ING: Risk Sentiment Weakens for the US Dollar Once More

On March 13, 2025, at 08:48:12, ING’s FX analyst Francesco Pesole shared insights into the current state of the US dollar (USD) and market sentiment. His analysis reveals a complex landscape influenced by various economic factors and political developments.

Bond Market Reaction to CPI Data

The bond market’s response to the previous day’s cooler – than – expected core Consumer Price Index (CPI) data, which showed a 0.2% month – on – month (MoM) increase, was counterintuitive. Instead of reacting in a typical deflation – friendly way, the pricing of the Federal Reserve’s terminal rate edged higher, and Treasury yields softened across the yield curve. Pesole suggests that this could be due to market participants’ reluctance to fully embrace the deflationary narrative before the impact of tariffs becomes apparent.

USD Performance and Market Correlations

Since the start of the week, the US dollar has followed the movement of US Treasury (UST) yields upward. However, it has still lost ground against most of its G10 currency peers. In the past few weeks, the traditional negative correlation between the US dollar and the equity market has diminished. Currently, US stocks are trading in close alignment with US economic activity sentiment. The key uncertainty lies in whether further declines in US equities will be isolated to the US market or if European stocks will also be affected. Futures indicate the latter for the day, which means the dollar may not face significant unique pressure.

PPI Data and Market Expectations

Today’s main economic event in the US is the release of the Producer Price Index (PPI) data for February. Many components of the core PPI feed into the Federal Reserve’s preferred inflation measure, the core Personal Consumption Expenditures (PCE). As a result, markets will be closely watching this data. Given the unusual reaction to the CPI data yesterday, it’s unclear whether a lower – than – expected PPI reading today will trigger a correction in the dollar’s value. The consensus forecast is for a 0.3% MoM increase in the core PPI, but after yesterday’s CPI data, expectations may have shifted slightly lower.

Political Uncertainty and Its Impact

This morning, sentiment has been dampened by the increased risk of a US government shutdown. Senate Democrats announced that they would block a bill aimed at preventing a government shutdown. Instead, they proposed an interim funding plan until April 11. This plan would only delay a major risk for the markets, leading to a negative reaction in stock futures. Considering the current strong correlation between the US economic outlook and the dollar, this political development is likely negative for the dollar. However, ING doesn’t have a strong prediction for the dollar’s direction today. For now, a stabilization of the dollar might be possible, but in the coming weeks, there are still upside risks for the greenback.