Headline US inflation declines sharply.

US consumer prices increased 0.1% for March, slightly below consensus forecasts of 0.2% and the year-on-year inflation rate declined sharply to 5.0% from 6.0%. This was below expectations of 5.2% and the lowest headline reading since June 2021.

Food prices were unchanged on the month with an annual rate of 8.5% while energy prices declined 3.5% to give a 6.4% annual decline.

Underlying prices increased 0.4% on the month with the year-on-year rate edging higher to 5.6% from 5.5% and in line with market expectations.

There was another monthly decline in used vehicles prices with an 11.2% decline over the year. There was a strong increase in transport services prices with a 13.9% annual increase with shelter prices increasing 8.2% over the year.

According to minutes from March’s policy meeting, several officials considered whether to pause rates at the meeting. Many officials also lowered their estimate of peak rates following strains in the banking sector.

San Francisco Head Daly stated that the central bank has more work to do on raising interest rates. She added that there is a lot of uncertainty about how long it takes for rate hikes to impact the economy. She also commented that the Fed is at a point where it does not expect to increase rates at every meeting.

The dollar overall lost ground after the inflation data with some relief that the inflation data was not worse than expected.

EUR/USD posted solid gains to test the 1.1000 level for the first time in over two months while the dollar index tested April lows even though Fed Funds futures still indicated close to a 70% chance of a May rate hike.

The Bank of Canada held interest rates at 4.50% following the latest policy meeting, in line with consensus forecasts.

The bank expects a further sharp decline in headline inflation but remains concerned that core inflation will be sticky.

The latest Australian labour-market data was stronger than expected with an employment increase of 53,000 for March compared with expectations of around 20,000 while the unemployment rate held at 3.5%.

The latest UK data recorded no change in GDP for February compared with expectations of a 0.1% increase with a marginal 0.1% increase on a 3-month basis.

The latest US producer prices data will be released on Thursday. The headline annual increase is forecast to slow to 3.0% from 4.6%.

The Euro posted sharp gains after the US inflation data with relief that US data was not worse than expected. On-going hawkish ECB rhetoric also underpinned the Euro. EUR/USD challenged the key 1.1000 level before consolidating just below this level.

Dovish Bank of Japan rhetoric undermined the yen. Lower US yields provided only temporary yen support. USD/JPY dipped to 132.75 before recovering to 133.25.

The Swiss franc held a firm tone despite solid risk conditions. EUR/CHF traded just below 0.9850 before a slight recovery with USD/CHF sliding to lows just below 0.8950.

Sterling was mixed as global developments dominated. Bank of England Governor Bailey made no comments on interest-rate policy. GBP/USD advanced to test the 1.2500 area.

Commodity currencies secured gains as the US dollar lost ground. There was a measured Canadian dollar reaction to the Bank of Canada policy decision. USD/CAD dipped to 1.3430 before consolidating. AUD/USD advanced to near 0.6700 on Wednesday. Stronger than expected jobs data triggered a further AUD/USD advance to 0.6710.

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