Markets still banking on 0.50% May Fed Rate hike.

In comments on Wednesday, San Francisco Fed President Daly stated that it would be prudent to raise rates to 2.5% by year-end as moving purposely to a more neutral policy stance is a top priority.

She added that the Fed will then need to assess financial conditions and inflation to see what more needs to be done.

Treasuries managed to secure some respite on Wednesday with the 10-year yield retreating to around 2.85%. There was again a glimmer of optimism that the US inflation pressures are peaking with the Beige Book slightly less alarmist over inflation pressures.

The decline in US yields triggered a limited dollar correction against all major currencies, although with little evidence at this stage of a shift in overall market dynamics and the move seen as a correction. The dollar index dipped to 100.20 before a recovery to 100.30. Markets will be monitoring price action if the dollar re-tests 2-year highs at 101.0.

There was hawkish rhetoric from ECB council member Kazaks stated that a rate hike was possible as soon as July as a gradual approach does not mean a slow response and that the central bank does not need to wait for stronger wages growth.

The ECB consensus for now is that interest rates will be increased at some point in the third quarter.

G20 quiet on the yen slide

The Bank of Japan continued to intervene to cap domestic bond yields. Bank Governor Kuroda stated that forex stability is desirable.

There were, however, no significant warnings over currency levels from the G20 meeting and overall yield spreads triggered renewed selling pressure on the yen.

Canadian consumer prices increased 1.0% for March with the year-on-year rate jumping to 6.7% from 5.7% previously which was well above consensus forecasts of 6.2% and the highest rate for 31 years.

The core inflation rate increased to 5.5% from 4.8% with the Bank of Canada core measures also continuing to increase. The data increased expectations of aggressive Bank of Canada tightening at forthcoming meetings.

ECB rhetoric provided an element of Euro support in global markets. French opinion polls continued to indicate a sold lead for Macron and victory over Le Pen in the TV debate. The Euro overall gained an element of relief during the day.

A retreat in US bond yields also curbed dollar support and encouraged a correction. EUR/USD advanced to around 1.0865 before consolidating close to 1.0850.

The yen also gained an element of relief as US yields declined. USD/JPY dipped to near 127.50 before a rebound as overall yields undermined the yen. The Bank of Japan continued to cap yields with USD/JPY back above 128.00 on Thursday. The Swiss franc resisted further heavy losses with USD/CHF around 0.9500.

Sterling was dominated by dollar moves and GBP/USD edged higher to 1.3050. GBP/EUR dipped to the 1.2000 area with no impact from UK politics. Stronger than expected inflation data triggered further Canadian dollar gains. USD/CAD dipped to lows near 1.2470 before consolidating around 1.2480. The Australian dollar posted solid gains with AUD/USD near 0.7450.

Economic Calendar

10:00Euro-Zone CPI (Y/Y)(MAR)7.50%7.50%
10:00Euro-Zone CPI (M/M)(MAR)0.90%0.90%
10:00Euro-Zone Core CPI (Y/Y)(FEB 15)2.70%3.00%
13:30USD Philadelphia Fed. Manufacturing Index(APR)20.927.4

*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.