Dollar Strength, ECB Caution, and Pound’s Path Amid Economic Turbulence.

• USD maintains strength post-CPI rally; US stocks decline as market doubts June Fed rate cut.
• Attention shifts to March PPI and University of Michigan’s consumer survey for further Fed rate cut clues.
• FOMC minutes reinforce cautious approach to interest policy easing, dampening June rate cut expectations.
• ECB anticipates holding main refinancing rate steady, conditional on first-quarter wage data in May.
• GBP vulnerable to Dollar pressure but finds support against Euro and ‘high beta’ currencies post-US inflation data.

Dollar Holds Strong in Asian Markets Amidst Post-CPI Surge

In the aftermath of a robust rally post-CPI, the US dollar remains steadfast in the Asian trading session. However, US stocks witnessed significant sell-offs, as market sentiment leans away from a potential June Fed rate cut. Investor focus now pivots towards the impending release of March’s PPI data and the results of the University of Michigan’s consumer survey. Should today’s PPI figures reveal strength, coupled with heightened consumer inflation expectations tomorrow, it could further delay the anticipated Fed rate reduction, bolstering the dollar’s position. Yesterday’s stronger-than-expected US CPI report prompted a sharp retreat in bets for a June Fed rate cut, leading to a dramatic shift in market sentiment, reflected in a plunge in the DOW and a surge in the Dollar index.

The latest FOMC minutes solidified this outlook, highlighting the Fed’s cautious approach towards interest policy easing and their preference for more evidence of disinflation progress before considering rate adjustments. Concerns over persistently high inflation and the broad-based nature of recent inflationary trends were underscored in the minutes, cautioning against dismissing these trends prematurely. Fed fund futures now indicate an 18% chance of a June rate cut, down from 58% the day before.

Eurozone Braces for ECB Rate Decision Amid Dollar Dominance

Across the Atlantic, European markets brace for the ECB rate decision, with expectations leaning towards the main refinancing rate remaining steady at 4.50%. The ECB has outlined a conditional plan to potentially initiate rate cuts by June, contingent upon first-quarter wage data due in May and new economic projections. President Christine Lagarde is likely to maintain a cautious stance, emphasizing a data-dependent approach. Today’s announcement and subsequent press conference are anticipated to have minimal market impact. The Dollar continues to dominate currency markets this week, with non-Dollar currencies trading within the previous week’s range, indicating a lack of definitive strength or weakness among them.

GBP Vulnerable to Dollar Pressure, Supported Against Euro and High Beta Currencies

The British Pound faces vulnerability against the Dollar but finds support against the Euro and ‘high beta’ currencies in the wake of strong US inflation data. Following the release, the Pound retreated against safe havens like the Yen and Franc, while gaining ground against ‘high beta’ commodity currencies such as the Krone, Australian Dollar, and New Zealand Dollar. Simon French, an economist at Panmure Gordon, notes a decrease in the likelihood of a UK rate cut in June, citing caution from the BoE and ECB to avoid preemptive actions ahead of the Fed. With rate cuts being priced out across developed world markets, the Pound closed lower against the Dollar, nearing the lower end of its 2024 range.