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US Dollar Continues to Strengthen as Government Bond Yields Rally

Yesterday saw surging government bond yields underpin the recently elevated US Dollar. The Dollar Index broke above the 101.00 mark for the first time since March 2020. Elsewhere on Tuesday, housing starts data posted an unexpected increase with little sign of production slowing. Meanwhile, the Dollar remained supported as investors brace for multiple half-point rate hikes from the Federal Reserve (Fed) as it seeks to curb soaring inflation rates. US Fed policymakers now only have a few days to signal their near-term policy intentions before they go into a blackout period ahead of the May policy update. The indications from previous comments are that they are likely to raise interest rates by 50-basis points at the forthcoming meeting, notably, St. Louis Fed President James Bullard repeated that rates may need to be increased to 3.5% by the end of the year.

Looking ahead to today, updated US housing sector data will be a good first indicator of whether higher interest rates are beginning to have an impact as the sector is particularly rate sensitive to movements in interest rates.

UK Growth Expected to Slow According to IMF

Sterling was restricted to narrow ranges on Tuesday with a light economic calendar. Later in the session it was announced that growth outlook in the UK may worsen rapidly. According to the International Monetary Fund (IMF), the UK is expected to show the joint fastest growth in the G7 this year, however the downgraded outlook weighed on Sterling later in the day. The Washington based lender commented that it expects GDP growth of 1.2% in 2023, indicating that the UK will face the weakest growth and the highest inflation of any G7 country in 2023. The data will add further pressure to the UK government, which is already under strain following the fines for Boris Johnson and Rishi Sunak for breach of lockdown regulations. Today’s data calendar is light with nothing of note scheduled for release in the UK.

EU Focus Turns to French Elections

The Euro remained subdued on Tuesday due to concerns about the EU’s economic prospects, following the IMF’s downgraded growth outlook for the bloc. The IMF slashed Euro Area GDP for 2022 from 3.9% to 2.8% due to shockwaves caused by the war in Ukraine, including soaring energy costs, supply chain disruptions and lower trade activity.

Elsewhere, the focus today in Europe will be on tonight’s TV debate (21CET) between Emmanuel Macron and Marine Le Pen. Polls currently show a strong lead (56% vs 44%) for Macron, while Le Pen will be hoping to improve on her poor TV debate performance back in 2017.

In the Eurozone today, industrial production for February is unlikely to show a significant impact from the Ukrainian crisis. The data will offer a gauge of the strength of the sector before the Ukraine crisis.

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