Dollar hits year-to-date highs as US CPI eliminates rate cuts

Headlines

* US Inflation quashes the chances of a June Fed rate cut

* Bank of Canada seeks more disinflation proof as it mulls rate cuts

* Meta debuts new AI chip, aiming to decrease reliance on Nvidia

* ECB expected to wait until June to start rate cuts

FX: USD surged higher on the hotter than expected CPI data. The DXY posted a new year-to-date high at 105.30. The all-important monthly core print, at 0.4%, came in double what is needed to bring inflation back to the Fed’s 2% target.  A June rate cut bet is now off the table even with two more jobs and CPI reports before that June FOMC meeting. The most likely start for policy easing is now in September, with just three more meetings until the end of 2024.

EUR fell as the major plunged to its worst day since July last year. Strong support sits around 1.07 as markets brace for today’s ECB meeting. That will be all about the signals around a June rate cut that is still seen as likely.

GBP dropped over 1% and to major support just above 1.25. Markets await UK GDP on Friday.

USD/JPY broke out of its range to the upside. We had been saying the longer we track sideways, the bigger the breakout will. And that is ordinarily in line with the long-term trend. Prices got above 153. The last intervention in 2022 came below 152. But surging Treasury yields have done for the yen bulls. The 10-year yield advanced through the key psychological 4.50% level.

AUD fell over 1.8% and close to 0.65. Markets have pushed out the RBA lowering rates in late summer. USD/CAD broke out of its range and through resistance above 1.36 to a five-month high, close to the next big figure. The BoC kept rates unchanged as expected. There was a mildly hawkish stance as the bank highlighted potential upward inflationary pressures. Positive revisions to

Stocks: US equities fell on diminishing hopes for hoe much and how soon the Fed can cut interest rates. The broad-based benchmark S&P 500 finished 0.95% lower at 5160. The tech-laden Nasdaq 100 lost 0.87% to close at 18,011. The Dow Jones settled 1.09% down at 38,461. Ten of the eleven S&P500 sectors ended in the red. Energy was the sole gainer. Regional banks were especially weak.

Asian Stocks: APAC futures are in the red. Markets traded better with stocks slightly bid, though the China holiday affected liquidity. The Nikkei 225 outperformed helped by the continued weak yen. The ASX 200 was boosted by gold miners with the spot price through $2,300.

Gold stood up relatively well but came off from its recent high at $2365. Yields reached multi-month highs.

Day Ahead – China CPI, ECB Meeting

Expectations are for a 0.4% print in March China inflation, down from the prior 0.7%. This is mainly due to falling food prices after the Chinese New Year. But consumers remain relatively subdued, while excess capacity still lingers.

The ECB will stand pat on rates but there will huge attention on what the statement says about future rate cuts. Inflation has fallen closer to target while the labour market remains solid. This is a concern to the Governing Council who are worried about wages growth staying too high to start policy easing.

There appears to be a broad consensus at the bank that rate setters will have enough information by the June meeting to make a decision to cut rates. As well as a new round of staff forecasts, wage growth data for Q1 and GDP growth among other data points will be available. President Lagarde has signposted this too.

The ECB want to feel more confident that inflation is falling closer to the bank’s 2% target. More evidence will be available in the coming weeks, so a dovish hold is expected.

Chart of the Day – EUR/USD hitting major  support

Tweaks to the statement language will determine volatility in the euro. The ECB could go all out and signal a June rate cut but then say they are fully data dependent and are on no preset path for more rate cuts. Or President Lagarde could be more cautious, wary of activity and wage data remaining strong. The latter could support EUR/USD and underpin support around 1.07. The recent swing low sits at 1.0694.

AUTHOR

Jamie Dutta >

Jamie Dutta is a Market Analyst for Vantage. He comes with extensive experience as a full-time trader and financial market commentator, having worked as a trader in top tier investment banks and trading houses.