Keep calm and carry on (purchasing)

Last Thursday’s ECB meeting saw the ECB maintain their benchmark deposit rate at -0.5%. This came as no surprise to markets, and had been widely expected. However, the central bank also reiterated guidance that QE should end in Q3. Furthermore, the ECB left their policy statement almost entirely unchanged from the March meeting.

With the ECB telling us that the APP (asset purchase programme) is still likely to end no sooner than July, the chances of a rate hike before September this year look less compelling, taking summer breaks into consideration, although the ECB’s Lagarde did at least keep the option of a July rate hike on the table.

It is long-term inflation that matters

On Inflation, Lagarde did point out that longer-term inflation expectations were showing tentative signs of moving above the ECB’s 2% target level. This is a much more worrisome issue for markets, and it could lead to a lack of belief that the ECB are far enough ahead of the curve. All of this combined to leave markets feeling flat. Whilst market pricing for ECB rate hikes in 2022 may have only dropped a smidgeon from 70 to 63 bps in total after the meeting, the single currency took the full weight of markets frustration, with EUR/USD slipping back from a high over 1.0900, to nearly as low as 1.0750 by the close. That’s a fairly sizeable intra-day move for the single currency.

Holiday-thinned market

Since Thursday, the single currency has regained some composure, but is still struggling to maintain a foothold over 1.0800 against the dollar. The holiday-thinned market has helped to dissolve any real appetite for bold moves, and as such, GBP/EUR has once again found a footing over 1.2000, without yet being able to explore any further meaningful upside. A return to more ‘normal’ market liquidity conditions over the next day or so will likely determine the next adventure for the single currency, which still has to contend with the ongoing developments in Ukraine, as well as a slew of Euro-area economic data, which will give markets fresh directional focus.

Dollar index breaks 100. Finally.

The dollar continues to benefit from the well-trodden double boost of nervy markets (risk off), and bullish Fed-speak on U.S rate hike expectations. Both featured strongly again throughout last week, with the latter boosted by the Fed’s Evans, who said that he was ‘open’ to a 50bps rate hike next month. As a consequence, the broad dollar index (DXY) finally managed to move above the key 100 region. You would have to go back to the beginning of March 2020 for the last time that the DXY reached these lofty levels. Understandably, GBP/USD was dragged lower too, and finally broke below the 1.3000 region for a spell, but the decline has lacked any real conviction thus far.

Powell’s words of wisdom

Whilst all economic data matters, last week’s hefty U.S Inflation print, and the March employment report were both strong enough to keep the Fed leaning heavily toward a 50bps rate hike for May. However, markets will still need to remain vigilant for any weakness in U.S economic data through this week, and ahead of the next FOMC meeting. Fed Chair, Powell, will be speaking on Thursday, and markets will be closely scrutinizing his words of wisdom for guidance on the Fed’s thinking, in his last public remarks before the FOMC’s self-imposed quiet period ahead of their May meeting.  

Elsewhere, its 50bps already

In case you missed it, both the Bank of Canada and RBNZ raised rates by 50bps last week. In both cases, the move was the biggest single rate hike in more than two decades. The BoC seem determined to keep pace with the Fed, going forward. However, USD/CAD is still some 200 points above the 1.2400 low set two weeks ago, which highlights just how strong the greenback has been of late. Looking ahead, another strong (5%) Inflation print is expected in Canada on Wednesday. Interestingly, New Zealand Inflation is also due on the same day, and a 7.1% YoY gain is earmarked. It will take some time for these big rate hikes to filter through to economic data.

What else really matters this week?

The PBoC will meet on Wednesday to determine Chinese interest rates. German PMI (Apr/Prel) are due on Friday. Canadian and UK Retail Sales are both due this Friday too. The BoE’s Bailey speaks on the same day.