Dollar surges across the board on hot inflation data

Is June off the Fed’s rate-cut map?

The US dollar skyrocketed yesterday against all its major peers as the US CPI data for March revealed hotter-than-anticipated inflation.

Investors rushed to scale back their rate cut bets, taking the probability of a June cut down to 20% from around 55%, while the total number of basis points worth of rate cuts by the end of the year dropped to 43.

At their March gathering, Fed officials continued to project three rate cuts for 2024, but the minutes of that meeting revealed that, even then, there were concerns with regards to the inflation trajectory. Some officials even raised questions about whether the current policy rate was restrictive enough to bring inflation to heel. However, the dot plot showed that no policymakers had favored a higher policy rate.

The attention today may turn to what Fed officials have to say in the aftermath of the inflation report, with members Williams, Barkin, Collins and Bostic stepping onto the rostrum. Just a day before the CPI release, Bostic said that he expects only one rate cut this year, but he is not ruling out the possibility of two or none, depending on how the economy and inflation evolves.

It will be interesting to see what his view is after the data and what his colleagues have to say. The US PPI data for March and initial jobless claims for last week are also on today’s agenda.

Yen intervention risk rises, BoC opens door to June cut

Dollar/yen rose above 152.00 for the first time since 1990, with the pair gaining almost 1% and intensifying the intervention discussion. Nevertheless, with any pending sells orders near 152.00 seemingly not enough to stop the buyers, it seems that investors didn’t see a big chance for intervention near that zone.

That said, as the pair marches further north the likelihood of action is increasing and this is evident by the fact that yesterday’s rally triggered another round of warnings, with Japan’s top currency diplomat Kanda saying that recent moves are rapid and that excessive moves will be dealt with an appropriate response.

Not long after the US CPI report, the BoC decided to keep interest rates untouched, noting that inflation has eased further in recent months and dropping concerns about inflation risks. At the press conference, Governor Macklem said that a June rate cut is within the realm of possibilities, yet, the probability for such action came down from around two-thirds to 50% as many investors were disappointed by the absence of clearer signals.

Will the ECB telegraph a June rate cut?

Today, the central bank torch will be passed to the ECB, which is expected to hold rates unchanged, although there is a 10% chance for a 25bps cut. Some members have been vocal about preferring a spring reduction, but with most of them signaling that waiting for June may be more appropriate, it is more likely that they will use this meeting to clearly communicate their intention to start easing in June.

Given that this is what the market expects, the euro may not respond much to such signals. Traders may be more on the lookout for hints about the Bank’s future course of action. Currently, the market is expecting 75bps worth of cuts by December, but it seems that there are some ECB members advocating for more.