The recent US data has sparked a hawkish repricing in rates, with Fed funds futures now almost fully priced in for a July cut of -24bps. This comes as no surprise given the strength of the US economy, which boasts strong job growth, low unemployment, resilient economic activity, and ISM manufacturing and services PMIs in expansionary territory. Additionally, the US equity space is testing all-time highs. The total easing priced in for the year now stands at -67bps. It will be interesting to see how the Bank of Japan (BoJ) reacts to this data, especially with the USD/JPY pairing on the verge of testing the ¥152.00 handle.
This week is shaping up to be crucial for market participants, with a slew of event risks on the horizon. Three developed central banks (the RBNZ, the BoC, and the ECB) will deliver updates, along with the highly anticipated US CPI inflation print and the minutes from the latest FOMC meeting. Of particular interest will be the European Central Bank (ECB) meeting scheduled for Thursday. The ECB is expected to leave all three key benchmark rates unchanged, with only a meager 9% chance of a cut. However, a total of -89bps is priced in for the year, with the first 25bp cut expected in June.
The ECB’s dovish tone has been underscored by recent economic data, including euro area inflation figures for March. Inflation has softened to 2.4% on a year-on-year basis for the headline print, aligning with ECB projections, while core inflation has cooled to 2.9%. This, combined with stagnant growth in Germany, has helped alleviate inflationary pressures. Most ECB members are eyeing June’s meeting for a possible rate cut, with ECB President Christine Lagarde acknowledging the eurozone’s disinflationary process. Further interviews with ECB members have hinted at the possibility of a 100bps rate cut, aligning with market expectations and potentially preceding the Fed’s move.
The market outlook for the coming weeks is characterized by a hawkish repricing in the US, dovish expectations from the ECB, and heightened volatility in currency markets. Traders will closely monitor central bank updates, inflation prints, and economic data releases for cues on future policy decisions. The global economic landscape remains uncertain, with geopolitical tensions and trade concerns adding additional layers of complexity to market dynamics. Stay tuned for further developments and be prepared for potential shifts in market sentiment.
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