US recap: Latest strong US data fails to trigger EUR/USD breakdown

Feb 16 (Reuters) – The dollar index was little changed after earlier gains on US PPI and claims data that lifted Treasury yields and Fed hike pricing, somewhat subdued by sour housing and Philly Fed reports and doubts about how much more tightening markets can realistically factor in.

Though most February’s US data has been surprisingly strong and inflationary, the market is finding it difficult to price in a Fed rate peak above 5.25%, though the year-end view has rebounded more than 50bp to 5.05% since the Feb. 2 payrolls shock.

Two-year Treasury yields are now up 56bp from Feb. 2’s lows, while 2-year bund yields are up 42bp, during which time EUR/USD fell 3.4% to find support Monday and Thursday at 1.0656/55 by the daily cloud top.

Federal Reserve Bank of Cleveland President Loretta Mester, a non-voter, said she thought the Fed ought to have raised rates by 50bp, not 25bp, at its last meeting, boosting the rebound in Treasury yields and the dollar initially, though both faded into the London close and New York afternoon.

And the recent consolidation of the dollar’s post-payrolls and CPI gains could persist in the absence of top-tier US data until next Friday. That day’s Japanese CPI release and nomination hearings for the BoJ’s new leadership picks could also create some volatility.

With the BoJ quadrupling the repo rate on various 10-year JGB issues to keep yields below the 50bp yield curve cap, potential policy normalization remains on traders’ radar, even if more on the periphery for now.

EUR/USD rose 0.07% and USD/JPY fell 0.32% and sterling slid 0.11%, as BoE Chief Economist Huw Pill acknowledged some loosening in the tight labor market and as the market no longer fully prices in two more 25bp rate hikes.

AUD/USD recovered from the 6-week lows made after another weak employment report.

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