Important calendar events
The dollar firmed on Monday, with the dollar index reaching above 100. Global bond yields have been on the rise over the past few days, with yields climbing across the US treasury curve. The US 10-year treasury note climbed up to 2.78% on Monday, for the first time since 2019, as investors anticipate a more aggressively hawkish Fed policy.
Over the past couple of weeks, Fed rhetoric has been one of the primary drivers of USD price, as markets are beginning to price in a steep rate hike of 50 base points at the Fed’s next policy meeting in May. Markets have been pricing in a total of over 225 base points of additional interest rate hikes this year, boosting the dollar.
Last week, Fed rhetoric continued in even more hawkish tones. On Thursday, FOMC member James Bullard spoke in favor of a more aggressive tightening of the Fed’s monetary policy, stating that the US Central Bank needs to raise its benchmark short-term borrowing rate to about 3.5%. FOMC members Brainard and Williams delivered speeches on Tuesday, pointing to an increasingly hawkish fiscal policy, boosting the dollar. Brainard, who is known for her comparatively dovish stance, stated in her speech that the US central bank needs to act quickly to drive down inflation, with a rapid reduction in the balancing sheet and aggressive rate hikes.
In addition, FOMC minutes released last Wednesday showed that several Fed officials were in favor of a rate hike of 50 base points last month, increasing the chances of a 50 bp increase in the Fed’s benchmark interest rate in May. FOMC minutes also signaled that the US Central Bank would reduce its bond holdings by as much as $95 billion per month.
Reports of escalating violence against Ukraine and increased sanctions on Russia have also turned investors’ interest towards safe-haven assets. The Biden administration announced new sanctions last Wednesday, targeting Russia’s largest financial institutions to increase economic pressure on Russia.
Several important financial indicators are scheduled to be released on Tuesday for the dollar, including Monthly CPI and Core CPI, 10-y Bond Auction. The CPI and PPI data, in particular, are leading indicators of inflation, and their release may cause some volatility in the currency. In addition, FOMC Member Brainard is due to speak about the economy at an online event hosted by the Wall Street Journal and her speech will be scanned by investors for insight into the Fed’s future direction.
The Euro rallied on Monday, as the reports of the French Presidential election results provided support for the currency. The results for the first round of the Presidential Elections in France showed Emmanuel Macron to be in the lead, although his adversary for the second round, Marine Le Pen, is not far behind in votes. Macron’s even marginal win, boosted the Euro, providing a promise of political stability for one of the Eurozone’s leading economies.
Even though the dollar continued going strong on Monday, the EUR/USD rate climbed as the Euro regained some of its lost ground. On Monday, EUR/USD traded around the 1.09 level. Last week, the Euro had retreated against the dollar, with the EUR/USD rate touching the 1.083 level, its lowest point since May 2020. If the currency pair goes up, it may encounter resistance at 1.118, while if it declines, support may be found at the 1.080 level.
Reports of escalating Russian attacks against Ukraine have boosted the safe-haven dollar last week, while the Euro retreated. A new round of sanctions on Russia was agreed upon by EU member states last Thursday, weighing down the Euro. According to European Commission President Ursula von der Leyen, the new ban includes the freezing of assets of several Russian banks as well as a ban on exports to Russia, including high-tech goods of up to €10 billion. More importantly, EU sanctions target the energy sector for the first time, with a ban on coal imports from Russia worth €4bn a year.
Russia’s demands for payments of energy imports in Roubles have increased concerns of an impending energy crisis in Europe, putting pressure on the Euro. Germany has already entered the initial phases of implementing an emergency gas law, preparing for rationing gas resources among its population.
The minutes of the latest ECB meeting were released last Thursday and were considered to be more hawkish than anticipated but failed to provide support for the Euro. ECB minutes indicated that many of the Central Bank’s members have expressed concern about the high inflation levels in the EU and were in favor of taking immediate steps towards monetary policy normalization.
ECB President Lagarde has stated that the growth of the Eurozone economy has been stalled by the war in Ukraine and that inflation will likely rise even further, stressing that the ECB needs to remain flexible and may alter its monetary policy in response to unforeseen inflationary and economic pressures. Europe’s headline inflation has hit a record high of 7.5%, but the ECB is trying to avert a dangerous economic effect known as stagflation, the mix of economic stagnation and high inflation rates.
The ECB has been pursuing a more cautious fiscal policy than other major Central Banks and does not plan to raise its benchmark interest rate before the end of its bond-buying program in the third quarter of 2022. As the Fed and the BOE have already raised their benchmark interest rates, the Euro remains at a disadvantage from the difference in interest rates.
Several financial data are scheduled to be released on Tuesday, such as ZEW Economic Sentiment, ZEW Economic Sentiment, German Final CPI, German WPI, and French Trade Balance. These are indicators of inflation and economic health for some of the Eurozone’s leading economies and may affect the Euro, especially before the ECB’s next meeting on Thursday.
On Thursday, April 14th, all eyes are going to be on the ECB, which is going to announce its main refinancing rate. Even though the EU Central Bank is not expected to change its benchmark interest rate at this meeting, the ensuing Monetary Policy Statement is going to be scanned closely by market participants and will likely cause some volatility for the Euro.
The Sterling plummeted early on Monday, following the release of weak economic data for the UK, but recovered later in the day. GDP, production, and trade data for the UK showed that the British economy is still struggling to recover from the effects of the pandemic.
The GBP/USD rate fell on Monday, testing briefly the 1.300 level support, before climbing back to the 1.304 level. If the GBP/USD rate goes up, it may encounter resistance at the 1.331 level and further up near the 1.341 level, while if it declines, support may be found near the 1.300 level.
New western sanctions on Russia bolstered the safe-haven dollar against riskier currencies last week. In addition, the sterling has lost ground against the dollar, due to the divergence in monetary policy between the Fed and the BOE. Although the BOE started the year with a strong hawkish policy, there are signs that its stance may soften in the coming months, weighed down by a fragile economy. In contrast, the increasingly hawkish Fed rhetoric is boosting the dollar against the pound.
BOE Governor Andrew Bailey has stressed the importance of delivering a clear message to the public regarding the BOE’s future policy. He has stated that the joint effects of COVID and the war in Ukraine on the global economy would take some time to manifest fully and, in the meantime, the BOE would need to remain cautious. Bailey has also warned that the energy crisis in the UK was going to be ‘historic’, displaying a relatively dovish stance these past couple of weeks, especially compared to the more hawkish Fed rhetoric.
UK inflation is already at a 30-year high and expected to rise further, with a peak rate close to 9% in Q4. Rising commodity prices and import costs in the UK, and especially the high costs of imported energy, are driving inflation rates even higher. A tighter fiscal policy and consecutive rate hikes though may stifle the country’s economy, forcing the BOE to perform a balancing act between bringing inflation under control and allowing for economic growth.
Several financial indicators are scheduled to be released on Tuesday for the sterling, including the Average Earnings Index, Claimant Count Change, and Unemployment Rate. These are indicators of employment and overall economic health in the UK and may affect the currency.
The Yen retreated against the dollar on Monday, with the USD/JPY rate climbing to the 125.7 level. The USD/JPY is following an uptrend and if it rises further, it may encounter resistance at the 2015 high of 125.8. If the USD/JPY declines, support might be found near the 121.3 level and further down near the 118 level.
The safe-haven dollar was boosted these past few days by reports of renewed hostilities in Ukraine and new sanctions on Russia. The Yen is also considered a safe-haven currency but has not been affected as much as other safe-haven assets by the crisis in Ukraine, and many investors have been doubting its safe-haven status. Rather, the primary driver of the Yen over the past few months has been the BOJ’s fiscal policy.
Bank of Japan Governor Haruhiko Kuroda delivered a speech on Monday at a BOJ branch manager's meeting in Tokyo. In his speech, Kuroda reaffirmed the BOJ’s commitment to a monetary easing policy. Kuroda stated that Japan’s economy is recovering from the impact of the pandemic, but stressed that the war in Ukraine has introduced a high level of uncertainty over the country’s economy. The Yen plummeted after his speech, as the BOJ’s ultra-accommodating policy is in stark contrast to the more hawkish stance of other major Central Banks.
The Bank of Japan has maintained its negative interest rate from -0.10%, while other Central Banks are moving towards a policy normalization after the pandemic and are raising their benchmark interest rates. The difference in interest rates with other major Central Banks, especially with the Fed and the BOE, puts the Yen at a disadvantage, driving its price down.
Last week Kuroda commented on the weakening Yen, expressing concern that recent yen moves have been somewhat rapid. Kuroda however, reiterated the benefits of a weaker Yen especially to Japan’s exports, although he acknowledged the added burden of the weak currency on households.
Japan’s core CPI may climb around 2% in April, similar to other countries that are expected to see a peak in inflation rates around the same time, largely due to the effect of the increase in oil prices. Japan is a net energy importer and the current energy crisis is damaging the country’s terms of trade and overall economic health. The rising cost of oil is causing goods prices to rise in Japan, with oil imports accounting for 80% of the country’s oil consumption.
Annual PPI and Annual Bank Lending data are scheduled to be released on Tuesday, which are indicators of inflation and economic health and may affect the Yen.
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