Fed speakers maintain hawkish narrative.
New York Fed President Williams stated that the central bank will move expeditiously to bring interest rates back to more normal levels. He stated that the US has a sizzling hot labour market while the central bank needs to be data dependent and adjust policy actions as circumstances warrant.
He added that 50 basis-point rate hikes at the next two policy meetings makes sense as a base case while the Fed can certainly move above neutral if necessary.
Cleveland Fed President Mester stated that she thought the central bank would need to go beyond neutral and that she would need compelling evidence that inflation is moving down. She added that there may be another quarter of negative growth and that unemployment may need to rise to bring inflation down.
US yields moved lower on Tuesday despite the generally hawkish Fed rhetoric. Market expectations remained elevated and there was an element of hope that the 75 basis-point rate increases could be avoided.
The 10-year yield traded just below the 3.00% level on Wednesday.
The latest US consumer prices data will be released on Wednesday. Consensus forecasts are for the headline CPI inflation rate to moderate to 8.1% from the 40-year high of 8.5% last month.
The core rate is also expected to retreat to 6.0% from 6.5%.
The impact on yields and any narrative surrounding peak inflation will be crucial for all asset classes in the short term.
There were sharp changes in direction on Wall Street during Tuesday. Initial gains gave way to notable losses in mid-session, but major indices did manage to post slight gains into the close and futures also edged higher on Wednesday.
Wall Street reaction to the data will be an important element on Wednesday.
Bundesbank President Nagel stated that the inflation trend is disturbing and that it is also gaining momentum. He added that the ECB should raise rates in July if incoming data confirms that inflation is too high and that the risks of acting too late are increasing.
He also warned that price expectations could become less anchored, although markets were still unconvinced that the ECB would take action.
The German ZEW economic sentiment index was slightly stronger than expected, but current conditions were weaker. Underlying confidence in the Euro-zone outlook remained fragile. Consolidation was the main theme as markets monitored risk conditions with caution ahead of the US CPI data.
EUR/USD held above 1.0500, but failed to make headway and settled around 1.0540. Lower US bond yields hampered the dollar to some extent with the currency index just below 20-year highs. USD/JPY did find support below 130.0 and traded around 130.35 on Wednesday.
The Swiss franc looked to resist further losses. USD/CHF still posted a slight new 26-month high around 0.9975 before consolidating near 0.9950.
Sterling was unable to make headway with Brexit concerns another negative element. GBP/USD did find support close to 1.2300 and traded around 1.2335 on Wednesday. GBP/EUR was little changed close to 1.1700.
Commodity currencies remained vulnerable on Tuesday before a slight recovery on Wednesday. AUD/USD was held below 0.7000 and traded around 0.6965 on Wednesday after finding support near 0.6900. USD/CAD traded just above 1.3000 on Wednesday after 17-month highs around 1.3050 on Tuesday.
|07:00||Germany CPI (Y/Y)(APR)||7.30%||7.40%|
|07:00||Germany CPI (M/M)(APR)||2.50%||0.80%|
|13:30||USD CPI (Y/Y)(APR)||8.50%|
|13:30||USD CPI Ex Food & Energy (Y/Y)(APR)||6.50%|
|13:30||USD CPI (M/M)(APR)||1.20%|
|13:30||USD CPI Ex Food & Energy (M/M)(APR)||0.30%|
|19:00||Federal Budget Balance(APR)||-191.0B||-193.0B|
|00:01||RICS Housing Price Balance(APR)||75%||74%|