Markets finally got the catalyst they were searching for in the front half of this week, and the United States Dollar is trading more than half a percent stronger against all G10 currencies this morning.
Overview
US CPI inflation readings printed above expectations for the third straight month in March, growing 0.4% compared with a market survey of 0.3%. The annualized figure showed prices rose 3.5% since this time last year, and annual core (excluding food and energy) prices grew 3.8%. US stock futures retreated substantially at the time of writing, treasury yields spiked, and gold prices retreated slightly.
With this morning’s upside release, it’s important to note that the last time CPI read under 3% was all the way back in June of last year, after which seasonal price pressures took hold, or at least that’s the narrative markets wanted to believe. As this morning has shown, the US may not be out of the woods just yet, and inflation may, in fact, be on the path toward a real resurgence. While not necessarily enough of an upside surprise to cause real alarm, it’s clear that the Fed (as a few speakers have shown this week) may be shifting more toward a ‘higher-for-longer’ approach. Currently, overnight swaps on the Federal Reserve show traders expect just 2 interest rate cuts this year, with the first not likely to come before July. In context, as recently as December of last year, traders believed the Fed would cut interest rates six times this year with the possibility of a seventh, so this is quite the remarkable flip in just a few months, especially given the Fed has not deviated much from Jerome Powell’s espoused path.
The larger US economic picture does remain strong, but if inflation continues to tick higher over the next few months, pressure on the Fed may be flipped in the other direction. With a late summer target in mind for the first interest rate cut (of either one or many, depending on who one asks), political pressures may also come into play ahead of the US presidential election in November. Uncertainty in markets is clearly back in a big way after today’s reading, and the week’s not over yet: PPI is due out tomorrow, along with the Bank of Canada’s interest rate decision at 10 AM today and the same from the European Central Bank tomorrow morning.
What to Watch Today…
- European Central Bank Rate Decision, Thursday
- US PPI, Thursday 8:30 AM
- UK GDP, Friday
- Monex USA Online is always open.
EUR ⇓
The single currency is finally moving against USD this morning after a flat start to the week, losing north of three-quarters of a percent of ground after the US’ hot CPI print. This all comes as the European Central Bank’s latest policy decision is due out tomorrow morning, and ECB officials are facing pressures of their own to cut interest rates to stimulate growth in the economic bloc. Currently, markets expect the first interest rate to come from the ECB in June, which, as of this morning, would place it substantially before the Federal Reserve is due to move and could spell some weakness for the EUR through Q2.
JPY ⇓
Japanese Yen rocketed through levels this morning traders have been calling a ‘line in the sand’ for potential currency intervention, losing just shy of half a percent against USD. Markets will obviously remain on high alert for any language or tangible intervention from Japanese officials on behalf of the flailing currency, now at its weakest point against USD since all the way back in 1990. BoJ Governor Kazuo Ueda said that there is ‘absolutely no chance’ that the central bank would raise interest rates simply to boost interest rates, raising the risk of intervention further this morning.
