Dollar Rebound Can Continue
Impact on GBP: No major impact from BoE hold
The Sterling yield curve experienced a modest 5bp hawkish shift following the Bank of England's decision to hold rates steady yesterday. Two key takeaways from the meeting were the shift in stance by Catherine Mann, who moved away from the dovish camp, leaving only one member voting against the hold, and the acknowledgment that increased labour market instability could lead the BoE to accelerate rate cuts based on disinflationary signals.
The outlook remains unchanged, with expectations for three rate cuts this year, though uncertainty around economic data remains high. The UK is set to contend with multiple economic challenges, including the recently announced corporate tax hike, US tariffs, and a likely fiscal tightening to be detailed next week. These factors suggest downside risks to growth and, by extension, to front-end GBP rates. However, inflation has remained persistently high, which has kept Sonia rate expectations cautious, with markets currently pricing in two cuts by year-end.
From a Sterling perspective, next week’s budget announcements could pose additional risks. The potential impact on growth and bond markets does not support a near-term bullish stance on the Pound. Any weakness in GBP is still expected to be more pronounced against the Dollar rather than the Euro.
No Major Data
Impact on EUR: Don't expect ECB guidance
European Central Bank President Christine Lagarde maintained a neutral stance in her speech to the EU Parliament yesterday. Given the current uncertainty surrounding both tariffs and fiscal stimulus, it is difficult to expect anything other than a commitment to data dependency. This suggests the ECB is unlikely to provide any forward guidance until economic data has already determined the Euro’s trajectory.
For now, the pullback in EUR/USD is aligning with expectations, albeit slightly earlier than anticipated. Market volatility remains high, but the broader outlook still favors a downward trend for the pair in the coming weeks. The current two-year swap rate differential of -150bp remains consistent with EUR/USD at $1.0700.
Today’s Eurozone calendar is relatively quiet, with no scheduled ECB speakers. The next key technical support for EUR/USD is at the $1.0725 level, which corresponds to the 200-day moving average. A break below this level would reinforce a stronger Dollar outlook.
Elsewhere in Europe, the Riksbank held rates steady, while the Swiss National Bank implemented another 25bp rate cut. Markets had already priced in the Riksbank's decision, resulting in only a marginal impact on the Krona.
No Major Data
Impact on USD: Data-light days can be good for the Dollar
The Dollar extended its gains yesterday and remained strong overnight, with no clear catalyst from data or market events. The rebound appears to be driven by short-covering ahead of US tariffs set to take effect on April 2. European equities have also underperformed US stocks this week, which has been uncommon lately. This may be partly due to reduced optimism surrounding a Russia-Ukraine truce, as high-level talks only resulted in a temporary halt to strikes on energy infrastructure.
At this stage, the preference is to follow the Dollar’s recovery, though upcoming data could disrupt the trend. The US Conference Board Leading Index released yesterday showed a slight decline of 0.3% month-on-month, slightly below expectations but not as concerning as other indicators. Meanwhile, jobless claims data continues to show little sign of strain in the labor market.
With no major US economic releases scheduled today, the Dollar may have an opportunity to consolidate its gains. The Federal Reserve’s blackout period has now ended, and the cautious tone from the FOMC and Chair Jerome Powell this week leaves room for potential adjustments in communication. While most updates will likely come after new data is released, today’s interview with Fed official Austan Goolsbee on CNBC will be closely watched for any signals.
The stronger Dollar trend is evident in USD/JPY, which is rising despite a higher-than-expected inflation report from Japan. Core inflation came in at 3.0% year-on-year, slightly above forecasts of 2.9%, though still slowing from January’s 3.2%. As a result, markets may not have enough reason to bring forward expectations for a rate hike in May.?
Data: President Trump Speech 15:00
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