Daily Market Pulse

European Inflation is on the rise again


After the strong rally for the greenback recently, this week has started with some consolidation, with the dollar index (DXY) now slipping around 0.5% from the high approaching 105.00. The timing of the decline is unusual, given the latest US data has remained relatively strong, which would normally imply a stronger dollar and broadly weaker risk assets. Indeed, both Pending Home Sales (up 8.1%) and Durable goods (down 4.5%, but stronger in the detail), reaffirmed ongoing strength amongst the US economy. Looking ahead, markets are likely to pay particular attention to the latest Consumer Confidence data, which is due for release later today. 



Strengthening inflation is the last thing that Europe needs just now, but the latest data confirms that, in the case of both France (up from 7% to 7.2%) and Spain (up from 5.5% to 6.1%), inflation is frustratingly on the rise once again. Ouch. The news has understandably helped to push European bourses lower on the session and drive Bond yields higher, given that higher inflation clearly impacts rate dynamics, with a more aggressive ECB hiking profile now a more likely outcome. The news has also helped to lift the single currency, with EUR/USD pushing roughly 0.6% higher over the past two days, with markets now pricing a 4% terminal rate from the ECB for the first time in this cycle.



The boost to the pound from yesterday’s announcement that the UK and EU have (finally) reached an agreement on the Northern Ireland protocol, has continued through this morning’s European session, albeit at a more modest pace. The rally has been further underpinned by the weaker dollar (see USD). GBP/USD is up over 1% since the beginning of this week, continuing to accelerate from the recent cycle low. GBP/EUR followed suit, probing levels not seen since the end of January in the process. Rishi Sunak is in Northern Ireland today, attempting to sell his improved deal and the potential economic benefits to Irish MPs.



USD/JPY marked a fresh yearly high earlier today, driven another 0.35% higher by the powerful combination of rising US Bond yields, a hawkish outlook from the Fed, and further aided by a fairly dovish commentary from incoming BoJ governor Ueda. In the case of the Fed, last week’s jump in the latest Core PCE Price Index has helped to stoke that particular fire, given the expanding rate dynamics between the US and Japan.



The latest Canadian GDP data is due for release later, and markets expect Q4 growth to have increased by around 1.5%, having risen by 2.9% in the previous quarter. USD/CAD has been fairly volatile since the end of last week and having rallied to a new cycle high on Friday, the pair has since witnessed a 0.8% decline, partly aided partly by broadly softer oil prices.



After recently reaching a new cycle low, USD/MXN has witnessed declining volatility, contributing to more compressed daily ranges of late. There was a mere 0.08% decline for the pair through yesterday, as the bullish dollar outlook is offset by strong inflows into Mexico, given the higher rate backdrop.


USD/CNH has declined by around 0.4% since the beginning of the week, although the outlook still remains bullish for the greenback.


The dollar has had more success against the BRL, rising by nearly 1.5% over the past two trading sessions.


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