Volatility in Currency Markets Driven by Mixed U.S. Economic Signals

This week, currency markets witnessed significant volatility, primarily influenced by conflicting indicators from the U.S. economy. The dollar index experienced a 0.28% decline subsequent to a below-forecast U.S. GDP report. This downturn was exacerbated by unexpectedly high Q1 inflation measures and a surprising drop in jobless claims. Consequently, Treasury yields reached their highest levels since November. These developments led to a shift in expectations regarding Federal Reserve rate cuts, with the market now fully pricing in only one cut for the year.

Euro and Other Major Currencies Respond to U.S. Economic Data

Initially, the euro and other major currencies benefited from the weak GDP data. However, they later receded as U.S. core PCE inflation figures revealed an unexpected rise. This underscored ongoing inflationary pressures, particularly in services prices excluding energy and housing, a metric highlighted by Fed Chair Jerome Powell.

Outlook Dependent on Economic Data and Central Bank Responses

Looking ahead, the market outlook is increasingly contingent on forthcoming economic data and central bank actions. The performance of the U.S. economy, particularly in terms of GDP and core PCE figures, remains a critical focal point. For the euro, recovery prospects hinge on upcoming U.S. economic data, especially March’s core PCE, income, and spending figures. Additionally, the Bank of Japan's upcoming meeting is highly anticipated, with market participants eager to see if measures will be introduced to address the yen's depreciation and the associated risk of imported inflation.

Eurozone and UK Uncertainties Impact Market Sentiments

Uncertainties in the eurozone and the UK, including potential rebounds in Q2 GDP and ongoing challenges in retail sectors, also influence market sentiments.

Currency-Specific Movements

In currency-specific movements, the EUR/USD managed a modest recovery, rising by 0.3% and bouncing off recent lows. This occurred as doubts about the U.S. economy's soft landing and the narrative of dollar exceptionalism began to be questioned. Sterling showed resilience, rising by 0.4%, buoyed by a record high in the FTSE 100 despite weak retail sales data from the UK, possibly influenced by the timing of the Easter holidays.

Divergent Rate Cut Forecasts Across Regions

Looking at broader market expectations, rate cut forecasts vary significantly across regions. The Bank of England is expected to implement more substantial cuts by year-end compared to the Fed. The ECB and the Bank of Japan are also anticipated to adjust their policies in response to evolving economic conditions.

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