Market Updates – March 5

Inflation remains the protagonist of another trading week and this time the focus is shifted in the eurozone, where inflation fell less than forecasted.

Core Harmonized Index of Consumer Prices in February saw an increase to 5.6%, 0.3% more of what previously anticipated while the overall consumer price growth decreased only by 0.1% from January value to 8.5%, against the forecasted 8.2% due to an increase in prices for services, goods and food.

The latest figure reinforced the view of inflation decreasing at a slower than expected pace resulting in the general belief that the ECB will keep raising rates by half a percentage point even in Q2.

The performance of the US dollar this week has been somewhat subdued, and this can largely be attributed to the behavior of EU yields, which has been a key driver of the global inflation narrative. Despite a market environment that has been generally supportive, with higher yields and weak risk sentiment, the dollar has not exhibited the strength that was initially anticipated.

The DXY index, a popular measure of the US dollar’s strength against a basket of major currencies, has experienced a recent bullish trend, thanks to a string of robust economic indicators from the United States. However, this upward momentum has been tempered by the recent stall in the DXY index rally, as investors eagerly anticipate the release of fresh economic data later this month. Currently, the closely-watched US dollar index has maintained a level of $105 for several days now, prompting market participants to closely monitor any potential shifts in sentiment.

The recent surge in US Treasury yields has presented a challenge for the overall risk landscape, causing major US indices to close the month of February with losses. Looking ahead to the first week of March, investors may face further challenges, however, history suggests that the risk environment typically improves thereafter, as the market enters a period of strength. However, It is worth noting that the recent strong economic data has provided policymakers with additional tools to potentially pursue further rate hikes. The UK’s successful negotiation of a Brexit agreement with the European Union has effectively resolved trade conflicts with Northern Ireland, signifying a significant step forward for the country’s economy. While the Brexit deal may offer some temporary respite for the pound against the USD, the ultimate gauge of currency movement will likely come from the US economy and the Federal Reserve’s monetary policies.