US Open Note – Euro cheers on rate hike talk; stocks in the green as well



ECB’s rate hike talk intensifies

It seems the European Central Bank (ECB) is prepping for the new reality of higher interest rates to fight inflation even though geopolitical developments around Ukraine keep clouding the Eurozone’s economic outlook.

ECB’s Spanish Vice President Luis de Guindos endorsed yesterday’s hawkish talk from Latvian ECB governing council member Mārtiņš Kazāks, confidently approving the end of the regular APP bond purchases in July, while stating that from today’s perspective a rate hike in July, September and even during the next months is possible, though a rate hike decision will be subject to data progress and particularly on monitoring inflation expectations and wage growth.

Expectations for a 25 bps rate increase in July and September jumped to 73% according to futures markets, triggering another bullish run in the euro. Euro/dollar flew to a two-week high of 1.0935 before quickly inching back below 1.0900 in the aftermath. Likewise, euro/yen pulled back a bit after almost touching the 140.00 level, while euro/pound surged above its 20- and 50-day simple moving averages (SMA) to 0.8365.

Shorter-term yields climb; Japan’s CPI inflation eyed

The growing hawkish communication within the ECB also helped shorter-term European government bond yields extend their rally to fresh highs, while the longer-term 10-year yields held neutral overall.

On the other hand, Japan’s 10-year equivalent crossed the BoJ limit of 0.25% once again to revisit the 0.26% level ahead of Friday’s CPI inflation readings (00:30 GMT). While forecasts point to higher inflation in March, the pickup may not exceed the central bank’s 2.0% target. Nevertheless, any upside surprises could add more fuel to the yield rally, which is already causing a headache to the BoJ.

Perhaps the battered yen could gain new buying traction in the aftermath. Any upside movements, however, could be more sustainable if dollar/yen slumps below 127.30 – 127.00.

US jobless claims reflect tight labor market

Applications for US unemployment benefits fell slightly to 184k last week, more or less as expected. That is still a level that reflects an exceptionally tight labor market. Continuing claims dropped to the lowest since 1970, but the dollar did not react.

A disappointing Philly Fed business survey in April could not move the greenback either. The survey missed expectations, indicating rising prices and slowing new orders. Encouragingly though, employment, delivery times, and supply chain issues seem to improve.

Central bankers speak

During Friday's early European trading hours, investors will be eagerly waiting for the Eurozone's flash PMI figures to get fresh direction on the common currency, though Lagarde’s speech before the virtual International Monetary Fund Debate on the Global Economy at 17:00 GMT today will also be under the spotlight.

Fed chief Jerome Powell will be addressing the event at the same time, while Bank of England chairman Andrew Bailey will be commenting a few minutes earlier at 16:30 GMT, but probably his appearance will do little to boost pound/dollar above the 20-day SMA at 1.3070.

The French election on Sunday could bode well for the euro if President Macron, who came out on top against his rival far-right Marie Le pen during a TV debate on Wednesday, wins another term.

Wall Street set for a bullish open; commodities stable

Turning to stock markets, European indices enjoy another green day, with real estate, consumer cyclicals and industrial shares driving the pan-European STOXX 600 higher. Wall Street could follow suit when markets open according to US futures. It would be interesting to see if the Nasdaq 100 can clear resistance around its 50-day SMA at $14,210. The S&P 500 is also capped by its SMAs at $4,500, while Dow Jones is testing March’s ceiling of $35,377.

Meanwhile in commodities, crude oil futures are pushing higher to regain lost ground, but upside pressures remain muted compared to last week’s increases. Hence, the oil-dependent loonie is struggling to renew its inflation rally below 1.2470 per US dollar.

Gold has been on the sidelines, building floor around $1,945/ounce following the pullback from $1,998 on Tuesday.

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