Daily Market Comment – Euro gets knocked down by ECB, dollar edges up in thin holiday trade

  • ECB leaves forward guidance unchanged, euro gets hung out to dry
  • Stocks struggle, dollar resumes uptrend amid lack of fresh drivers during Easter weekend
  • Oil heads higher on reports EU will phase out Russian imports

Euro sinks to 2-year low after ECB inaction

The European Central Bank kept worries of burgeoning inflation aside on Thursday as it reiterated its previous forward guidance that asset purchases will end at some point in the third quarter, while providing no precise timeline of when it will start to raise interest rates.

Following recent remarks from policymakers as well as the worsening inflation data, market participants headed into the meeting expecting that the ECB will announce an end date to its long-running quantitative easing programme, paving the way for rate hikes. However, it seems that the central bank still wants to keep its options open about how soon it will lift borrowing costs given the uncertainties with the situation in Ukraine, maintaining its vague sequence of “some time” after QE has ceased.

The euro nose-dived after the ECB statement, briefly dropping below the $1.08 level to two-year lows. President Lagarde didn’t really give the euro bulls anything to go on in her press conference, as she stressed the upside risks to inflation while warning about downside dangers to growth.

There can be no denying that the ECB is in a much bigger bind than other major central banks when it comes to the old stagflation dilemma. That probably explains why the usual post-meeting disclosure by ECB sources hasn’t caused much of a stir today. According to ECB insiders, Governing Council members are converging towards a Q3 liftoff date, likely comprising a 25-basis-point hike.

However, the euro is wallowing around $1.08 today as the US dollar regains its positive momentum.

Dollar holds onto FX crown after wobble

The greenback looks set to end the week on the front foot after Treasury yields soared yesterday. Although European yields also jumped before the Good Friday holiday, the spreads widened in favour of the US as the 10-year Treasury yield climbed back above 2.8%.

The dollar index has edged up to around 100.45 in the last 24 hours, with renewed yen weakness providing an additional boost. Slightly softer-than-expected retail sales numbers out of the US on Thursday haven’t caused much of a dent in the dollar despite some indications from the report that high prices may be starting to curtail spending.

The pound is steady around $1.3070 but the aussie and kiwi are on track for a second straight week of losses.

Australian and New Zealand government bond yields haven’t been able to keep up with their US counterpart during April so that could be weighing on the local dollars. Plus, the rally in some commodities such as copper and iron ore appears to have lost steam so that could be a factor too.

However, the Canadian dollar is a little firmer today, finding support in higher oil prices.

Oil extends gains as EU closer to banning Russian oil

Both WTI and Brent crude futures are up more than 2% on Friday, extending this week’s rebound. Oil is on course to post its first weekly gain in three weeks, having been bolstered by a partial easing of lockdown restrictions in Shanghai, China.

But in a further boost for the commodity, the New York Times reported on Thursday that the European Union is considering phasing out the import of Russian oil.

Although a complete ban would probably be months away even if the EU went ahead with an oil embargo, it does nevertheless keep prices supported above $100 a barrel for now.

Wall Street ends week with losses, Asia slips too

Asian stock markets closed lower on Friday following losses on Wall Street yesterday. Worries about supply-chain disruptions hurt big tech stocks such as Apple and Tesla. The latter was also weighed by its CEO, Elon Musk’s $43 billion bid to acquire Twitter.

But although Twitter’s shares surged in pre-market trade, they closed down by 1.7% on speculation that the takeover bid would probably be rejected.

Meanwhile, the mixed run of earnings releases was a drag on all of Wall Street’s main indices. The Nasdaq Composite fell the most (-2.1%), likely additionally pressured by the rebound in yields.

The big banks – Goldman Sachs, Morgan Stanley, Wells Fargo and Citigroup – all reported a drop in quarterly profits but only Wells Fargo’s stock tanked as investors were impressed with the better-than-expected earnings per share results for the others.

Trading is expected to remain thin for the rest of the day as well as on Monday as US markets are shut today for the Western Easter celebrations and most European markets will not reopen until Tuesday.

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