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Italian ECB Governing Council Member Fabio Panetta urged the central bank to steer its attention toward inflation projections rather than attempting to anchor policy decisions on the elusive concept of the “neutral interest rate” or R-star.

In a letter to the Financial Times, Panetta argued that the neutral rate is an invisible target that can only be approximated using models and surveys that are “riddled with uncertainty,” especially in today’s volatile environment.

Panetta warned against ECB becoming “fixated” on labeling its stance as restrictive based on R-star estimates, calling. Instead, he emphasized that the ECB’s efforts should remain firmly grounded in assessing inflation data and determining whether monetary policy is appropriately calibrated to bring inflation sustainably back to the 2% target.

Markets

After a rather clear, straightforward narrative earlier this month including a presumed European reflation and at the same time risks for the US to slip into stagflation dynamics, global markets this week entered a more erratic wait-and-see pattern. Amongst others, the April 2 ‘Liberation Day’ tariffs are looming large. The March US consumer confidence (Conference Board) confirmed the stagflation mix seen in other sentiment indicators of late. The headline index declined from 100.1 to 92.9, but expectations nosedived (74.8 from 65.2, the lowest in 12 years). Inflation expectations for the next 12 months rose further from 5.8% average to 6.2%. US yields reversed an initial up-tick with yields closing the session lower between 2.6 bps (5-y) and 0.4 bps (30-y). In an FT article this morning, Fed Goolsbee indicated that if market-based long-term inflation expectations would move toward recent rises in survey expectations, this would be a red flag which the Fed would have to address ‘almost regardless of the circumstances’. Overall Goolsbee indicated that wait-and-see remains the preferred approach when ‘there’s a lot of dust in the air’. Equities showed some intraday swings but closed in green on both sides of the Atlantic, Europe this time outperforming (S&P +0.16%, Eurostoxx 50 +1.09%). No clear trend in the dollar. DXY ran into resistance after recent rebound (close 104.18). Even so, also the euro failed to profit (EUR/USD close 1.0791).

This morning, Asian equities mostly show limited gains, but caution prevails going into the end of the quarter and the April 2 deadline. Later today, the eco calendar in EMU is thin. In the US, the February durable goods orders will only be of intraday importance. The US CBO gives an estimate on when the country reaches its debt ceiling. The Goolsbee comments, alongside last week’s Fed dots in theory should help to put a floor for US (ST) yields. EUR/USD struggles to avoid further losses below 1.08. The UK ONS reported UK headline inflation slightly lower than expected at 0.4% M/M and 2.8% Y/Y (from 3.0%). Core inflation also eased to 3.5% from 3.7% (3.6% expected), but services inflation remains elevated at 5.0%. Sterling is ceding modest ground after the release (EUR/GBP 0.8345). Question is whether this provides enough room for the BoE to continue further easing in May. UK Chancellor Rachel Reeves will present the Spring Fiscal update. The Office for Budget responsibility in a new forecast might signal lower growth and higher inflation, further pressuring UK finances. Reeves is expected to respond with additional spending cuts (£10bn?). A restrictive fiscal policy in theory turns the focus to monetary policy (if there is room) and ceteris paribus also shouldn’t be great news for sterling.

News & Views

Moody’s warned the US for a deteriorating fiscal outlook, saying that president Trump’s policies including trade tariffs and unfunded tax cuts could in fact do more harm than good for government revenues. Moody’s is the last of the three major ones to have assigned the US a topnotch AAA-rating. It downgraded the outlook to negative in November 2023 though over entrenched political polarization and worrying fiscal developments. Moody’s said yesterday the situation has only deteriorated further since. “Fiscal strength is on course for a continued multiyear decline” even in very favorable economic and financial scenarios, it added. And while Moody’s assumes a still strong and resilient US economy, it said that these “formidable strengths” may no longer offset widening fiscal deficits and declining debt affordability. The rating agency also warned for the significant long-term consequences that the US policy agenda on trade, immigration, taxes, federal spending and regulations could have as it reshapes not only the US but also the global economy.

The Hungarian central bank (MNB) kept policy rates as expected steady at 6.5%. They won’t be lowered any time soon either with the new governor Varga in his first presser pointing to a deterioration in the inflation outlook. While inflation likely peaked in February (5.6%), strong price dynamics in market services point to higher prices throughout the year, the central bank statement reads. In the upwardly revised projections, CPI won’t return to the central bank 3% +/- 1 ppt tolerance band before the beginning of 2026 and hit the mid-point by the end of that year. Forecasts for this year were put sharply higher, from 3.3%-4.1% to 4.5%-5.1%. Inflation risks remain tilted to the upside. Private consumption is expected to drive economic growth with recovering external demand (exports) adding to that over the medium term. GDP should grow by 1.9-2.9% in 2025 and 3.7%-4.7% in 2026. The forint closed at a slightly weaker level against the euro in volatile trading. EUR/HUF remains just south of 400 though. Hungarian swap yields dropped sharply, up to 20 bps, suggesting the market pricing was getting stretched. Virtually no cuts were priced in for this year prior to the central bank decision..

Daily Pivots: (S1) 1.0769; (P) 1.0800; (R1) 1.0822; More...

Intraday bias in EUR/USD remains neutral for the moment. Corrective pattern from 1.0953 could extend with another fall. But downside should be contained by 38.2% retracement of 1.0358 to 1.0953 at 1.0726 to bring rebound. On the upside, break of 1.0953 will resume the rally from 1.0176 towards 1.1274 key resistance.

In the bigger picture, prior strong break of 55 W EMA (now at 1.0675) suggests that fall from 1.1274 (2024 high) has completed as a three wave correction to 1.0176. Rise from 0.9534 is still intact, and might be ready to resume. Decisive break of 1.1274 will target 100% projection of 0.9534 to 1.1274 from 1.0176 at 1.1916. Also, that will send EUR/USD through a multi-decade channel resistance will carries larger bullish implication. This will now be the favored case as long as 1.0531 resistance turned support holds.

Daily Pivots: (S1) 149.33; (P) 150.14; (R1) 150.72; More...

Intraday bias in USD/JPY remains neutral at this point. Strong resistance is still expected from 150.92 to complete the corrective recovery from 146.52. On the downside break of 148.17 support will bring retest of 146.52 first. Sustained trading below 61.8% retracement of 139.57 to 158.86 at 146.32 will resume the fall from 158.86 to 139.57 support. However, firm break of 150.92 will argue that fall from 158.86 has completed and turn bias back to the upside for 154.79 resistance next.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low), with fall from 158.86 as the third leg. Strong support should be seen from 38.2% retracement of 102.58 to 161.94 at 139.26 to bring rebound. However, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 1.2909; (P) 1.2938; (R1) 1.2974; More...

Intraday bias in GBP/USD remains neutral first. On the downside, break of 1.2886 will resume the correction from 1.3013 and turn bias to the downside. But downside should be contained by 38.2% retracement of 1.2248 to 1.3013 at 1.2721 to bring rebound. On the upside, break of 1.3013 will resume the rally from 1.2099.

In the bigger picture, up trend from 1.3051 (2022 low) is not completed. Resumption is expected after corrective pattern from 1.3433 completes. Next target will be 1.4248 key resistance. This will now remain the favored case as long as 1.2099 support holds.

Daily Pivots: (S1) 0.8801; (P) 0.8825; (R1) 0.8850; More…

Intraday bias in USD/CHF remains neutral. Consolidation from 0.8757 is still in progress. In case of stronger recovery, upside should be limited by 0.8911 support turned resistance. On the downside, break of 0.8757 will resume the fall from 0.9200 to 61.8% retracement of 0.8374 to 0.9200 at 0.8690. Sustained break there will pave the way back to 0.8374 support.

In the bigger picture, rejection by 0.9223 key resistance keep medium term outlook bearish. That is, larger fall from 1.0342 (2017 high) is not completed yet. Firm break of 0.8332 (2023 low) will confirm down trend resumption.

Daily Pivots: (S1) 0.6278; (P) 0.6302; (R1) 0.6327; More...

Intraday bias in AUD/USD remains neutral for the moment. On the downside, firm break of near term trend line support (now at 0.6262) will argue that corrective pattern from 0.6087 has already completed. Intraday bias will be back on the downside for 0.6186 support. Further break there will solidify this bearish case and target 0.6087 low. For now, in case of another rise, upside should be limited by 38.2% retracement of 0.6941 to 0.6087 at 0.6413.

In the bigger picture, fall from 0.6941 (2024 high) is seen as part of the down trend from 0.8006 (2021 high). Next medium term target is 61.8% projection of 0.8006 to 0.6169 from 0.6941 at 0.5806. In any case, outlook will stay bearish as long as 55 W EMA (now at 0.6467) holds.

Daily Pivots: (S1) 1.4254; (P) 1.4294; (R1) 1.4316; More...

Intraday bias in USD/CAD is mildly on the downside with current fall. Break of 1.4238 support will argue that corrective pattern from 1.4791 has already started the third leg. Deeper decline should be seen to 1.4150 support next. On the upside, above 1.4400 resistance will turn intraday bias neutral again first.

In the bigger picture, long term up trend is tentatively seen as resuming with prior breach of 1.4667/89 key resistance zone (2020/2015 highs). Next target is 100% projection of 1.2401 to 1.3976 from 1.3418 at 1.4993. This will remain the favored case as long as 1.3976 resistance turned support holds (2022 high), even in case of deep pullback.

Daily Pivots: (S1) 0.9508; (P) 0.9531; (R1) 0.9549; More....

Intraday bias in EUR/CHF remains neutral for the moment. While pull back from 0.9660 might extend lower, further rally is expected as long as 0.9489 support holds. On the upside, above 0.9581 minor resistance will bring retest of 0.9660 first. Further break there will resume whole rise from 0.9204.

In the bigger picture, prior strong break of 55 W EMA (now at 0.9487) is a medium term bullish sign. Sustained break trading above long-term falling channel resistance (at around 0.9618) would suggest that the downtrend from 1.2004 (2018 high) has bottomed at 0.9204. Stronger rally should then be seen to 0.9928 key resistance at least.

Daily Pivots: (S1) 193.46; (P) 194.24; (R1) 194.84; More...

Range trading continues below 194.89 in GBP/JPY and intraday bias stays neutral. On the upside, above 194.89 will resume the rebound from 187.04 towards 198.94 resistance. On the downside, break of 190.71 will bring deeper fall back to 187.04 support. Overall, corrective pattern from 180.00 is still be extending.

In the bigger picture, price actions from 208.09 are seen as a correction to rally from 123.94 (2020 low). Strong support should be seen from 38.2% retracement of 123.94 to 208.09 at 175.94 to contain downside. However, sustained break of 152.11 will bring deeper fall even still as a correction.