As we discussed in our FOMC review comment, the Fed’s pushback against a March cut has helped short-dated US rates edge a little higher and offered some support to the dollar. The strong message coming across from the Fed yesterday was that inflation and growth were moving into ‘better balance’, rate cuts would likely be coming but more data was required to give the Fed confidence to start the cycle. Beyond tomorrow’s nonfarm payrolls data, we think the annual CPI benchmarks revisions on 9 February and the January CPI release on 13 February are now going to be big dates in the Fed’s and investors’ diaries.

Also making an appearance on the market’s radar yesterday were US regional banks. New York Community Bancorp’s (NYCB) share price was marked down heavily on poor quarterly earnings, with some of the large loan loss provisions being linked to the Commercial Real Estate sector – perhaps the Achilles Heel of the strong US story. This comes at a time when the Fed’s emergency Bank Term Funding Programme (BTFP) is due to expire on 11 March. Investors will certainly heavily scrutinise this story, but those of a bullish disposition will be expecting that the US authorities, including the FDIC, would never have allowed NYCB to take over the assets of the failed Signature Bank if it were not in a strong enough position to do so.

That said, we did notice a 7bp widening of the 3m EUR/USD cross-currency basis swap on the NYCB news yesterday. Recall that this represents banks paying up to secure dollar funding and is normally associated with dollar strength. If the US regional bank crisis flares up again, keep a close watch on this basis swap, where the dollar may initially strengthen until the Fed calms funding conditions down again.

For today in the US, the calendar focuses on initial claims and ISM manufacturing. We doubt these will prove major market movers ahead of tomorrow’s US NFP release. This means that DXY should continue to grind higher towards the upper end of a 103-104 range.

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