US CPI inflation data was stronger than expected with a headline year-on-year rate at 2-year highs of 2.6%.

US CPI inflation data was stronger than expected with a headline year-on-year rate at 2-year highs of 2.6%.

Despite the higher inflation print, bond yields moved lower which had an important impact across asset classes. Lower yields helped underpin risk appetite and offset coronavirus vaccine reservations. Wall Street equities posted limited gains to a fresh record high with net gains for global bourses.

The dollar moved lower amid the retreat in US yields and retreated to 3-week lows. EUR/USD also hit 3-week highs above 1.1950. Sterling was mixed with protection from gains in equities, but GBP/EUR secured net gains. Commodity currencies gained as the US dollar lost ground.

The German ZEW economic confidence index retreated to 70.0 for April from 76.6 the previous month and below consensus forecasts of 79.0. There was, however, a stronger than expected net improvement in the current conditions index to -48.8 from -61.0 previously. The Euro-zone expectations index improved slightly to 66.3 from 74.0 the previous month. The Euro drifted lower after the data, although overall moves were limited amid caution ahead of the US CPI data.

ECB council member Villeroy stated that the cause of higher inflation is only temporary and that it was too early to remove policy stimulus.

Delays to the Johnson & Johnson vaccine could be a significant setback given that the EU has placed huge orders for the vaccine, but the Euro was resilient.

The US NFIB small-business confidence index strengthened to 98.2 for March from 95.8 the previous month, maintaining confidence in the outlook.

US consumer prices increased 0.6% for March, above consensus forecasts of 0.5% with the year-on-year inflation rate increasing to 2.6% from 1.7% previously and the strongest reading since September 2018 as gasoline prices increased sharply. Core prices increased 0.3% on the month, above consensus forecasts of 0.2% with the annual rate increasing to 1.6% from 1.3% and above market expectations of 1.5%.

Although markets have been fretting over inflation risks and the consumer prices data was stronger than expected, US yields moved lower following the data. The 5-year yield dipped to below 0.85% from 13-month highs around 0.95% early last week. Markets also appear to have been positioned for a strong figure and dollar gains. In this environment, the dollar failed to gain support from the data and quickly lost ground with EUR/USD strengthening to highs near 1.1950.

Commodity currencies rallied and the dollar remained on the defensive later in the session. The US currency retreated further to 3-week lows on Wednesday with EUR/USD trading around 1.1965.

Risk appetite was slightly more fragile after news that the Johnson &Johnson vaccine rollout had been delayed in Europe due to blood-clotting concerns while US regulators also called for the domestic use to be suspended. This is a similar issue which has been seen in the AstraZeneca vaccine, increasing uncertainty.

Lower yields had a significant impact in undermining dollar support following the data with USD/JPY retreating to lows near 109.20. The dollar remained vulnerable later in the session and US yields moved lower following a strong US bond auction which also curbed US currency support.

Philadelphia Fed President Harker expressed confidence that inflation would not run out of control this year.

Japanese machinery orders declined sharply for February with an 8.5% slide after 4.5% drop the previous month which triggered wider concerns over the Japanese recovery outlook. The dollar overall remained on the defensive during the Asian session and USD/JPY retreated to 3-week lows below 109.00 with EUR/JPY above 130.00.

There was some disappointment that the UK GDP data failed to beat expectations and the trade data maintained underlying unease over underlying developments with volumes still below 2020 levels which will maintain reservations over the longer-term recovery outlook.

The Bank of England announced that chief economist Haldane would leave the bank in June. Haldane has talked-up the recovery outlook this year and adopted a generally more hawkish stance. His departure could tilt the balance on the committee significantly and lead to a more dovish policy stance over the medium term with increased resistance to higher interest rates. In this context, Sterling dipped lower following the news.

The UK currency was also hampered to some extent by unease over the Johnson &Johnson vaccine and a fresh outbreak of cases for the South African variant.

Risk appetite was slightly firmer later in the session which curbed potential selling pressure. GBP/USD currency settled near 1.3750 with GBP/EUR moving above 0.8700 before a retreat. Risk appetite held steady on Wednesday with GBP/USD trading around 1.3780 and EUR/GBP around 1.1500.

Economic Calendar

07:15BoJ Governor Kuroda Speaks
10:00Euro-Zone Industrial Production (M/M)(FEB)0.80%
10:00Euro-Zone Industrial Production (Y/Y)(FEB)-2.40%0.10%
12:00USD MBA Mortgage Applications-5.10%
12:45European Central Bank Panetta Speaks
13:30USD Export Price Index (M/M)(MAR)0.91.6
13:30USD Import Price Index (M/M)(MAR)1.20%1.30%

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.