FX Update: ECB checks euro advance. End of quarter for JPY.

Forex 5 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  EU sovereign bonds caught a strong bid today, the last day of the quarter, after a brutal run lower year-to-date, in part on ECB Chief Economist Lane out arguing that ECB policy can still go in either direction. This checked the euro advance from earlier this week, which was already built on the rather shaky foundation of hopes that the war in Ukraine is moving toward détente. Further bad headline on that front also pressure euro pairs today.


FX Trading focus: ECB’s Lane caps euro advance. JPY and last day of Japan financial year. Next tests for Fed credibility.

The EURUSD advance was checked today in part by surprisingly dovish rhetoric from ECB Chief Economist Lane, who fretted the impact of soaring energy prices on growth prospects and argued that policy still needs to consider two-way risks from the ECB’s latest favourite word: “fragmentation”, which is the code word for uneven monetary policy transmission across the Euro zone due to perceived variation in credit strength by the various EU sovereigns that drove peripheral spreads wider together with the general sharp rise in EU yields in February, if failing to do so since the Russian invasion of Ukraine. After the latter, the strong sense of solidarity and large mutual EU debt issuance has made a strong impression and there has been no fragmentation since then even as yields have risen sharply again in recent weeks. Nonetheless, I have long considered it more likely and appropriate that the ECB ends up hiking rates for inflation credibility while still maintaining selective QE to avoid peripheral spreads blowing as they might if their QE ends. It is either that or a deepening commitment to a mutual fiscal foundation after the first steps in this direction were made in response to the pandemic, and now more impressively in the wake of the Russian invasion of Ukraine.

As discussed in the EURUSD chart below, this dovish blast from Lane and others at the ECB has turned the EURUSD rise in a very pivotal technical area, underlining its importance. The euro was under pressure broadly on today’s developments, as the war impacts clearly need to lift durable for the euro to realize its potential. EURGBP is at an interesting inflection points as well, having closed above its 200-day moving average (0.8470) yesterday and trying to follow through higher before a vicious reversal set in.

Chart: EURUSD
A mini-swarm of developments have seen the euro in steep retreat today after the sharp rally Tuesday that was built on the rather shaky foundation of hopes that Russia’s announcement of a cessation of operations in the Kyiv and other areas were a step in the direction toward détente. This hope has yet to pan out with any further developments, as natural gas prices remain elevated in EU and the latest leg lower in the euro around lunch-time in Europe today seemed triggered by Italy’s Prime Minister Draghi saying that Putin told him that conditions are not right for a cease-fire and that it is too early for a meeting with Ukrainian president Zelenskiy. Besides Chief Economist Lane’s dovish comments today, we also had the ECB’s Guindos out saying that he hasn’t seen many signs of rising wages yet and that he hopes inflation will peak in the next two to three months as part of the inflation shock is linked to temporary factors. The EURUSD action turned tail today after having bulled almost precisely to the late 2021 low at 1.1186. A weak close today underlines the importance of the 1.1125-1.1185 resistance zone and keeps the focus on the lower zone for now.

Source: Saxo Group

JPY: finally, end of financial year in sight. The dovish ECB musings are taking some of the sting out of the yen’s recent dire isolation, as EURJPY corrects further. But the solid rally in US treasuries since the beginning of the week is the more important JPY-supportive coincident indicator at the moment and the one to watch going forward as we have important US data on tap today (more below) and a new quarter getting underway tomorrow after a brutal one for most of Q1 for fixed income assets, which has likely helped trigger some portfolio rebalancing in support of bonds this week.

Test of Fed credibility into next week. Today sees the release of the Feb US PCE inflation data, which is weeks after the BLS CPI data series, but nonetheless could carry some weight with the Fed as it is the Fed’s preferred inflation indicator. A higher than expected PCE number together with a strong jobs (and especially earnings) report tomorrow would be the latest test for this Fed and its attempt to catch up with the curve. Yesterday’s March ADP private payrolls number was out at a more than solid +455k, though we have seen some wild revisions in that and the official data in recent months. By the way, a good discussion on financial conditions on today’s Saxo Market Call podcast as we look at some indicators suggesting tightening financial conditions (likely those linked to rising nominal yields, especially for mortgage rates) while market measures of financial conditions (volatility and credit spreads, for example) have improved at a blistering pace over the last couple of weeks. Is the Fed focusing on the whole picture?

Table: FX Board of G10 and CNH trend evolution and strength.
Some solid mean reversion in the JPY sell-off this week – but as noted, an important calendar roll taking place today. Elsewhere, note the interesting AUD drop, and oil-linked currencies struggling on US President Biden’s plan for a sustained release of strategic reserves.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
The AUDNZD up-trend looks derailed on the charts after the recent sharp reversal, though this reversal not showing up yet in the trend reading. Elsewhere, note NOKSEK suffering on this latest crude oil sell-off. USDCNH is a waste of time as it has merely mean reverted back to the middle of the range it has traded all year. China is signaling more policy support overnight after weak official PMI’s, particularly for Services (48.4).

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Feb. Personal Spending/Income
  • 1230 – US Feb. PCE Deflator/PCE Core inflation
  • 1230 – US Weekly Initial Jobless and Continuing Claims
  • 1230 – Canada Jan. GDP
  • 1300 – US Fed’s Williams (Voter) to speak
  • 1345 – US Mar. Chicago PMI 
  • 2100 – New Zealand Mar. ANZ Consumer Confidence
  • 2350 – Japan Q1 Tankan Surveys
  • 0145 – China Mar. Caixin Manufacturing PMI

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992