Headlines:The yuan drop this week is one to pay attention toECB’s Kazaks: A rate hike is possible as soon as JulyBOJ to continue with bond market intervention through to next weekNo such thing as good or bad when it comes to exchange rate, says Japan govt officialUS MBA mortgage applications w.e. 15 April -5.0% vs -1.3% priorGermany March PPI +4.9% vs +2.6% m/m expectedEurozone February industrial production +0.7% vs +0.7% m/m expectedEurozone February trade balance -€7.6 billion vs -€27.2 billion priorMarkets:JPY leads, USD lags on the dayEuropean equities higher; S&P 500 futures up 0.1%US 10-year yields down 5.4 bps to 2.861%Gold up 0.2% to $1,954.10WTI up 1.5% to $104.06Bitcoin up 2.0% to $42,140The yen weakened to its lowest level in two decades in Asia Pacific trading but caught a bid after hitting an air pocket with USD/JPY sliding from a high of 129.40 to a low of 127.60 in European morning trade.The pair is still down nearly 120 pips now to 127.70 levels as we see a bit of a retracement amid fears of intervention and profit-taking on the way up towards the 130.00 level.The drag in the pair is also weighing on the dollar across the board as we see the bond market selling also take a bit of a breather. 10-year Treasury yields are down over 5 bps to 2.86% after having hit a high of 2.98% during the early stages of the week.The dollar drag helped to see EUR/USD climb to 1.0840 before hawkish remarks by ECB policymaker Kazaks on a July rate hike helped to prop up the euro to 1.0865 though that jump has since abated. GBP/USD is up 0.5% to 1.3050-60 as buyers continue to hold a defense of the 1.3000 level.Elsewhere, AUD/USD is seeing a decent jump of 0.9% back above 0.7400 to 0.7430-40 levels as buyers seize back some near-term control in the pair. Put together the near-term dollar charts and that hints at a bit of a breather in the recent dollar momentum.There isn’t much leading the change in narrative though we are seeing USD/JPY be rather overstretched so perhaps that calls for a bit of a correction. Besides that, the usual drivers are still at play i.e. the bond market and inflation vs central bank debate.

The European Central
Bank kept its benchmark interest rates unchanged, as widely expected and stuck
to its decision to end the stimulus program in the third quarter of this year
but did not provide any further details that disappointed markets, as many expected
a hawkish reaction in light of surging inflation that prompted a number of
major central banks to start tightening policies.

 

The ECB’s President Christine Lagarde
pointed to growing uncertainty on the war in Ukraine, as the main obstacle, but
said that the central bank will maintain optionality, gradualism and
flexibility in conducting its monetary policy.

 

The end of asset
purchases could come at any time in the third quarter but without any further
information about the timing, as well as no timeframe for when the central bank
would start to raise rates, adding that rate hike could occur weeks or even
months after the stimulus ends and when the ECB gets there.

 

Unexpectedly dovish
stance suggests that the European Central bank is diverging from its all major
peers, as the US Federal Reserve and The Bank of England already started to
tighten their policies after nearly three years, with the US central bank
leading on expectations for eight or more hikes in next two years.

 

The most recent action
in increasing the cost of borrowing, was seen from the central banks of New
Zealand, Canada and South Korea.

 

The policymakers were
split, as hawks, including governors of Germany, Austria, Netherlands and
Belgium, made the case for rate hikes, arguing that inflation could rise
further, with households and the economies overall being already strongly hit
by rising energy prices, draining
household savings and growing uncertainty.

 

On the other side,
doves supported their decision by the notion that most of the inflation is a
result of an external supply shock, therefore the price pressures will fade over
time.

Lagarde supported the
central bank’s decision to stay on hold, by the situation in Ukraine, as all 19
economies of the eurozone are heavily exposed to the conflict that further
damages the confidence and adds to persisting supply disruptions that started
during the coronavirus pandemic.

 

The bloc’s members are
also strongly concerned about the reverse impact of sanctions imposed on
Russia, as the newest plan to add Russian oil and natural gas to the list of
banned items imported from Russia, as the bloc is so far lacking unity on this
matter, with strong dissonant tones coming from Germany, the EU’s largest
economy, Hungary and Slovakia.

 

If all members agree on
imposing sanctions on energy from Russia that would further undermine the
already fragile bloc’s economy, not recovered from the pandemic and sent most
of the countries of the union into recession, a scenario that all want to
avoid.

Lagarde stressed that
the EU economy’s development will be strongly dependent on how the conflict
evolves that results in the central bank’s prolonged ‘sit and wait’ policy
which continues to damage the confidence and darkens the outlook, as economists
already lowered bets on a rate hike by the end of the year.

 

The ECB currently faces two opposing economic
forces as the recent surge in inflation, which rose to a record high at 7.5%,
collides with the central bank’s
purchases of nearly 5 trillion euros of public and private debts in the past
few years, aiming to revive inflation which was stubbornly low since 2015 until
recently.

 

Continuation of pumping
money into the economy, although the ECB signaled it will end purchases
sometime in the third quarter, will continue to fuel the inflation which is
already at the historical high and threaten of further undermining the economic
growth that would push the bloc’s economy into recession.

 

On the other side, the
European Central Bank fears that raising interest rates in a situation when the
economy has not recovered from a strong contraction during Covid pandemic,
could produce a negative effect.

 

Overall, the EU is in a
difficult situation, as five top German economic agencies sharply lowered their
forecasts for the GDP growth of the bloc’s largest economy which is expected to
reflect on the whole union’s economy, with a dramatic warning that the economy
would fall into recession as the EU would sanction itself by imposing sanctions
on Russian energy.

Prior -1.3%Market index 374.0 vs 393.5 priorPurchase index 254.0 vs 261.8 priorRefinancing index 1,023.2 vs 1,109.0 prior30-year mortgage rate 5.20% vs 5.13% priorThe long-term mortgage rate climbs to a 12-year high and that is proving to be a drag on demand conditions as mortgage applications slump once again. Both purchases and refinancing activity fell on the week as the run up in home-financing costs is weighing heavily on sentiment.

Nothing major on the board today although there are some decent expiries around 1.0790-10 for EUR/USD but not of much interest in my view.The order board for tomorrow is more interesting with large expiries seen closer to 1.0900-05 for the pair, so that will be one to watch if the slight upside push today stays the course.Besides that, it is again worth taking note that there aren’t any significant expiries for USD/JPY between 125.00 to 130.00. That adds to the suggestion that it leaves room to roam for the pair as the volatile swings continue in the past few days.For more information on how to use this data, you may refer to this post here.