US recap: Dollar rallies as US data crushes forecasts again

Feb 15 (Reuters) – The dollar index gained 0.8% on Wednesday on broad-based advances following a fresh batch of far-above-forecast US economic reports, highlighted led by a 3% surge in retail sales, with chart resistance against key majors looking vulnerable.

The New York Fed manufacturing index, US manufacturing output and the NAHB housing market index added to the picture with improvements from more negative previous readings.

Taken within the context of the shockingly strong January employment report and still sizzling CPI data, the market is pricing in higher-for-longer Fed rates, now projected to peak at 5.25% and ending 2023 at 5.06%.

EUR/USD fell 0.6%, is by February’s 1.0656 low on EBS and is threatening to close below nearby supports, which would augur a broader retreat toward January’s 1.0482 low by the 38.2% Fibo of the September-February uptrend at 1.0459.

Prices were not helped by ECB President Christine Lagarde’s policy comments, which favored further rate hikes though she noted long-term inflation expectations remained near 2%.

Two-year bund-Treasury yield spreads were only marginally lower, in part due to a 5-bp rebound in 10-2-year Treasury curve inversion trades that nullified the expected rise in 2-year yields in response to inflationary US data.

The associated 4- to 5-bp rise in longer-term Treasury yields was partly a concession ahead of Wednesday’s 20-year Treasury auction.

Sterling tumbled 1.4% toward February’s 1.1961 lows, yanked lower earlier by below-forecast UK inflation data that trimmed BoE rate hike pricing and gilts yields, while Treasury and bund yields advanced.

USD/JPY rose 0.84% to well beyond important resistance near 133 and toward 2023’s 134.78 high on soaring Treasury-JGB yield spreads.

That high looks permeable given new BoJ leadership nominees that look unlikely to rush normalization of the central bank’s ultra-easy policies.

The Australian dollar plunged 1.3% amid risk-off flows stemming from the RBA and other central banks being forced to raise rates further to defeat inflation.

Thursday brings US PPI, jobless claims, Philly Fed and housing starts and several Fed speakers.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)