Markets find their mojo ahead of the ECB, US Inflation

A much better day was had by most in markets yesterday, as a combination of factors helped to stop the rot – for now at least. Ukraine held out a potential olive branch to Russia, talk of a temporary ceasefire, enabling successful civilian evacuation corridors. Add into the pot a slew of position squaring ahead of today’s ECB meeting, with some US Inflation sprinkled over the top for good measure, due later today too. The ‘news’ all conspired to accelerate risk appetite amongst investors. Oil dropped 10%, Gold forgot its lines over $2000, as just about everything else rallied.

What did all that mean for currencies?

Quite a bit, actually. Much like the broader asset universe, currency markets chose yesterday to turn the recent theme of a stronger USD and weaker everything else (bar maybe CHF and JPY) on its head. The beleaguered single currency ripped off the shackles, and posted some impressive intra-day gains.

EUR rallies ahead of the ECB

On the day, EUR/USD moved from 1.0900 to 1.1100, having been as low as 1.0800 on Monday. That big reversal may well run into a wall of ECB caution later today (more on that below), but let’s celebrate the 2% rally outside of a central Bank meeting day, for what it was. It just doesn’t happen all that often as ‘major’ Fiat currencies do not generally tend to move much outside of 1 – 1.5% trading ranges per day, unless that it is, bigger things are afoot. The single currency also posted decent gains further afield, with GBP/EUR scurrying back below 1.1900, having threatened a move over 1.2200 just two days beforehand. Both EUR/JPY and EUR/CHF also followed suit in posting strong EUR gains.  

Dollar down, but not out

All of this positivity sent the greenback walking quickly, if not running for the hills. GBP/USD pushed back toward 1.3200, as it often does on a positive sentiment day, despite the obvious lack of any keynote UK or U.S data to drive markets imagination, notwithstanding the weekly U.S jobs data. The greenback was weaker across the board. Today is another day, however, and the latest US Inflation figure will focus minds, and remind us all what we were expecting from the Fed through this year on rate rises.

Big data day

Whilst no changes are really expected on interest rates or QE at today’s ECB meeting, what ECB Head, Lagarde, says about the future outlook from the ECB will be key here. Cast your minds back a few weeks ago, and markets had been busy pricing in rate hikes later this year from the ECB. However, the Ukraine war has opened up the potential for weaker economic growth for the region, which has understandably resulted in an about-turn by markets. Madame Lagarde might mention the weaker outlook. So, even though frothy energy prices will feed into higher inflation, the Ukraine crisis may weigh on growth, which offers the very real prospect of stagflation. Sobering talk.  

Talking of Inflation, the US release key February CPI data for February later today too. Last month saw a 0.6% increase (MoM), this month markets expect a 0.5% rise. That puts the (ex food and energy) YoY rate at 6.4%. Markets will react to any big change versus expectation, especially as we are rapidly approaching the March Fed meeting. Elsewhere, the remaining data is of less significance. However, RBA governor, Lowe, is giving a speech, which will be closely monitored.