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US inflation figures are set to create volatility

USD

The Dollar Index was steady on Tuesday, but the USD traded lower against all of the major currencies except for the Swiss Franc. During the session, the Dollar Index tried to settle below the support at the 90 level, but gains in yields proved to be supportive. The Consumer Price Index for April is due today and debate rages over whether the expected jump in price pressures will be enduring enough to force the Fed into tightening the policy sooner than the current guidance suggests. Hence, these inflation figures will create volatility, with Treasury yields, currencies, and equities swinging between gains and losses over today’s session. Meanwhile, the EIA Crude Oil Weekly Inventory later today will provide a fresh direction for the oil market.

EUR

Yesterday, the common currency recovered some lost ground (+0.14%) as investors reacted positively to upbeat data out of the Eurozone, with the German ZEW survey rising sharply in May.  Germany’s ZEW rose to 84.4 this month, up from 70.7 in April, beating consensus and registering a 21-year high as the slowing down of the third wave of the pandemic provides some optimism. Looking ahead, Germany’s Consumer Price Inflation for April will be closely watched later today, as European Central Bank stated that German inflation could exceed 3% this year. Inflation fears are also haunting markets in the bloc and putting the focus on potential interest rate hikes at the end of a dovish stance in the region.   

GBP

Once more, the Pound closed in positive territory (+0.16%) on Tuesday, consolidating the previous gains against the dollar. With this result, the Sterling continues to be the best performer among the G10 currencies, with the GBP/USD rate hovering at 1.5-year highs. Today, investors and traders will digest the latest U.K. GDP, which contracted by 1.5% in the first quarter of 2021 as nationwide lockdown measures continued to weigh in on their activities. Although the data is negative, a bearish market reaction is not expected as with lockdown measures now being phased out and the economy reopening, the country is expected to see a sharp rebound for the remainder of the year. Later today, industrial production and the trade balance are due for release too.

JPY

The Japanese Yen erased its losses from the day before after closing 0.22% higher against the greenback on Tuesday. Surprisingly, the JPY’s jump came about even with the U.S. yields advancing.  The yield on 10-year Treasuries advanced two basis points, climbing for the fourth straight day, the longest winning streak since March 19. Domestic data might be behind the positive performance, as earlier on this week authorities reported that the Japanese Household Spending was outperformed in March, with a gain of 6.2% year-on-year. Looking ahead, all eyes will be on the U.S. Consumer Price Index report, as it has the prospect to create volatility in the markets, including in the bond yields.

CAD

The Loonie edged 0.06% higher against its U.S. counterpart on Tuesday, extending gains for the fifth trading session in a row. With this result, the CAD is just above its best levels in more than three years. However, the recent rally seems to be losing steam as the hawkish tone from the Central Bank is dissipating and the price of oil is cooling down. Although West Texas Intermediate crude oil is still trading above $65/barrel, fears of a prolonged outage at the largest U.S. fuel pipeline system is fading, as well as a worsening India’s coronavirus crisis might put pressure on the oil prices. Looking ahead, Canadian traders will keep an eye on the U.S. CPI data today, which is likely to report higher inflation and create volatility in the FX and commodity markets.

MXN

The Mexican Peso traded down -0.06% against the greenback following the major emerging markets’ narrative – inflationary pressure. Investor concerns are centered on the growing inflationary pressure that threatens to advance the monetary tightening cycle in emerging countries. Thus, Mexico’s Central Bank (Banxico) is likely to keep its basic interest rate on hold at tomorrow’s monetary policy meeting, as inflation surges well above Banxico’s target. Today, industrial production figures for March will be published and are set to be a market mover.

CNY

The Chinese Yuan gave back its gains from the day before inching down 0.22% against the USD, interrupting a sequence of four trading sessions in positive territory.  Traders reported that offshore Chinese companies were buying dollars to make dividend payments, however, trade was cautious ahead of the U.S. consumer inflation data today. Domestically, the inflation pressure has also raised investor’s concerns as a scorching rally in industrial commodities has spurred China to try and temper prices. On that note, Chinese authorities are likely to be tested in how effectively they can rein in surging costs that sparked the fastest rise in producer prices since October 2017. The Chinese demand, as well as the CNY rate, might be a strain on its ability to influence commodity prices.

BRL

Yesterday, Brazil IPCA inflation came in at 0.31% for April, bringing the annual rate to 6.76% and standing well above the Central Bank’s (BCB) upper target of 5.25%. Nonetheless, the reading was expected and the BRL ended up 0.10% against the USD, suggesting that inflationary pressure is widely priced in. Meanwhile, market participants are also digesting the minutes from the latest BCB policy meeting, which disappointed investors who were hoping for the bank to aggressively hike rates to reduce inflationary pressures in 2022. Looking ahead, updates from the service sector and foreign exchanges flow data will highlight today’s economic calendar. The latter is expected to provide support to the BRL as higher commodity prices have boosted exports in the country. 

Quick Insights

USD: The Consumer Price Index for April is due today

USD: The Consumer Price Index for April is due today

EUR: German ZEW survey rises sharply in May

EUR: German ZEW survey rises sharply in May

GBP: Sterling continues to be the best performer

GBP: Sterling continues to be the best performer

JPY: Domestic data might be behind the positive performance

JPY: Domestic data might be behind the positive performance

CAD: CAD is just above its best levels in more than three years

CAD: CAD is just above its best levels in more than three years

MXN: Inflationary pressure threatens the monetary easing cycle in Mexico

MXN: Inflationary pressure threatens the monetary easing cycle in Mexico

CNY: Surging costs spark the fastest rise in producer prices since October 2017

CNY: Surging costs spark the fastest rise in producer prices since October 2017

BRL: Tuesday’s move suggests that inflationary pressure is widely priced in

BRL: Tuesday’s move suggests that inflationary pressure is widely priced in

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