Talk of a rate hike by the ECB is growing
It appears that the European Central Bank (ECB) is preparing for the new reality of higher interest rates in a bid to fight inflation, although geopolitical developments around Ukraine continue to cloud the euro zone’s economic outlook.
Spanish ECB Vice-President Luis de Guindos backed yesterday’s dovish comments from Latvian ECB Governing Council member Mārtiņš Kazāks, who confidently endorsed the end of regular APP asset purchases in July, while forecasting a rate hike in July, September and even during as of today des noted possible over the next few months, although a rate hike decision will depend on data progress and in particular monitoring of inflation expectations and wage growth.
Expectations for a 25 basis point rate hike in July and September rose to 73% according to futures markets, triggering another bullish trend for the euro. The euro/dollar flew to a two-week high of 1.0935 before quickly slipping back below 1.0900 afterwards. Similarly, the euro/yen edged lower after almost hitting 140.00, while the euro/pound rose above its 20- and 50-day simple moving averages (SMA) to 0.8365.
Short-term yields rise; Japan’s CPI inflation eyed
Increasingly hawkish communications within the ECB also helped short-dated European government bond yields extend their rally to new highs, while longer-dated 10-year yields remained broadly neutral.
On the other hand, Japan’s 10-year equivalent again breached the BoJ’s 0.25% line to hit the 0.26% mark ahead of Friday’s (00:30 GMT) CPI inflation reading. While forecasts point to higher inflation in March, the recovery is unlikely to exceed the central bank’s target of 2.0%. Still, surprises to the upside could fuel the yield rally that is already giving the BoJ a headache.
Perhaps the battered yen could gain new purchasing power in the period that followed. However, any upside could be more sustainable if dollar/yen breaks below 127.30 – 127.00.
US jobless claims reflect tight labor market
US jobless claims fell slightly to 184k last week, more or less in line with expectations. That’s still a level that reflects an exceptionally tight labor market. Current claims fell to their lowest level since 1970, but the dollar did not react.
Even a disappointing business survey by the Fed in Philadelphia in April could not move the greenback. The survey missed expectations, pointing to rising prices and slower order intake. Encouragingly, employment, delivery times and supply chain issues appear to be improving.
central bankers speak
During early European trading on Friday, investors will be anxiously awaiting flash euro-zone PMI numbers to set new directions for the shared currency, despite Lagarde’s speech ahead of the International Monetary Fund’s virtual debate on the global economy at 5pm today Clock GMT will also be a spotlight.
Fed Chair Jerome Powell is set to deliver a speech at the same time, while Bank of England Chair Andrew Bailey is due to comment a few minutes earlier at 16:30 GMT, but his appearance is likely to do little to help the pound/dollar above the 20-day SMA at 1.3070.
Sunday’s elections in France could bode well for the euro if President Macron, who defeated his far-right rival Marie Le Pen in a televised debate on Wednesday, wins another term.
Wall Street poised for a bullish open; were stable
As for equity markets, European indices are enjoying another green day, with real estate, consumer discretionary and industrials propelling the pan-European STOXX 600 higher. Wall Street could follow suit when markets open according to US futures. It would be interesting to see if the Nasdaq 100 can clear the resistance around its 50-day SMA at $14,210. The S&P 500 is also capped by its SMAs at $4,500 while the Dow Jones is testing the March ceiling of $35,377.
Meanwhile, among commodities, crude oil futures are pushing higher to regain lost ground, but upside pressure remains muted compared to last week’s gains. Hence, the oil addicted idiot is struggling to renew its inflation rally below 1.2470 per US$.
Gold has been on the sidelines, building the bottom around $1,945/oz after pulling back from $1,998 on Tuesday.
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