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US Dollar Remains Elevated as Inflation Pressures Remain

Another volatile week across financial markets saw a higher level of volatility ahead of the Easter holiday weekend. The volatility saw government bond yields initially fall over concerns about accelerating inflation and hawkish policy signals from Federal Reserve (Fed) officials. A drop in market sentiment saw bond yields rally later in the week with the US 10-year Treasury yields breaking above 2.8%. Further sharp rises in annual CPI inflation to new multi-year highs in March did little to dampen concerns over intensifying price pressures.

The inflation data reported that US Core CPI rose less than analysts had forecasted in March, suggesting that the Fed might not need to adopt the level of urgency to raise interest rates as analysts have been pricing in. The US Core CPI, rose by just 0.3%, below the 0.5% expectations and the smallest increase since September which represents some good news in terms of inflation rates cooling off.  A concern for the Fed, however, will have been the larger than expected rise in service prices, which was an indication that inflationary pressures were widening. Several Fed policymakers have recently signalled the possibility of a 50-basis point rate increase at the next policy update on 4 May, helping to reinforce odds that the Federal Open Market Committee (FOMC) will hike rates more aggressively.

Looking ahead to this week, US PMI data will be reviewed by markets. Typically, this release attracts less attention than the more well-established ISM surveys data and the impact may be limited. Last month, both the manufacturing and services indices were up from February, and both are at elevated levels typically consistent with strong economic growth.

BoE Moves Back Into Focus Ahead of May Meeting

Sentiment around the Bank of England (BoE) has taken a back seat recently, with no BoE speakers scheduled this week and following the March meeting where policymakers shifted tone from very hawkish to more cautious. That said, we could see some more interest in the pound as we head closer to the May BoE meeting. Significantly, the next 25-basis point hike will see the BoE reach the 1% level and the focus this week will turn to Governor Bailey who will speak twice on the economy, with Thursday’s discussion at the Peterson Institute for International Economics event likely to be the most important where he is likely to address inflation. Meanwhile, Monetary Policy Committee (MPC) member Mann speaks on decision-making under uncertainty on Thursday as well.

The data calendar for the coming holiday foreshortened week is relatively light. Potentially of most interest are the preliminary April readings for the manufacturing and services PMIs. Last month saw a big jump in the services measure as the post-Omicron rebound in consumer-facing services continued, however, the manufacturing index fell to its lowest since last February. This month’s data will be watched for evidence of how much the Ukrainian crisis is impacting the UK. March retail sales will provide a further steer on whether consumer spending is slowing

Downside Risks Continue to Weigh on Single Currency

Last week’s European Central Bank (ECB) meeting fell short of the market’s hawkish expectations. As the ECB officials outlined, an end to stimulus efforts in Q3 2022 remains the most likely course of action. The policy outlook leaves the Euro at a disadvantage in the near term, as other major central banks including the BoE and Fed are raising rates to try and curb price pressures. The euro plunged to a two-year low against the greenback following comments from ECB President Christine Lagarde that have been taken as a signal to markets that there will be no hurry to raise interest rates. Analysts continue to forecast July for the first ECB rate hike which may see the single currency continue to come under pressure against the US Dollar and Pound.

Looking to the week ahead, the final March Euro inflation rate (HICP) report isn’t anticipated to showcase any changes from the preliminary readings, with forecasters expecting a modest increase. April manufacturing and services PMIs will also be out for the Eurozone. Last month saw the Eurozone manufacturing PMI measure drop but the services index rose very modestly compared to February. Given the Eurozone’s closer economic links to Russia and Ukraine (relative to the UK), it seems likely to be more impacted by the crisis.

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