NEWS / Foreign Exchange

USD Awaits Key Data

The dollar regains composure across the board on a combination of weak Japanese inflation and M&A flows hurting GBP. The dollar was hit earlier during Asian trade after comments from Richmond Federal president Jeffrey Lacker indicating that inflation expectations were anchored between 2% and 2.5%. This compares to statements made earlier in the month indicating inflation was ???not anchored enough???. Although Mr. Lacker is not a voting member at this year??™s FOMC, his views are particularly vital considering his dissenting votes last year when he demanded further rate hikes. Lacker, however, reiterate the Fed??™s overall mantra that inflation is ???uncomfortably high???.

The latest inflation figures are due today at 8:30 am when core PCE is expected to have risen 0.2% last month from 0.3% in January, pushing the year-on-year rate to 2.4% from 2.3%. This would match the y/y 2.4% rate on the February headline CPI and justify the Fed??™s inflation??™s hawkishness, thereby lending support to the dollar.

The accompanying report at 8:30 am on consumer spending will also be essential in determining early estimates for Q1 GDP. Consumer spending is seen slowing to a 4-month low of 0.3% from 0.5%, 0.7% and 0.4% in January, December and November. Personal income is seen slowing sharply to 0.3% from 1.0% in January.

At 9:45 am is the Chicago PMI release seen edging up to 49.4 in March after 47.9 in February. The expected increase may not help the dollar as long as the figure remains under 50, which means regional manufacturing remains in contraction territory. The report would be especially dollar negative if it remains below 48-48.5. But a rise above 50 should be give the dollar s sharp boost as it would draw conclusions of further stabilization in US manufacturing, particularly the national manufacturing ISM due on Monday. The combination of firming inflation and stabilizing manufacturing would not only reduce arguments of an H1 rate cut but also justify the Fed??™s ongoing inflation focus.

The final March release of the University of Michigan consumer sentiment is expected down at 88.5 from the preliminary release of 88.8, after registering 91.3 and 96.9 in February and January. Rising gasoline prices and subprime concerns impacting borrowers and equity market sentiment should continue to dampen overall consumer expectations.

Also at 10 am is the construction spending report seen down 0.4% in February after a 0.8% decrease in January. The ex-residential aspect of the report will be be under special scrutiny as it relates to the general state of the housing slowdown.

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