Mounting inflationary concerns raised speculation that the Fed may be forced to tighten its monetary policy faster than expected, and pushed the US dollar to rally against all of the major currencies expect for the Japanese Yen. As a result, all of the commodity currencies slide against the greenback amid surging oil prices, with the
A speech by Kansas City Fed President Thomas Hoenig sparked bullish sentiment for the greenback as he stated ‘serious’ upside risk for inflation - signaling that the series of rate cuts by the Fed has reached its peak. The speech highlighted the growing concerns for inflation, and sparked bets that the Fed may look to increase rates this year in order to contain the current rise in inflation. Amid the bullish sentiment taken on by currency traders, fresh economic data continued to reflect a troublesome housing market as Pending Home Sales dipped to a new record low for the second consecutive month as it fell 1.0 percent in March. However, the credit market is beginning to show signs of recovery as the Consumer Credit index rose well beyond expectations to $15.3B from $5.2B in February.
The stock markets tumbled lower as oil surged to fresh record high of $123.53, with shares struggling to hold on as investors grew weary of the downside economic risks. As a result, the DJIA plunged 206.48 points to hold off at 12,814.35 points, with 24 of the 30 components declining. The broader S&P500 fell 25.69 points to 1,392.57 points, with 169 stocks falling to a new 52 week low.
Sluggish performance in the stock markets spurred increased demands for US Treasuries, and pushed risk adverse investors into the safe haven of risk free bonds. As a result, the benchmark 10-Year yield dropped to 3.850 percent from 3.924, while the 2-Year yield plunged to 2.316 percent from 2.393.
Looking ahead, the rate decision by the Bank of England and by the European Central Bank will hold major event risk for the currency markets, and expect heightened volatility to follow as we forecast the BoE and ECB to hold rates steady at 5.00 percent and 4.00 percent, respectively. The Bank of England is schedule to release their decision at 11:00GMT with the ECB’s decision coming in at 11:45 GMT, and do not expect major movements in the market prior to the release.