EUR / USD
There was a sharp decline in German bond yields after the European open with the 2-year yield sliding 40 basis points to below 2.70%, the sharpest one-day decline since early 1995. Sources suggested that the ECB would not hold an emergency meeting of the Supervisory Council, although there were still important tensions with European markets. There was also a dip in expectations surrounding this weeks’ ECB policy decision with the chances of a 50 basis-point rate hike now seen below 50% compared with close to 100% last week. The decline in German yields and shift in ECB expectations were significant in limiting scope for further Euro support.
There was, however, a further slide in US expectations with markets now ruling out the possibility of a 50 basis-point rate hike this month. Indeed, futures indicated more close to a 30% chance that rates would not be increased at all.
The shift in expectations was a key component undermining dollar support with the currency index dipping to fresh 3-week lows before a limited recovery.
The Euro strengthened to highs around 1.0735 before fading as the US currency stabilised and it retreated to near 1.0700 on Tuesday as market conditions calmed.
The latest US inflation data will be watched closely on Tuesday, although the impact is likely to be slightly less than expected previously given the financial-sector focus. Consensus forecasts are for the headline annual rate to decline to 6.0% from 6.4% with a slight decline in the core rate to 5.5% from 5.6%.
US Treasuries posted further strong gains in early Europe on Monday with the 2-year yield dipping to around 4.25%. Risk appetite was vulnerable and the dollar continued to lose ground with a test of the 133.00 level against the yen. There were further gains in US bonds just after the New York open which undermined the US currency. The 2-year yield briefly dipped to near 4.00% before a recovering with the dollar sliding to lows around 132.30 before rebounding to the 133.00 level.
The US employment trends index edged higher to 118.29 from 118.14 the previous month.
The 1-year New York Fed inflation expectations index dipped sharply to 4.2% for March from 5.5% previously and the lowest reading since May 2021.
The 5-year index, however, edged marginally higher to 2.6% from 2.5%.
Lower short-term inflation expectations maintained expectations that the Fed would be able to adopt a less aggressive stance in the short term and one investment bank made the call that rates could be cut next week. There was a further unwinding of yield-curve inversion which hampered overall dollar support.
Overall conditions were slightly calmer on Tuesday, although there were still sharp moves. The yen lost ground amid expectations that the Bank of Japan would maintain a very loose monetary policy. The dollar strengthened to highs just above 134.00 before a fresh slide to near 133.00 and settling around 133.60.
Sterling overall was able to secure a firm tone on Monday despite fragile risk conditions. There was initial relief that the SVC UK bank had been bought by HSBC which limited any potential contagion risks in the UK financial sector. Although there was a drop in UK bond yields, there was a more substantial shift in expectations surrounding Federal Reserve and ECB policy expectations which provided net Sterling support in relative terms.
Sterling found support close to 1.2050 against the dollar and posted another advance to 3-week highs near 1.2200 after the Wall Street open. The Euro also posted net losses to 0.8820 amid the shift in ECB expectations and net short covering. UK labour-market data was mixed with unemployment holding at 3.7%. Earnings data was slightly weaker than expected with the core annual increase slowing to 6.5% from 6.7% and below expectations of 6.6%. The wages data could deter the Bank of England from raising rates further at the March meeting and Sterling traded around 1.2170 against the dollar.
Swiss sight deposits declined to CHF510.8bn in the latest week from CHF519.4bn previously. This was a further sharp decline in deposits which suggests that the National Bank is still looking to tighten liquidity within money markets.
The Swiss franc gained further net support from fragile risk conditions and fears surrounding the financial sector. The slide in US and Euro yields was also an important element underpinning the franc. The Euro dipped to 4-month lows below 0.9720 before a recovery to 0.9770 while the dollar dipped to 5-week lows below the 0.9100 level. The franc was unable to gain further traction on Tuesday as immediate volatility declined while the dollar settled around 0.9130.