The US Dollar and Japanese Yen may find resistance after strong overnight rallies as soft US CPI data caps the hawkish shift in Fed policy expectations.

Talking Points

Dollar, Yen Rally as FOMC Minutes Hint at Early Fed Stimulus Unwind
Euro Plunges as PMIs Disappoint, Boosting to ECB Stimulus Expectations
Soft US CPI May Cap Hawkish Shift in Traders’ FOMC Policy Outlook

The Japanese Yen and soared overnight and continues to push higher in early European trade as risk aversion grips financial markets, stoking an unwinding of carry trades funded in the low-yielding currency and boosting safe-haven demand. The MSCI Asia Pacific regional benchmark equity index fell 1.5 percent and European shares are down close to 0.5 percent on average thus far.

The selloff reflects a reaction to the hawkish tone found in minutes from January’s FOMC meeting as traders fret about the implications of unwinding stimulus in the world’s largest economy on its still-fragile recovery. The US Dollar is likewise capitalizing in the aftermath of the Fed release as traders scale back the degree of QE dilution threatening the benchmark currency in the months ahead.

The Euro is bearing the brunt of the selloff after February’s preliminary Eurozone PMI numbers fell short of economists’ expectations, showing the pace of contraction in manufacturing- and service-sector activity accelerated. The outcome hints that recession will push the ECB to introduce new stimulus as LTRO repayments shrink the central bank’s balance sheet, acting as de-facto tightening of monetary policy and compounding an already dismal growth landscape.

Looking ahead, US Consumer Price Index figures come into the spotlight. Consensus forecasts point to a slight tick lower on the headline year-on-year inflation rate, down to 1.6 percent in January from 1.7 percent in the prior month. The outcome would mark the third consecutive decline as well as the lowest reading since July 2012. That may pour a bit of cold water on the nascent hawkish shift in traders’ Fed policy expectations, capping Dollar and Yen gains.

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