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EUR/USD

During yesterday's session, the euro jumped after scorching CPI numbers for the United States, but the gains were quickly erased. The bearish pressure persisted until the end of the session and the pair closed around the daily lows, with prices testing the bottom from the beginning of March. In the early hours of today, a pullback move is developing, and it is expected to be limited by the resistance at 1.0850. If such a scenario is to develop, the breach could be considered as confirmed and the downtrend should continue. The mood remains bearish, as a breach in the area at around 1.0810 could plunge prices towards 1.0730 and 1.0640. A possible recovery towards 1.0900 would defer the bearish pressure, allowing trading to continue in the 1.0850 – 1.0940 range.

USD/JPY

The pair ended the day almost unchanged and the uptrend is still spared from deep retracements. The expectations are for the trading action to slow around the resistance of 125.75 – the peak zone from 2015. If this zone is overcome, then prices are likely to set a record not seen in nearly 20 years. This type of movement belongs to the highest timeframes and it is possible that the bears will continue to be stuck. The first daily support for buyers is 124.74, followed by the already confirmed zone at 124.00.

GBP/USD

The sterling slowed the declines and is currently range trading within the support at 1.2988 and the resistance at 1.3050. The bulls' attempts to overcome the resistance were quickly suppressed and the pair ended the day in the red. The bears are therefore expected to overcome the support at 1.2988 and the decline is to continue towards 1.2845. First resistances for the bulls are 1.3050 and 1.3165, but a recovery towards the resistance at 1.3100 so far seems unlikely.

EUGERMANY40

The German index slowed its decline, but the session still ended with losses. On the analysed timeframe the trend is rather negative, but when analysing the higher ones, the market is trading in a range and prices are currently found under its support. If the prices stay above 14050, then yesterday's decline could be interpreted as an attempt by the bulls to generate liquidity and prepare for a bearish squeeze. April is seasonaly good for the capital markets and so it is possible for the bulls to muster another attack on 14835. Their first resistances are 14360 and 14560, while the supports are found at around 14050 and 13880.

US30

The situation with the U.S. blue chips is similar to that of the EUGERMANY40. The index made several false breaches of the 34300 support and the chart is about to form a double bottom with bullish divergence. With the onset of April, which is seasonally strong for the market, as well as the first quarter earnings season, rallies with targets of 35310 and 35500 can be expected, with the sentiment already seeming negative enough to realise such scenarios. Today, increased activity can be expected around the announcement of the U.S. producer price index at 12:30 GMT.

The US Dollar started a steady upward move above the 124.50 resistance against the Japanese Yen. The USD/JPY pair traded above the 125.00 level to move further into a bullish zone.

The pair even traded above 125.50 and settled above the 50 hourly simple moving average. A high is formed near 125.75 and the pair is still showing positive signs. An immediate support is near 125.35.

The next major support sits near the 125.25 level and a connecting bullish trend line on the hourly chart, below which there is a risk of more downsides. In the stated case, the pair could decline towards the 124.80 level.

On the upside, an immediate resistance is near the 125.75 level. A clear break above the 125.75 resistance could push the price towards 128.20 on FXOpen. The next major resistance is near the 128.80 level or 129.00.

BoJ Governor Haruhiko Kuroda said in a speech today that the economy was expected to pick up on improvement in consumption and robust overseas demand. "The outlook, however, remains highly uncertain due to the impact of the pandemic, as well as developments regarding Ukraine and the impact on commodity prices," he warned.

Additionally, "recent rising inflation, driven by higher import costs, weighs on Japan's economy by reducing households' real income and corporate profits," Kuroda said. "BOJ will underpin economy's recovery from pandemic by patiently sustaining current powerful monetary easing."

Markets

Yesterday’s US CPI caused investors to take a step backward and assess the standing uptrend in US/global yields. Both the headline CPI (1.2% M/M and 8.5% Y/Y) and core (0.3% M/M and 6.5% Y/Y) reached the highest levels since 1981/1982, but contrary to previous months, there was no upside surprise. Core inflation even rose less than expected. The jury is still out whether this marked some kind of peak. Even if so, a more important question is whether this will be start of a real and protracted slowdown (decline in M/M dynamics).

Whatever, after touching cycle peaks for yields at maturities longer than 5 year earlier, US bonds were caught in a ‘profit taking short-squeeze’. The US yield curve steepened with the 2-y/5-y easing 9.2/9.5 bps, the 10-y lost 5.9 bps. The 30-y still gained marginally (+0.1 bp). Markets now will look out for further Fed communication on frontloading of policy normalization. We don’t expect any change of the (hawkish) tone yet.

EMU markets showed a similar steepening move (German 2-y -5.3 bps, 30-y + 1.9 bps), but the correction was more modest as investors were looking forward to the assessment at the ECB meeting tomorrow.

The easing in the bond sell-off initially propelled US equities. However, headlines from Russian president Putin that talks with Ukraine were ‘at a dead end’ dampened optimism. Major US  indices closed about 0.3% lower.

The correction on US yields didn’t hurt the dollar. On the contrary: DXY closed north of 100 for the first time since May 2020. EUR/USD immediately after the US CPI release touched the 1.09 area, but the move lacked momentum and persistent uncertainty on the war in Ukraine/Putin comments didn’t help. EUR/USD closed at 1.0828, within reach of the YTD low of 1.0806. USD/JPY also closed little changed at 125.38.

This morning, the pause in the US yield rally also gives some breathing room for Asia. Equity markets mostly trade in positive territory with Japan outperforming. The dollar remains well bid. USD/JPY (125.60) is again with reach of the 2015 top (125.86).

Later today, the calendar contains the US PPI (headline expected to rise to 10.6%). However, we doubt this report will change markets’ assessment after yesterday’s CPI release.

On interest rate markets, we look out whether yesterday’s correction as further to go. The picture/trend especially for LT yields both in the US and Europe hasn’t changed in any profound way. Especially in Europe, an ongoing rise in inflation expectations supports yields at longer maturities.

On FX markets question is whether EUR/USD can avoid a return/break of the 1.0806 YTD low. Probably a convincing anti-inflation message from Lagarde an Co is needed to ‘save’ the euro.

his morning, both UK core (5.7% Y/Y) and headline CPI (7.0% y/y) surprised on the upside. It questions recent soft BoE speak. Even so, sterling hardly gains in a first reaction (EUR/GBP 0.8330).

News Headlines

The Reserve Bank of New Zealand stepped up its tightening cycle by unexpectedly raising its policy rate by 50 bps (to 1.5%) instead of 25 bps like at the previous three meetings. The MPC also agreed to continue to tighten monetary conditions at pace even as they remain comfortable with the outlook as outlined in February. This implies a 2.2% policy rate end this year and 3.3% by end of 2023. Moving the policy rate to a more neutral level sooner, reduces the risks of rising inflation expectations. A larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment. First local signs come from weakening consumer confidence (eco uncertainty + inflation) and a reduction in mortgage demand and house prices (rise in mortgage rates). The NZD swap curve bull steepens this morning (up to 15 bps lower for 2-y tenor) as markets ran ahead of their selves and the February RBNZ guidance. The MPC sticking to that view now triggers some return action despite the 50 bps rate hike. NZD/USD attempted to take out the 0.69 big figure, but failed to do so and tumbled to the low 0.68-area

Bloomberg reports that China is allowing Shanghai, Guangzhou and six other cities to shorten quarantines for overseas travelers and those who’ve had a close contact with infected individuals from 14 days to 10 days as authorities test potential tweaks to the country’s rigorous Covid-measures. Apartment complexes, retail outlets and office building will also be allowed to reopen more quickly. The trial period will run for a month.

St Louis Fed President James Bullard said in an FT interview, there's "a bit of a fantasy" in current policy in centrals banks to think thank inflation could be brought down by moving interest rate to neutral.

"Neutral is not putting downward pressure on inflation. It's just ceasing to put upward pressure on inflation," he said. "We have to put downward pressure on the component of inflation that we think is persistent."

"Getting to neutral isn't going to be enough it doesn't look like, because while some of the inflation may moderate naturally . . . there will be a component of it which won't," he added.

Bullard also warned that this week's CPI report just " underscores the urgency that the Fed is behind the curve and needs to get moving."

"If markets and households get the idea that the Fed's not going to do the right thing and not going to keep inflation under control, then you have to gain credibility by actually doing things that show them that you are serious," he said.

UK CPI rose 1.1% mom in March, above expectation of 0.7% mom. For the 12-month period, CPI accelerated from 6.2% yoy to 7.0% yoy, above expectation of 6.7% yoy. That's the highest rate in the historic modeeled series since March 1992, when it stood at 7.1% yoy. RPI rose 1.0% mom, 9.0% yoy, versus expectation of 0.9% mom, 8.8% yoy.

Also released, PPI input came in at 5.2% mom, 19.2% yoy, above expectation of 0.5% mom, 13.4% yoy. PPI output rose 2.0% mom, 11.9% yoy, above expectation of 0.7% mom, 10.2% yoy. CCPI output core rose 2.0% mom, 12.0% yoy, above expectation of 0.9% mom, 10.6% yoy.

Full CPI release here.

The FTSE 100 struggles as UK consumer confidence wanes amid geopolitical uncertainty. The index has met stiff selling pressure near the recent peak (7690).

A combination of profit-taking and fresh selling weighs on price action. Nonetheless, sentiment remains upbeat. And a bullish MA cross on the daily chart suggests strong impetus in the latest recovery.

7530 is fresh support and 7450 is the second line of defense in case of a deeper retreat. The bulls need to clear 7650 before they could regain the upper hand in the short term.

Gold rallied after US inflation in March came out less than market participants had expected. The metal’s medium-term uptrend is still intact as long as the price is above the major support at 1895.

The recent consolidation could be an opportunity for the bulls to accumulate. A break above 1965 prompted some sellers to cover. This could also pave the way for a bullish reversal.

1990 is the next hurdle and its breach may send bullion to the March high at 2070. 1940 is the immediate support in case of a pullback.

The New Zealand dollar bounced back after the RBNZ raised its interest rates by 50bp. The pair came under pressure after hitting resistance near the psychological level of 0.7000.

The kiwi then saw bids at 0.6810 near the base of a previous bullish breakout. A rally above the support-turned-resistance at 0.6900 may turn sentiment around. The next hurdle will be 0.6950.

A fall below 0.6810 could trigger a sell-off towards the daily support at 0.6740. And that is an important level safeguarding the March rebound.

US equity investors jumped on an emotional roller-coaster following the release of the inflation data in the US yesterday. The data came in at 8.5% for March, in line with expectations. This was the highest jump since 1981, and the straight 13th month read above the Federal Reserve’s (Fed) 2% policy target.

Yet, the core inflation, which filters out the impact of volatile food and energy prices, came in at lowest since September, giving some hope to investors that inflation may soon hit a high and start easing, hence get the Fed to move less hurriedly for raising the interest rates. Perhaps a wishful thinking that helped the US equities gap higher at the open, but couldn’t cement gains as all three major US indices ended the session in the negative.

US equity futures are in the positive at the time of writing, hinting at a minor rebound at today’s session, but the high energy prices, the pandemic and the war, combined with the Fed’s tied hands can’t do much to boost the investor mood. Only hope is earnings, but…

…the expectations for the bank earnings are soft this quarter. The net income for the six biggest American banks is expected to fall about 35% from a year ago, also including the major deceleration in activity in March due to the war in Ukraine and the loss due to exiting operations in Russia.

JP Morgan will announce its Q1 earnings today, and the CEO Dimon warned that the bank could lose about $1 billion on its Russia exposure. JP Morgan has been trading lower since last October despite the hawkish shift in Fed expectations. Worries that the economic slowdown could result in lower trading activity, and lower loan growth, and jeopardize the gains from higher interest margins weigh on the sector.

Banks, listed among the favourite reflation trades, haven’t proved to be resilient to the rising yields.

US’ gas tweak

Because gas prices drive more than the half of the monthly rise in inflation, US government is also rolling up its sleeves to ease the pressure at the pump. The US announced yesterday that it will allow the sale of gas with higher ethanol content – which sells with some 15% discount compared with the regular gas, to reduce the US dependence on foreign gas. But first, they need to change the anti-pollution rules as the gas with ethanol is dirtier. It looks like the worry of inflation is worse than the worry for climate change.

Crude oil made a sharp U-turn yesterday, and rebounded more than 6% as the dip-buyers piled in after the price of a barrel slipped below the $93 mark earlier this week and consolidates near the $100pb level at the time I am talking. The fact that Putin wants to continue the war in Ukraine is pointed as the major reason behind the sharp rebound. The recent rebound in oil prices come as a confirmation that the latest relief was nothing more than a temporary correction and the overall trend remains comfortably positive.

One’s misfortune is other’s happiness

But one country’s misfortune is another country’s happiness. The rally in oil prices help Russia reach a record surplus in its current account, along with the fact that the sanctions weighed on imports and triggered circa 270% capital outflows compared to a year ago.

The Institute of International Finance projects that Russia will post a record $250 billion this year, which could make up for a major part of the central bank reserves that have been frozen by the Western sanctions. It doesn’t mean that the Russian economy will do fine, as the living standards will be deteriorating heavily for households, but the regular and resilient money inflow from oil and gas sales will continue financing the war in Ukraine. So, the European ban on Russian coal, which represents about less than 5% of the money paid to Russia, won’t do much unless Europe takes the difficult step to ban oil and gas imports from Russia. For now, the EU prefers sending arms.