On Tuesday, the downward trend of the US Dollar (USD) persisted, marking its fifth decline in six trading days, just ahead of the crucial US inflation report scheduled for today.

The March inflation figures hold significant sway over expectations concerning a potential Federal Reserve rate cut in June.  A robust inflation figure might squash hopes for a June rate cut, whereas a figure in line with or below forecasts could sustain these hopes.  According to Reuters, analysts anticipate a rise in annual headline inflation from 3.2% to 3.4%, while core inflation is projected to dip from 3.8% to 3.7%.

Despite ongoing concerns in financial markets about monthly fluctuations in US inflation, the data reveals that headline inflation has hovered around 3.5% for nearly a year, with core inflation remaining close to 4.0% for over six months. Both figures mark a considerable decrease from the highs observed in 2022, when headline inflation peaked at 9.1% in June and core inflation hit 6.6% in September.  Looking ahead, there are indications that US inflation may eventually trend downward, particularly as the more persistent components of inflation, excluding shelter costs, are showing a decline. Nevertheless, elevated housing expenses, particularly rent, remain a significant risk factor.

The Australian Dollar (AUD) and New Zealand Dollars (NZD) led in gains, with both currencies climbing by 0.4% prior to today's Reserve Bank of New Zealand decision scheduled for 2:00 pm NZST.  Similar to its stance in late February, the Reserve Bank of New Zealand appears poised to offer cautiously balanced guidance and maintain an unchanged cash rate of 5.50%.

Since their previous meeting, there have been declines in food and dairy prices, a more significant contraction in GDP than expected, and a generally dovish tone from other major central banks. However, the NZD has also depreciated, while oil prices have risen. Overall, we perceive the risks to be relatively evenly distributed, although we do not foresee a substantial shift in policy stance at this juncture.

Before seriously considering arguments for rate cuts, it's likely that the RBNZ board will want to assess the Q1 CPI, expected on April 17th, revised staff estimates on May 22nd, and the upcoming budget announcement on May 30th.  We anticipate the first 25 basis point rate cut to occur in August, with a total of 75 basis points of easing anticipated throughout the year. Consequently, there may be limited upside for the NZD/USD pair in the medium term.

The EUR regained strength, rising above $1.0850 as the appetite for riskier assets improved early in the week.  While the DXY experienced a slight decline due to a report indicating sticky consumer inflation expectations, the EUR was bolstered by a positive industrial production report from Germany and improving investor sentiment data.

The recent report revealed that German industrial production surged by 2.1% month-on-month in February, surpassing market forecasts of 0.3%.  This marks the second consecutive month of growth and the quickest rate of expansion in 16 months, driven by increased activity in construction, automotive, and chemical sectors.  Despite the optimistic data, it's important to note that this does not signify a significant structural recovery yet, but rather a seasonal uptick in economic performance. Industrial production still lags approximately 8% below its pre-pandemic levels, and the less volatile three-month comparison continues its decline.  Additionally, the latest Sentix report indicated a strengthening investor confidence across the Euro area for the sixth consecutive month in April, reaching a 26-month high, as expectations turned positive for the first time since the onset of the Ukraine war.

Looking ahead, investors will closely monitor the US Consumer Price Index (CPI) report for March, set to be published tomorrow.  Robust price pressures could dampen expectations of Federal Open Market Committee (FOMC) rate cuts for June, bolstering demand for the US dollar, whereas weak figures might fuel speculation about the Fed shifting towards rate cuts during the same period.  On the Eurozone front, attention will turn to the European Central Bank (ECB) interest rate decision scheduled for Thursday.  Although the central bank is widely expected to maintain its key borrowing rates at 4.5%, investors will be keen to discern hints about the timing of potential rate cuts.  In the short term, with EUR/USD stabilising above the $1.0850 threshold, it is positioned for a bullish trend until Thursday, with the next resistance level anticipated at $1.0873, corresponding to the 100-day simple moving average.

Market sentiment continues to be swayed by factors such as interest rate projections, the timing and extent of potential rate adjustments, and escalating geopolitical tensions, all of which have contributed to pushing gold prices to unprecedented levels.

Despite enduring fundamental challenges, the UK economy exhibits a degree of resilience, though concerns linger regarding persistent wage inflation. Analysts are predicting a 0.75% reduction in interest rates by the Bank of England this year, anticipated to commence in either June or August.

In the United States, Federal Reserve Chair Powell reiterated a cautious approach towards rate cuts, while market projections indicate the initiation of a cutting cycle in June, with an expected cumulative reduction of 0.75% throughout the year. The US economy maintains robust performance, with recent data propelling yields to new highs for the year. The forthcoming US jobs report and inflation figures are pivotal in shaping monetary policy, potentially introducing heightened short-term volatility.

Across Europe, headline inflation fell slightly below expectations at 2.4%, reinforcing anticipations of aggressive rate reductions by the central bank, slated to begin in June, with nearly 1% in cuts anticipated.

Regarding currency exchanges, GBP/USD experienced a decline towards its year-to-date lows around 1.2550 this week before rebounding, while GBP/EUR remains relatively stable, hovering around the 1.1700 mark.

The USD surged from its two-week low yesterday following remarks by Minneapolis Federal Reserve President Neel Kashkari suggesting that rate cuts might not be necessary this year if inflation remains subdued.  This week has seen significant developments on the macroeconomic front, with Eurozone inflation continuing its decline and the ISM PMI surveys indicating a gradual convergence between the manufacturing and services sectors. However, the primary concern for central banks globally and the current low-volatility environment stems from the recent rise in commodity prices, the USD, and inflation expectations.

This interconnected trio of challenges for risk assets demands close monitoring in the weeks ahead, particularly as the Stoxx 600 European equity index just experienced its most negative week in over two months.  Looking forward to today, volatility is expected to increase around the release of the jobs report for two main reasons. Firstly, the non-farm payrolls report has consistently been the most volatility-inducing data release globally for several years.  Secondly, recent months have witnessed staggering revisions to the initial numbers, with an average downward revision of jobs growth for seven months since the start of 2023, with revisions typically reducing the initial figures by 7%. Notably, December's figures were revised upwards by 74 thousand jobs while January's figures were revised downwards by 124 thousand.  Given this volatility in the data and market reactions, similar fluctuations are anticipated today.

Recent hawkish adjustments to Fed policy expectations, coupled with Chairman Powell's apparent inclination towards a June rate cut, suggest that the risks to the USD after today's US jobs report may lean asymmetrically towards the downside.  In simpler terms, a weaker jobs report could potentially weaken the USD more than a stronger report would strengthen it.

The US Unemployment Rate is projected to remain unchanged at 3.9% during the same period. Meanwhile, Average Hourly Earnings, a key indicator of wage inflation, are expected to increase by 4.1% in the year ending March, showing a slight deceleration from February's growth of 4.3%.