Market Drivers – US Session – 31 March

The euro tumbled on Thursday as investors fretted about rising EU-Russia economic tensions after Russian President Vladimir Putin doubled down on a demand that European nations pay for Russian gas in roubles, exacerbating fears that Russia might block energy exports to the EU bloc.

This, coupled with a generalized paring back on recent optimism about alleged progress in Russo-Ukraine peace talks, which recommence on Friday, contributed to risk-off flows and downside in global bond yields, with these moves most acute in Europe. Thus, the euro was the worst performing G10 currency, with EUR/USD dropping 0.8% from intra-day highs near 1.1200 to current levels in the mid-1.1000s.

Economic Data:

Inflation continued to run at the fastest pace in 40 years in February, fresh data released on Thursday showed, at a moment when war in Ukraine and continued supply chain disruptions tied to the coronavirus promise to keep prices rising.

Prices as measured by the Personal Consumption Expenditures Index rose 6.4 percent in the year through February, up from the 6.1 percent increase in the year through January and the fastest inflation rate since 1982.

They climbed 5.4 percent after food and fuel costs, which can be volatile, are stripped out, the data showed. That pace was also faster than the prior month’s reading, which was 5.2 percent.

Other Developments:

The best performing G10 currency was again the Japanese yen, with the safe-haven currency benefitting from the downside bias to global equity market trade and in global bond yields, thus extending on a much overdue month/quarter-end recovery after weeks of underperformance.

USD/JPY stabilized below the 122.00 level, with the bears eyeing a retest of 120.00. GBP/USD, meanwhile, was a tad higher on the day, but remained within recent intra-day ranges in the mid-1.3100s and capped by its 21-Day Moving Average.

Finally, it was a mixed picture for the commodity-sensitive Aussie, kiwi and loonie. USD/CAD was flat and managed to shrug off sharp losses in the crude oil complex as a result of the announcement of a historic Strategic Petroleum Reserve release out of the US (1M barrels per day for the next six months). The pair remained underneath the 1.2500 level and not far below recent multi-month lows printed in the 1.2430 area earlier in the week. AUD/USD, meanwhile, dropped 0.3% to back below 0.7500 but remains well within recent ranges and near to multi-month highs in the mid-0.7500s, while NZD/USD fell 0.6% to back under 0.6950, putting the pair back near the middle of this week’s approximate 0.6875-0.7000 ranges.

The weakness in EUR/USD helped give the Dollar Index a lift, with the trade-weighted index of major USD pairs rallying 0.5% to around 98.30 from weekly lows in the 97.70 area. The upside had little to do with another rise in US inflation in February as per the Core PCE Price Index, or the latest very solid weekly jobless claims figures, both of which support the economic rationale behind the Fed’s recent hawkish pivot. Indeed, against the rest of the G10 currencies, the US dollar was fairly mixed, with focus now shifting to the release of the official US labour market report for March on Friday.

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