On Wednesday, the main story in FX markets was the continued weakness of the US dollar. The DXY fell 0.6% further to the 97.80s. It now hovers at mid-March lows that are more than 1.5% below its previous weekly highs. Wednesday's US data releases (ADP Jobs and final Q4 Core PCE estimates) were strong, which along with further Fed talk helped to solidify expectations of a 50-bps rate increase from the bank in May.
However, this was not enough to protect the US dollar against a bearish combination 1) of unfavourable rate differential moves amid downside in US yields and 2) month/quarter end selling and 3) optimism about Russo-Ukraine peaceful talks. Concerning the latter, despite the fact that there is still some doubt about the progress of the talks this week, FX markets are pricing in a more favorable geopolitical outlook.
Analysts at JPMorgan suggested that the conflict might be shifting to a more localized stage with some of more extreme tail-risk scenarios decreasing in probability. They also recommended that EUR/USD be bought. Referring to earlier sub-1.0950 weekly lows, EUR/USD reached its highest level since the beginning the month at the north end of the 1.1150 mark. It was up 0.7% and 1.9% respectively. The continued upside in Eurozone short-end yields gave the euro some support. Traders increased their bets on ECB tightening following the surprise results of the March HICP inflation figures from Germany and Spain.
The rest of the G10 saw the euro perform well, but it was not the best. That honor went to the Swiss franc, and the Japanese yen. USD/JPY fell 0.8% to a low of 122.00. This was due to the drop in US yields. It is now more than 2.5% lower than its previous weekly highs. USD/CHF saw an unusually large 0.9% decline from above 0.9300s to the low of 0.9200s. It is now just a few pips away from testing its 200-Day Moving average.
The kiwi was the beneficiary of strong domestic data (New Home Building Consents and Business Sentiment), with USD rising slightly more than 0.5% to the upper 0.6900s. The Aussie, its antipodean counterpart, failed to take advantage of higher energy prices. AUD/USD traded in an uninspired fashion at 0.7500 (still near multi-month highs), while USD/CAD languished just below 1.2500 and close to annual lows.
Sterling was an average performer. GBP/USD rallied back to the mid-1.3100s, but failed to maintain above its 21-Day moving average for a sixth session. Meanwhile, EUR/GBP reached its highest level in over three months at 0.8500.
While FX markets will continue to be focused on geopolitical developments, and their impact on risk appetite/the commodities complex, the economic data will still remain a key driver. Traders will also continue to evaluate G10 monetary policy divergence. In the next session, the OPEC+ meeting and the US February Core PCE figures as well as the Canadian January GDP figures will be the key events. This is in addition to Friday's release of the US labor market report, which is the most important of the week. The Eurozone HICP inflation numbers will be out on Friday. They should show a sharp rise, as did the national figures from Germany and Spain on Wednesday.
