The euro continues to hover around the $1.07 mark, maintaining its downward trajectory against the US dollar, largely influenced by investors favoring the more dovish stance of the ECB compared to the Fed. European stock markets experienced a dip, with the broad European equity index closing 0.5% lower, marking the third decline this week. France's CAC 40 saw a sharper drop of nearly 0.9%, hitting its lowest point since February, as markets reopened post a midweek European holiday and analysed the Fed's rate decision. German bond yields mirrored movements in US treasuries, declining across the yield curve.

Despite being somewhat overlooked by markets, Eurozone manufacturing sectors faced a seventh consecutive month of contraction in April, marking its longest downturn since 2013. Input costs and output charges continued to decrease, while business sentiment showed improvement for the second consecutive month, reaching its highest level since February 2022. In other European news, the Swiss franc surged against both the US dollar and the euro following a higher-than-expected inflation report, leading to a reassessment of looser policy expectations by the SNB. Annual inflation in April rose to 1.4% from a 2 ½ year low of 1% in the previous month. Concerns over the pace of inflation acceleration, despite warnings from the SNB about a bumpy recovery, raised doubts about the likelihood of another rate cut in June. Meanwhile, the Czech National Bank reduced its two-week repo rate by 50 bps to 5.25%, citing ongoing disinflation and economic weakness.

In terms of technical analysis, EUR/USD has entered a new range-bound phase since March 23rd, fluctuating within a ±50pip range centered around $1.07. Currently, the 21-day SMA at $1.0715 seems to limit further euro gains, while the 100-week SMA at $1.0630 acts as a robust support level. However, this pattern could face challenges from seasonal trends, as historical data indicates the euro tends to depreciate by an average of 0.68% against the Greenback in May since 1971.

Yesterday's Federal Reserve meeting drew considerable attention, but it was the suspected intervention by Japanese authorities that stole the spotlight. Within minutes, the Japanese yen surged over 2%, sending shockwaves through FX markets.

Seizing the opportunity presented by weaker-than-expected US macro data and a neutral Fed meeting, the Japanese Ministry of Finance (MoF) intervened in FX markets for the second time in a week. The intention behind this move appears to be twofold: to surprise speculators and render interventions more unpredictable. As a result, USD/JPY plummeted sharply from ¥157.55 to precisely ¥153, while GBP/JPY, having reached ¥200 on Monday, dipped below ¥192. This drastic fluctuation across multiple JPY crosses marked another significant event in the market.

Although the yen has already retraced a portion of its gains, both USD/JPY and GBP/USD saw nearly a 1% increase this morning. This intervention contradicts the notion of a specific threshold and suggests that the MoF and Bank of Japan are aiming to keep markets on their toes, making policy decisions more erratic and betting against the yen more challenging.

Today's spotlight is on the US Federal Reserve's Open Market Committee meeting, a pivotal event following a slew of significant data releases in the US. Although no rate adjustments are anticipated, there's a notable uptick in the likelihood of a hawkish stance from the Fed, especially in rhetoric. April marked the fourth consecutive month of the US dollar's ascent, fueled by surging US yields reaching five-month highs on the prevailing narrative of prolonged hawkishness from the Fed.

The Fed's reliance on data adds an element of uncertainty to forecasts regarding monetary policy trajectory. Any deviation, particularly in inflation, from the central bank's projections could prompt a reassessment. With the three-month average job growth standing at 244 thousand and three-month annualized core inflation at 4.5%, it's probable that Fed officials will maintain the status quo on rates for several meetings. Notably, the employment cost index, the Fed's favored gauge of labor expenses, spiked by 1.2% in the first quarter, surpassing expectations and emphasizing persistent wage pressures, which could exacerbate ongoing inflationary concerns in the US economy. This further bolsters the case for a hawkish tilt from the Fed today. Notably, Fed Chair Jerome Powell omitted the suggestion of potential interest rate cuts "likely being appropriate" at some stage this year during the last meeting, raising questions about the possibility of rate hikes this time. Market sentiment has significantly reduced expectations for rate cuts in 2024, now projecting less than two cuts, a stark contrast from the six anticipated at the beginning of the year. There's even a 25% chance that the Fed won't cut rates at all this year.

Ahead of the Fed's decision, the release of the ISM manufacturing PMI survey and JOLTS job openings data could add further volatility to today's proceedings. Last month's ISM data led to three key observations: firstly, that the manufacturing sector seems to be stabilizing while the services sector may have peaked; secondly, that the US dollar remains responsive to macroeconomic indicators; and thirdly, that concrete data points have a greater impact on the dollar compared to softer indicators.

The euro slipped below the $1.07 mark as investors tread cautiously amidst mixed inflation figures and an unexpected drop in Eurozone economic sentiment. The STOXX 50 ended in negative territory, while the yield on the 10-year German Bund fell below 2.55%, retracting from its recent five-month high.

Preliminary reports revealed that German inflation remained stagnant at 2.2% year-on-year in April, slightly below the market's expectation of 2.3% year-on-year. This was attributed to a slowdown in service inflation offset by a rebound in food prices and a lesser decline in energy costs due to the expiration of a temporary tax cut on natural gas. The EU-harmonized inflation rate came in slightly higher at 2.4% year-on-year, while core inflation, excluding volatile items like food and energy, decreased to 3.0% in April, marking its lowest level since March 2022. Elsewhere in Europe, Spain's Consumer Price Index rose to 3.3% year-on-year, the highest in three months, albeit slightly below market forecasts of 3.4%.

Despite indications that reaching the 2% inflation target is challenging, an ECB rate cut at the June meeting seems increasingly likely, with money markets pricing in a probability of over 90% for easing. However, the path forward remains uncertain. The recent uptick in inflation in the US is raising concerns about spillover effects in the Eurozone, while higher oil prices and a weaker euro could further elevate inflation expectations domestically. The market's fear of a prolonged period of elevated inflation is only matched by concerns about potential policy missteps. Without a clear necessity for a rate cut, there's a growing argument for a wait-and-see approach.

Today's economic calendar is bustling with activity. German retail sales pleasantly surprised, with April figures surpassing market expectations. Later, the Eurozone will release its initial estimates for Q1 GDP and April CPI, with projections indicating a modest uptick in growth accompanied by a slight easing in core inflation. Any positive surprises could lead to a reduction in expectations for rate cuts in the second half of the year, providing support for the euro. Risk sentiment in EUR/USD leans towards a slight decline, as indicated by the skew in overnight risk reversal, with the possibility of choppiness in trading due to month-end dynamics, albeit less pronounced than usual ahead of the looming FOMC meeting.