Higher yields aid dollar, while euro remains heavy even as CPI spike jolts ECB

A risk-off vibe seems to have overshadowed US stock futures as positive sentiment is lacking at the start of this week. The S&P 500 has managed to hold above its 200-day simple moving average (SMA) around 4,550, while the Dow Jones 30 and Nasdaq 100 composites have stabilized after a pullback below their respective longer-term 200-day SMAs at 35,057 and 15,167.

Higher US yields are underpinning the greenback. The 10-year yield is currently creeping higher to 2.38%, while the 5- and 2-year yields remain elevated as well at 2.53% and 2.40% respectively, despite dipping from their intra-day highs. The 2-year differentials with Germany, Japan and UK have also hit cycle highs, offsetting any evident gains in the euro, yen and pound.

The nonfarm payrolls report last Friday has indicated that employment in the US is only getting better and better, which is helping solidify the Fed’s belief that the economy can handle more aggressive tightening should they choose to finally take that path.

The dollar index has bounced from its March 17 trough of 97.69, and recent positive traction has reached the 98.85 level, while the euro has been deteriorating since Thursday 31 March and is testing the S1.1000 handle. The pound has been more resilient towards the strong dollar, though slipping temporarily below, is now trading around the $1.3100 price hurdle.

The euro area’s March inflation print at 7.5% m/m seems to have gotten the ECB’s attention but may be unable to provide immediate assistance to the common currency, even though this has intensified tightening expectations of the already more hawkish ECB. Despite the aggressive tightening the market is pricing in to tackle inflation, which has been exacerbated by the Ukraine conflict, this scenario for now looks unrealistic and maybe if the ECB updates its forward guidance in April, things could change.

On the Bank of England front, their messaging has tilted more dovish of late, which is somewhat hurting the pound.

Although the dollar’s influence has boosted the haven swissie and yen pairs recently, the swissie intraday has weakened to 0.9280 Swiss franc per dollar, while the yen is largely unchanged today around 122.82 yen per dollar. The weaker yen is a conundrum for the Bank of Japan as a weaker currency does help exports but makes the country’s position towards import prices a more difficult one.

Elevated commodity prices and risks toward slowdown in China

Commodity currencies like the loonie, aussie and kiwi are consolidating around C$1.2500 per dollar, $0.7500 and $0.6930, respectively. PMI readings in March are warning that China may slip into contractionary territory. Elevated commodity prices are only picking at the wound, as are the continued delays in approving stimulus.

The Bank of Canada’s tightening expectations are hot after it started the cycle with a 25-bps hike, reaching 0.5% earlier this month. Any stronger numbers out of its business survey today at 14:30 GMT, and upcoming Canadian Ivey PMI as well as employment data later in the week could elevate the BoC’s hawkish tone.

Gold’s deep retracement to the 50.0% Fibonacci retracement of its recent six-week rally has steadied around the $1,928/oz level, while WTI oil futures’ March 29 trough is supporting the price north of the $98.50 per barrel mark, whose 50-day SMA is also at the $98.00 hurdle.

At 15:00 GMT, US monthly factory orders will be released, while UK MPC Member Cunliffe will be speaking at the European Economics & Financial Centre in London.