Inflation and the EUR in Focus, with One Eye on the Dollar

Markets were left unguided on Wednesday, with U.S Treasury yields on the slide following comments from FED-Vice Chair Stanley Fischer speaking on Wednesday evening. Fischer’s 1-2 rate hike forecast for the year was considered too dovish for the markets, despite the comments being a carbon copy of comments made at the start of the week, a time when the markets were reeling from the failure of the healthcare bill.

Rate hike projections have been mixed this week, with voting members seemingly taking a more dovish stance, but this would perhaps be expected considering the fact that the FOMC’s March economic projections were released just weeks ago. The markets are searching for the hawks and a call for a 4^th rate hike for the year, but without the roll out of tax reforms and a fiscal stimulus package, the market’s pricing of 2 further hikes are likely to be appropriate, at least for now.

It’s been a quiet week on the economic calendar, which has left the Dollar susceptible to negative sentiment and, while voting FOMC members may be holding back from talk of an upward revision to rate path forecasts, news hitting the wires suggests that the Republicans are looking to get passed the failures of last week and ensure that there is no repeat in the coming months, once a tax reform bill is presented.

We can expect the markets to remain wary and sensitive to noise from Capitol Hill, but with 3^rd estimate GDP figures and the weekly initial jobless claims figures scheduled for release this afternoon, the Dollar could see some upside should the figures be in line with or better than forecasted.

Voting FOMC members Kaplan and Dudley are also scheduled to speak through the U.S session, which could well provide the Dollar with further direction should there be any views shared on monetary policy and the U.S economy, though there would need to be talk of a 4^th for the Dollar to move north.

Across the pond, the pound has also struggled to find direction, the pound now likely to be in limbo as the markets look ahead to the EU Brexit Summit, with no material stats out of the UK until tomorrow’s 3^rd estimate GPD and business inventory figures for the 4^th quarter. Any moves in the pound ahead of the end of April Summit will likely be driven by market sentiment towards BoE monetary policy.

The EUR is likely to take the spotlight through the European session, with Spain and Germany’s March prelim consumer price figures on the economic calendar. Speculation on ECB monetary policy has been providing strong support for the EUR in recent weeks, the Eurozone’s annual rate of inflation hitting the ECB’s inflation target. Draghi has continued to downplay the jump in inflation, attributing it to gains in oil prices, while conceding that the ECB will monitor harmonized consumer prices during the last ECB press conference.

Spain’s annual rate of inflation decelerated from February’s 3.0% to 2.3% in March, according to the figures released this morning, weighing on the EUR ahead of this afternoon’s figures out of Germany. Weaker inflation figures will certainly support Draghi’s views on inflation and, more importantly ease market expectations of a near-term rate hike by the ECB, the markets having accepted the ECB’s willingness to move on rates ahead of the asset purchase program’s maturity at the end of the year.

With the EUR on the back foot following Spain’s inflation figures, further declines are to be expected should Germany’s inflation figures disappoint ahead of the Eurozone numbers tomorrow.

At the time of the report, the Dollar Spot Index stands at 100.04, a gain of just 0.04%, with the index likely to stay within the day’s tight range ahead of today’s stats and FOMC member commentary, with the EUR down 0.26% at $1.07379 and cable down 0.16% at $1.24147, any material downside in the pound unlikely while the markets continue to speculate on a rate hike by the BoE in the months ahead.