Fixed-income markets of advanced economies show signs of recovery after a heavy sell-off on Tuesday. European currencies cede ground against USD after a brief rebound. US 10-year Treasury yield bounced off 2.40% and is moderately down. GBPUSD fall intensified after release of February inflation data, which together with the dovish BoE shift in March hit UK real yields outlook badly. Annual inflation in England accelerated to 6.2% (forecast 5.9%) – the highest level in almost 30 years:
Producer price inflation also hit a new high of 14.7%, setting the stage for high consumer inflation next month.
The dollar resumed advance against the background of an increasing number of signals that the Fed will tighten monetary policy much faster than the central banks of other developed countries. Following the speech by Powell and a number of other top managers of the Fed on Monday and Tuesday, there was a strong reassessment of expectations for the next two Fed meetings. Markets now expect the rate to be at least 75 bp higher after two next meetings, the probability that interest rate will be 100 bp higher estimated at about 35%. This means that markets are quite seriously considering the scenario that the Fed will raise rates by 50 bp for two meetings in a row.
Another powerful USD driver are expectations for the Fed's terminal rate (the rate level at which the Fed will complete tightening cycle). Now it is at the level of 2.75%, but may soon reach 3%. It is clear that the vector of markets’ interest rate expectations suggests more near-term USD gains are ahead with the biggest advance to be seen against currencies where central banks persist with low rates, as well as against European currencies, which continue to be pressured by uncertainty around the Ukraine conflict and its economic consequences.
With the equilibrium in sovereign debt markets, USDJPY has also stabilized, however, the pair is apparently bracing for a breakout of 121. Also, pressure on the yen and European currencies is exerted by a strong increase in oil prices, which creates a dilemma for the central banks of these countries – slowing growth potential and high inflation which greatly limits ability of monetary policy to affect output. Attempting to contain inflation by raising rate, the central bank only stifles growth.
EURUSD dived below 1.10 again forming double bottom at 1.0950, suggesting bearish breakout may be in cards. In case of a leg lower, retest of horizontal support at 1.08 looks highly likely in the near term: