positive results for January, which also provide a hopeful outlook for upward price pressures.

At the January Fed meeting, the minutes revealed a more cautious Fed with most members agreeing that it would be important to closely monitor global economic and financial developments and to continue to assess their implications for the labour market and inflation. Many members judged that uncertainty regarding the outlook had increased.

The December employment report was solid despite a miss on the headline change of 151,000, below estimates of 190,000. The robustness of the release was found in Average Hourly Earnings which ticked up to 0.5% and the Unemployment Rate which dropped to 4.9% – both beating expectations. The results shows the US labour market remains strong. The USD appreciated across the board following the release.

Consumer Price Index inflation measures for January beat estimates across all components; headline CPI was at 1.4% y/y (exp. 1.3%) and flat for the month (exp. -0.1%), while core CPI at 2.2% y/y (exp. 2.1%) and 0.3% m/m (exp. 0.2%). These results are impressive and no doubt reassure the Fed that underlying inflation is moving towards the 2% target. After 11 consecutive months of Core PCE failing to break above 1.3%, Core PCE hit 1.4% y/y for December. The m/m figure was flat, below expectations of a 0.1% increase. Headline PCE was at 0.6% y/y, in line with expectations but also the highest reading since February 2015.

Growth for the first fourth quarter reading was at 0.7% annualised, down from the final third quarter reading of 2.0%. The biggest drag on economic growth was a fall in household consumption which accounts for 70% of economic activity. The next GDP data release will be the preliminary reading on February 26.

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