• US stock markets gained over 1% yesterday as risk sentiment improved during US dealings. Kremlin fake news reports on progress in Ukrainian peace talks initially caused some hesitance. US secretary of state Blinken later also openly doubted Russia’s diplomatic efforts to end the war. News that Russia completed a coupon payment on international debt, avoiding external default, was later met with some optimism. EUR/USD tested 1.1121 resistance. The pair’s reaction function since Wednesday’s FOMC meeting suggests a stronger bottom below EUR/USD. The dollar failed to eke out additional gains on a hawkish Fed despite additional short term interest rate support. The euro from his part finally enjoys ECB backing since last week’s actions/intentions. Expect a significant EUR/USD relief rally the day we finally get some real positive cease-fire news on Ukraine. Taking out EUR/USD 1.1121 would put us back in the old 1.1121/1.1483 range. EUR/GBP rose from 0.8392 to 0.8435 in a technically insignificant move. First resistance stands at 0.8478. Gains probably could have been bigger following the Bank of England’s “dovish” policy rate hike (0.50% to 0.75%). The BoE toned down forward guidance on future hikes slightly because of the squeeze on UK households’ disposable income. It caused a huge outperformance of UK Gilts in a bull steepening move. UK yield dropped by 1.7 bps (30-yr) to 11.4 bps (2-yr). Changes on the German curve were insignificant, varying between +1 bp and -1 bp. US yield changes ranged between -3.7 bps (5-yr) and +1.7 bps (30-yr).
• The Bank of Japan kept its policy unchanged this morning (see below) while downgrading the eco outlook. The BoJ is in absolutely no hurry to follow the global policy normalization swing. Japanese inflation remains low, but nevertheless rose to its highest level since February 2020. National CPI ex fresh food this morning printed at 0.6% Y/Y, up from 0.2% in January and beating 0.5% consensus. The BoJ’s stance leaves the yen vulnerable. USD/JPY earlier this week briefly exceeded the 119 big figure for the first time since early 2016. A weekly close above USD/JPY 118.66 makes way for a return to the 2015 high at 125.86. Today’s eco calendar is empty. Much attention will go to the call between US President Biden and Chinese president Xi Jinping. The US is worried about China siding with Russia in the conflict and won’t hesitate to impose sanctions if China effectively does so. General risk sentiment will be decisive today. Keep a close eye on energy prices as well with Brent crude yesterday and this morning gaining $10/b from $100 to $110.
• There were no changes in the Bank of Japan’s policy parameters after holding a meeting today. The base rate remains at -0.10% and the 10y target at 0%. The BoJ did downgrade its economic assessment just two months after it was upgraded. While it cited the impact of Covid, the central bank also flagged the war in Ukraine. It is monitoring in particular the effects from it on inflation, saying it expects it to “clearly” rise on soaring energy prices. Some warn inflation may reach 2% this year with base effects also kicking in from April and with the recent weakening of the yen (especially vs the USD) acting as an accelerator. The cost-push nature of such inflation against a weakening economic background limits the scope for the BoJ for a tightening move.
• Chinese president Xi Jinping made a pledge to keep the economic collateral damage from its Covid-Zero policy at a minimum, but probably won’t give up that strategy any time soon. China will “strive to achieve the maximum prevention and control effect at the least cost and minimize the impact of the epidemic on economic and social development,” he said at the country’s top financial policy committee at a time millions of people are in lockdown. The comments can be seen as part of the vow China made earlier to stabilize financial markets and stimulate the economy.
European yields recovered from the setback by the Russian-Ukrainian war. It will slow down growth but didn’t deter the ECB from formally stepping up the normalization plans. QE is to end in Q3 with a rate hike in the next quarter. Real yields may further bottom out while inflation expectations may ease but will probably remain elevated. Next resistance stands at 0.58%.
The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. The US yield curve extended its bear flattening trend. Plans to shrink the balance sheet will be published in May. Medium term, the sell-off on core bond markets isn’t over.
EUR/USD tested the 1.08 pandemic support zone but survived. A subsequent short squeeze propelled the pair then back to 1.10. The ECB sticking to – accelerating even – the normalization schedule is a (latent) positive for the common currency. It protects EUR/USD’s downside even as the Fed conducted its policy rate lift-off. US (real) policy rates remain deeply negative.
Sterling proves no longer resilient to the uncertain risk environment. Combined with new-found euro vigor, EUR/GBP took out the first resistances between 0.82 and 0.83. A return above 0.845/72 would bring the pair back in the sideways trading range that dominated 2021. Regarding monetary policy, the balance after the March ECB and BoE meetings turned more even.
This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). These market recommendations are the result of qualitative analysis, incorporating room for past experiences and personal assessments. The views are based on current market circumstances and can change any moment. The most prominent input comes from publicly available data, financial news, economic and monetary policies and commonly used technical analysis. The KBC Economics – Markets desk has used reasonable efforts to obtain this information from sources which it believes to be reliable but the contents of this document have been prepared without any substantive analysis being undertaken into these sources. It has not been assessed as to whether or not these insights would be suitable for any particular investor. Opinions expressed are our current opinions as of the date appearing on this material only and can be opposite to previous recommendations due to changed market conditions. The authors of this recommendation do not warrant the accuracy, completeness or value (commercial or otherwise) of any recommendation. Neither are the authors liable to those who receive these recommendations for the content of it or for any loss or damage arising (whether in tort (including negligence), breach of contract, breach of statutory duty or otherwise) from any actions or omissions of the authors in reliance on any recommendation, or for any claim whatsoever in respect of the content of, or information contained in, any recommendation. Any opinions expressed herein reflect the judgement at the time the investment recommendation was prepared and are subject to change without notice. Given the nature of this advice (linked to currencies and interest rates) , the advice is overall not specific in nature. As such there is no reference to any corporate finance contract and as such there is no 12 month overview based on the different advices. This document is only valid during a very limited period of time, due to rapidly changing market conditions.
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