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Fed between a rock and a hard place

The US CPI data yesterday (Tuesday, March 14th) was the last inflation report before the FOMC meeting next week.

The figures highlighted that hot prices remain and put the pressure on policymakers to remain in tightening mode even as concerns around the SVB blow-up linger.

Financial stability is key for the FOMC, but high and sticky inflation sees the Fed at risk of facing another credibility issue if it abruptly calls to an end its anti-inflation campaign.

More tightening would be good for the dollar which has struggled with the banking contagion issues.

Short-term yields bounced back yesterday giving the greenback some support. But this move could be cut short if financial risks fail to abate and US regulators are forced to take more steps to try and restore market confidence.

Any long-lasting rebound in risk sentiment, which kicked off on Tuesday, could see some of the risk-on, cyclical currencies also start to look attractive again.

In fact, the Tuesday turnaround also saw safe haven currencies like the Japanese yen and Swiss franc which had enjoyed Monday’s panic get sold.

Safe haven currencies like Japanese yen and Swiss franc got sold

 

ECB meeting to be a challenge

Money markets have been on a huge rollercoaster ride this week with massive safe haven buying and dovish repricing on Monday seeing part of those moves reversed yesterday.

The narrowing in European and US government bond yields has pushed up EUR/USD as the ECB is still expected to hike rates by 50bps at its meeting tomorrow.

The recent financial turmoil is only seen impacting the bank’s discussion on the rate path beyond the March meeting with the Governing Council likely to remain laser focused on fighting elevated inflation.

EUR/USD has run into the 50-day simple moving average (SMA) at 1.072 which may act as near-term resistance. A decisive close and advance beyond this point is needed to boost the euro’s near-term outlook.

Support sits around 1.069, with the 21-day SMA set to shore things up further below.

Narrowing in European and US government bond yields pushed up EURUSD

 

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