Forex News

• Inflation in Germany declined at a softer pace than expected in March.
• EUR/USD continues to push higher toward 1.0900 after the data.

Inflation in Germany, as measured by the Consumer Price Index (CPI), declined to 7.4% on a yearly basis in March from 8.7% in February. This reading came in higher than the market expectation of 7.3%. On a monthly basis, the CPI was up 0.8%, matching February's print.

The annual Harmonised Index of Consumer Prices (HICP), the European Central Bank's (ECB) preferred gauge of inflation, fell to 7.8% from 9.3% in the same period, compared to analysts' estimate of 7.5%.

Market reaction

EUR/USD continues to edge higher following these data. As of writing, the pair was up 0.4% on the day at 1.0886.

EUR/USD probes upper 1.08s. Economists at Scotiabank expect the pair to test last week’s high of 1.0930.

Intraday support looks pretty solid at 1.0830

“A firm, short-term bull trend is supporting a positive EUR technical tone on the short-term charts.”

“Intraday support looks pretty solid at 1.0830; bullish trend momentum signals across a range of time frames implies limited downside scope for the EUR and ongoing pressure for gains to extend.”

“The EUR is within reach of last week’s 1.0930 high; above here targets 1.10+.”

• EUR/GBP rallies over 50 pips from the 100-day SMA support and jumps to a multi-day peak.
• The ECB’s hawkish outlook boosts the shared currency and remains supportive of the move.
• Bets for further rate hikes by the BoE underpin the British Pound and might cap the upside.

The EUR/GBP cross rebounds swiftly from the 100-day Simple Moving Average (SMA) support, around the 0.8780 area and turns positive for the second successive day on Thursday. Spot prices rally to a four-day peak, around the 0.8820 region during the first half of the European session and seem poised to appreciate further.

The shared currency strengthens across the board after the European Central Bank (ECB), in its Economic Bulletin, noted that inflation is projected to remain too high for too long. This comes on the back of the recent hawkish commentary by several ECB officials and reaffirms bets for additional interest rate hikes in coming months, which, in turn, prompts aggressive short-covering around the EUR/GBP cross.

It is worth recalling that the ECB chief economist Philip Lane reiterated that rates would need to rise several times to make sure inflation comes down to 2%. Adding to this, Slovak central bank chief Peter Kazimir noted the ECB should not change its stance on rates, though advocated the case for slower rises following three straight 50 bps hikes. This reinforces prospects for further policy tightening by the ECB.

The EUR/GBP bulls, meanwhile, seem rather unaffected by softer Eurozone inflation data, which showed that the Spanish Harmonized Index of Consumer Prices (HICP) fell to 1.1% in March from 0.9% recorded in the previous month. Next on tap is the flash German consumer inflation figures, which will play a key role in influencing the Euro and provide some meaningful trading impetus to the EUR/GBP cross.

In the meantime, rising bets for further rate hikes by the Bank of England (BoE) might continue to underpin the British Pound and cap gains for the cross. In fact, the UK central bank Governor Andrew Bailey said earlier this week that interest rates may have to move higher if there were signs of persistent inflationary pressure. This might hold back traders from placing aggressive bullish bets around the EUR/GBP cross.

Technical levels to watch

• EUR/USD keeps the weekly bullish tone unchanged on Thursday.
• If the recovery picks up pace it could revisit the 1.0930 zone.

EUR/USD climbs to weekly highs in the 1.0880/85 band on Thursday, extending the bounce for the fourth session in a row.

The likelihood of extra advances appears favoured for the time being. Against that, the pair could now set sail to the March peak at 1.0929 (March 23) prior to a potential test of the 2023 high at 1.1032 (February 2).

Looking at the longer run, the constructive view remains unchanged while above the 200-day SMA, today at 1.0338.

EUR/USD daily chart

GBP/USD strengthens to mid 1.23s. Cable should retain a firm undertone, in the view of economists at Scotiabank.

Bulls are in control

“The broader outlook remains positive – solid trend momentum and a steady run of higher highs and higher lows on the short-term chart that shows the bulls are in control.”

“Key resistance remains the recent peaks for the pound at 1.2445/50 but that looks reachable in the near-term.”

“Minor resistance stands at 1.2400. Support is 1.2295/00.”

See – GBP/USD: On course to retest and eventually break above the 1.2447/49 highs – Credit Suisse

• DXY keeps the erratic mood and resumes the decline on Thursday.
• Next on the downside emerges the March low near 101.90.

DXY rapidly fades Wednesday’s uptick and refocuses on the downside amidst the continuation of the choppiness activity so far this week.

In the meantime, it seems the index could face some consolidative range amidst the prevailing bearish stance for the time being. That said, a drop below the monthly low at 101.91 (March 23) should open the door to a potential visit to the 2023 low around 100.80 (February 2).

Looking at the broader picture, while below the 200-day SMA, today at 106.56, the outlook for the index is expected to remain negative.

DXY daily chart

USD/JPY bottom out as systemic banking fears ease. Economists at MUFG Bank expect the pair to stabilize around the 130.00 level.

JPY gives back some of recent gains as banking fears ease

“The reversal of recent Yen gains reflects that investors have become less concerned for now over the risk of a bigger negative systemic shock coming from the banking system although the loss of confidence is expected to result in tighter credit conditions and less lending into the economy than would otherwise have been the case that will put a dampener on the global growth outlook.”

“US rate market participants remain reluctant to price back in further rate hikes for the Fed. It sets a much higher bar for US rates to regain higher levels that were in place prior to the collapse of Silicon Valley Bank earlier this month.” 

“We now believe it is more likely that USD/JPY will settle in the low 130.00’s for now rather than quickly retracing its steps back to the high from 7th March at 137.91.”

“JPY should derive more support in the month ahead as well from building speculation over a further shift in YCC policy settings in the run up to new Governor Ueda’s first policy meeting on 28th April. We still expect the BoJ to abandon YCC in Q2 but have recently delayed the timing from the April to June in response to recent banking disruption. However, we are becoming more confident that the BoJ will exit negative rates later this year.” 

• EUR/JPY picks up extra pace and trespasses the 144.00 hurdle.
• Extra advance could put the YTD high near 145.60 to the test.

EUR/JPY adds to the weekly optimism and extends the strong rebound north of 144.00 the figure on Thursday, or 2-week peaks.

Following the breakout of the key 200-day SMA (141.80), the cross could now accelerate gains to the 2023 top at 145.56 (March 2). The surpass of this level could motivate the cross to embark on a potential visit to the December 2022 high around 146.70 (December 15).

In the meantime, extra gains remain on the table while the cross trades above the 200-day SMA.

EUR/JPY daily chart

Economists at Société Générale analyze Rand's outlook ahead of the South African Central Bank meeting.

Positive carry and dovish repricing of the Fed are a boon for the Rand

“We have pencilled in another 25 bps increase to 7.50% today after core inflation unexpectedly accelerated to a 5-year high of 5.2% in February.”

“Our house view is that today may not be the final hike. We have pencilled in a peak of 7.75% in 2Q.”

“The positive carry and dovish repricing of the Fed are a boon for the Rand.”

“A retracement in USD/ZAR towards 18.00 is not ruled out if the SARB comes across as hawkish.”

• USD/CAD drifts lower for the fourth straight day and is pressured by a combination of factors.
• The risk-on mood weighs on the USD and acts as a headwind amid a fresh leg up in Oil prices.
• Spot prices find some support ahead of the 100-day SMA as traders look to the US macro data.

The USD/CAD pair remains under some selling pressure for the fourth successive day on Thursday and drops to over a one-month low during the first half of the European session. The pair, however, manages to rebound a few pips in the last hour and is currently placed around mid-1.3500s, down less than 0.10% for the day.

The prevalent risk-on environment - as depicted by an extension of the recent rally in the equity markets - exerts fresh downward pressure on the safe-haven US Dollar (USD) and turns out to be a key factor acting as a headwind for the USD/CAD pair. The takeover of Silicon Valley Bank by First Citizens Bank & Trust Company helped calmed market nerves about the contagion risk. Furthermore, no further cracks have emerged in the banking sector over the past two weeks, which suggests that a full-blown banking crisis might have been averted and drives flows away from traditional safe-haven assets, including the Greenback.

Apart from a modest USD weakness, a fresh leg up in Crude Oil prices underpins the commodity-linked Loonie and contributes to the offered tone surrounding the USD/CAD pair. A surprise drop in US Crude stockpiles to a two-year low and concerns about tightening global supplies assist the black liquid to regain positive traction following the overnight pullback from over a two-week high. In fact, the Energy Information Administration reported an unexpected fall in US inventories to a two-year low
during the week of March 24. Moreover, exports from Iraq's northern region remain halted and lend support to Oil prices.

The USD/CAD pair, however, manages to find some support ahead of a technically significant 100-day Simple Moving Average (SMA) as traders keenly await the US inflation data due on Friday. The US Core PCE Price Index - the Fed's preferred inflation gauge - will play a key role in influencing market expectations about future rate hikes. This, in turn, will drive the USD demand and provide a fresh directional impetus to the major. In the meantime, traders on Thursday will take cues from Thursday's US economic docket, featuring the release of the final Q4 GDP print and the usual Weekly Initial Jobless Claims data.

Technical levels to watch

EUR/USD is expected to see an eventual break above its downtrend from May 2021 and 50% retracement at 1.0931/44, analysts at Credit Suisse report.

Break under 1.0750/14 would warn of a fall back toward 1.0590

“Whilst we see scope for further consolidation beneath key resistance from the 50% retracement of the 2021/2022 fall and downtrend from May 2021 at 1.0931/44, we continue to look for an eventual break for a retest of the 1.1035 YTD high. Whilst this should continue to be respected, we see no reason not to look for an eventual break for a test of 1.1185/1.1275 – the 61.8% retracement and March 2022 high.”

“Support at 1.0750/14 now ideally holds. A break would warn of a fall back to the uptrend from last September, currently at 1.0590.”

Gold looks set to benefit from its safe-haven appeal in more uncertain markets, according to economists at UBS.

It will take time for investor confidence to be fully restored

“Gold has already been gaining due to the recent market volatility. The spot price broke above $2,000 an ounce to hit a 12-month high. Meanwhile, Gold exchange traded funds look set to post net inflows in March for the first time in almost a year.”

“Given recent events, we think there’s a chance that Gold prices will reach our end-March 2024 target of $2,100 earlier than expected. While a repeat of the global financial crisis appears to have been averted, we think it will take time for investor confidence to be fully restored.”

• USD/JPY attracts some dip-buying on Thursday and reverses a major part of its intraday losses.
• The prevalent risk-on environment undermines the safe-haven JPY and lends support to the pair.
• A modest USD weakness is holding back bullish traders from placing fresh bets around the major.

The USD/JPY pair rebounds over 50 pips from the daily low and steadily climbs back closer to the top end of its daily trading range during the first half of the European session. The pair is currently placed around the 132.75 region, nearly unchanged for the day and just below the one-week high touched on Wednesday.

An extension of the risk-on rally across the global equity markets undermines the safe-haven Japanese Yen (JPY) and assists the USD/JPY pair to attract some dip-buying near the 132.20 area. The global risk sentiment remains well supported by receding fears of a full-blown banking crisis, especially after the takeover of Silicon Valley Bank by First Citizens Bank & Trust Company. Furthermore, no further cracks have emerged in the banking sector over the past two weeks, which boosts investors' appetite for riskier assets and continues to drive flows away from traditional safe-haven currencies, including the JPY.

The upside for the USD/JPY pair, meanwhile, remains capped amid the emergence of some selling around the US Dollar (USD). That said, easing concerns over the banking sector led to fresh speculations that the Federal Reserve (Fed) will move back to its inflation-fighting interest rate hikes. This was seen as a key factor behind the recent strong rally in the US Treasury bond yields, which is seen acting as a tailwind for the Greenback and supports prospects for a further near-term appreciating move for the major. Bulls, however, seem reluctant to place aggressive bets ahead of the crucial the US Core PCE Price Index - the Fed's preferred inflation gauge – which is due for release on Friday and will inform expectations about future rate hikes. This, in turn, will drive the USD demand and provide a fresh directional impetus to the USD/JPY pair.

USD/JPY gains may be limited in the long run, however, by an expected hawkish pivot by the BOJ if it undos years of easy money from an ultra-dovish stimulus approach to monetary policy. Many see the election of a new BOJ governor in the form of Ueda Kazuo as heralding a potential pivot in BOJ policy. If the Bank does embark on a new tightening path, the effects for the Yen may be dramatic. According to a report from Bloomberg, the Yen could rise rapidly on a backflow of $3.4 trillion of investments made by the Japanese overseas over recent decades, in a effort to eke out yield as rates at home remained perma-low.   

In the short term, however, traders will take cues from the release of the final US Q4 GDP print on Thursday and the usual Weekly Initial Jobless Claims data for some impetus later during the early North American session. Apart from this, the broader risk sentiment might produce short-term opportunities.

From a technical perspective the pair has broken above the trendline capping the move down since the March 7 highs. Wednesday witnessed a strong green breakout candle which suggests more gains could be on the horizon. The only fly in the ointment of the bullish thesis is the location of the 50-day Simple Moving Average (SMA) which sits at 132.85, capping the previous day's gains and providing a tough line of resistance to any further upside. A clear and decisive break above the 50 DMA, as well as a break above the previous higher low at 133.00, is necessary therefore, to provide a confirmation of further gains. Such a move could see USD/JPY recover to 135.00 initially. Alternatively, a break back below the 129.64 lows would reassert the bearish short term trend and see a move lower evolve. 

Technical levels to watch