US stocks plunged, bond yields soared, and the USD surged to its highest point since November following a third consecutive month of unexpectedly high inflation in the US. In March, headline inflation reached 3.5% annually, surpassing the forecast of 3.4%, while the core reading came in at 3.8%, compared to an expected 3.7%. As a result of this news, market sentiment swiftly abandoned hopes for a rate cut in June. Prior to the CPI announcement, the likelihood of a cut was estimated at around 60%, but it plummeted to just over 20% afterward.
The USD/JPY pair surged by 0.9% in Asia, marking fresh 34-year highs and highlighting the strength of the USSD in the region. This puts the spotlight on 155.75, though attaining it may be challenging, especially in the short run. The Bank of Japan has shifted away from nearly a decade of unconventional loose policies but continues to maintain an accommodative stance. Despite this, the struggling Yen has seen little improvement, particularly as the Federal Reserve appears hesitant to loosen its monetary restraints. However, with the BoJ raising rates last month and potentially planning another hike within the year, while the Fed is anticipated to decrease rates, the contrast in monetary policies between the two central banks remains significant.
The European Central Bank (ECB) takes centre stage today following the decisions of two significant central banks to maintain their rates over the past 24 hours. Yesterday, the Reserve Bank of New Zealand kept its rates unchanged at 5.50% and showed no inclination toward considering rate cuts in the near future. Initially, the NZD strengthened after the announcement but later aligned with most markets following the US CPI figures. Also, the Bank of Canada similarly opted to hold rates steady at 5.00% and indicated a need for further evidence before considering rate cuts.
Today's ECB decision holds particular importance, as markets currently view the ECB as the major central bank most likely to implement substantial rate cuts over the next 12 months. Any confirmation tonight that the ECB is contemplating rate cuts could prompt a rapid decline in the value of the EUR.
