The Morning Update

The USD strengthens, oil prices rally, equity markets are up, and US yields ease on interest rate bets and geopolitical concerns. The USD rallied on the prospect of higher rates for longer, while European equity markets strengthened on the prospect of the ECB rate cut by June. The ECB's latest survey of professional forecasters forecasted EU inflation to ease to 2.4% in 2024 and down to 2% in 2025 & 2026. The ECB kept interest rates on hold on Thursday but signaled it could start cutting rates as soon as June. In the US, the stubbornly high US inflation levels have now reduced expectations of a rate cut by June, and with the US elections, it could complicate rate cuts for the Fed in Q3/Q4 2024. Elsewhere, the expectation of higher rates in the US following a third month of inflation gains has helped wipe out the 4.2% return on global sovereign debt from 2023. Japan's 5-year yield has risen to its highest level since 2011 on expectations of a BoJ rate hike. Oil prices rally on increasing Israel/Iran tensions. Markets will be focused on the US Michigan Consumer Sentiment Index and UoM 5-year Consumer Inflation Expectations, alongside Fed's Bostic & Schmid speech, which will help provide intraday direction to currency markets today.

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In other news. The Biden administration will forgive $7.4 billion in student debt to another 277,000 borrowers. China's exports dropped more than expected, setting back recovery. The IEA trims oil demand forecasts for weakness in wealthier countries. Iran aims to contain fallout in Israel response, will not be hasty, sources say. The US proposes debt to fund Ukraine using profits from frozen Russian assets. The US vows 'ironclad' defense of Philippines military in South China Sea. The Global economy faces a decade of weak growth, warns IMF chief. Mexico demands the UN expel Ecuador after a raid on its embassy. The UK economy grew by 0.1% in February. Brussel says it suspects Russia of interfering in EU elections.

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In currency markets. EUR, AUD, NZD & CAD post weekly losses, while the pound drops to its lowest level since December on the prospect of less Fed rate cuts in 2024. CNY is flat, while Asian currencies weaken by 0.3% on average compared to USD. Trading currencies are primarily under pressure, with SEK tumbling 1%, AUD & NZD falling 0.45%, NOK, MXN & CHF weakening 0.3%, while JPY & ZAR are flat vs. USD.

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In commodity markets. Oil & Gold prices strengthened by 1.2% and 1.8%, respectively; Natural Gas & Soybean prices firmed by 0.4%,  Silver prices rallied by 3.6%, Copper prices gained by 2.4%, and Wheat prices are up by 0.15%.

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CAD continues underselling pressure, falling to a fresh 5-month low on expectations of interest rate divergence between the BoC & the Fed. On Wednesday, the BoC commented on the weakening CAD economy and easing inflation pressures, opening up the prospect of an interest rate cut by June. At the same time, the USD continues to rally, supported by the increasing prospect of higher US rates for longer, coupled with safe-haven buying on increasing geopolitical conditions. Today, there are no CAD economic releases, so the loonie will depend on the US economic data releases to drive intraday direction. A break of 1.3775 opens up the potential of a retest of 1.3900, last seen in November 2023.

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EURCAD weakens as both currencies face selling pressure vs. the USD, but the CAD finds support vs. the Euro on strengthening commodity prices.

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EUR finds support at 1.0650 amid the prospect of interest rate divergence between the US and the EU. The euro continues to suffer increased selling pressure, falling to its lowest level against the USD since November following bearish comments from the ECB. ECB President Lagarde reiterated that the ECB took a data-dependent approach to policy and didn't give a clear signal that the bank could cut in June. At the same time, Reuters reported that ECB policymakers were still expecting a rate cut in June. Domestically, the German Harmonized Index of Consumer prices y/y held steady at 2.3%, and French CPI held steady at 2.4% y/y. The US data will help provide intraday direction to the single currency. A clean break of 1.0650 opens up the prospect of a test of November lows of 1.0515.

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GBPEUR continues to rise, testing a fresh April high as markets expect the ECB will cut its interest rates in Q2. Meanwhile, the BoE is expected to keep its domestic interest rate higher to Q3 as its inflation levels remain the highest of its G7 peers.

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GBP breaches 1.0500 on sustained USD strength. The pound continues to struggle against the strengthening of USD due to stubbornly high US interest rates. Domestically, UK Manufacturing Production y/y beat expectations, jumping to 2.7% y/y Feb vs. 1.5% previously; Industrial Production was also robust, coming in at 1.4% y/y Feb vs. 0.3%. The UK GDP continues to struggle but moves out of recession, coming in at 0.1% m/m in Feb vs 0.3% in January. Technically, a breach below 1.2450 opens up the potential of a retest of November's lows of 1.2105.

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