There isn’t anything too significant on the board once again for today, with little expiries of note for the remainder of the week as well.As a reminder, it is a shortened week in Europe as well as for Australia and New Zealand with the Easter break coming into effect on Friday. So, that also partly explains the lack of interest on the day itself.For more information on how to use this data, you may refer to this post here.

European indices have also turned around earlier losses to be up around 0.1% to 0.2%, though the DAX is still down 0.3% currently. But US futures are keeping higher with S&P 500 futures and Dow futures both up 0.6%, while Nasdaq futures are up 0.8%.As much as there is optimism, it may prove to be fleeting with earnings releases coming into focus.It’s all about what the companies will say about the state of the economy and how badly inflation is biting at the business outlook. As Adam pointed out here, sentiment may very well hinge on what JP Morgan CEO, Jamie Dimon, says later today.Here’s the full lineup of the earnings calendar through to the end of the month.

Headlines:Japan PM Kishida: FX stability is importantUSD/JPY keeps above 125.00 despite more verbal interventionUS March NFIB small business optimism index 93.2 vs 95.7 priorUK March jobless claims change -46.9k vs -48.1k priorGermany April ZEW survey current conditions -30.8 vs -35.0 expectedGermany March wholesale price index +6.9% vs +1.7% m/m priorGermany March final CPI +7.3% vs +7.3% y/y prelimMarkets:AUD leads, EUR lags on the dayEuropean equities lower; S&P 500 futures up 0.1%US 10-year yields down 0.7 bps to 2.775%Gold flat at $1,955.40WTI up 3.9% to $97.95Bitcoin up 1.3% to $40,335The session was quiet in terms of major headlines but there was some decent movement throughout.The bond market continues to be under the spotlight and the selling continued early on but has cooled considerably ahead of the US CPI data release later. 10-year Treasury yields were up to 2.84% but have come down to near 2.77% currently but all eyes will be on what the inflation numbers have to offer in just over half an hour.The dollar was mostly steady as it kept a slight advance against the euro, pound and yen. EUR/USD eased from 1.0880 to 1.0855 while GBP/USD was brought down from 1.3030 to test the 1.3000 handle again. Meanwhile, USD/JPY kept higher around 125.50-70 for the most part despite some jawboning by Japanese officials.In the equities space, European stocks are staying more sluggish following the drop in Wall Street yesterday. But losses have been trimmed as US futures have also pushed a little higher, with S&P 500 futures covering a 0.6% drop early on to be up by 0.1% now.Could this all be pointing to some positioning play for a softer US CPI report? Perhaps. But we’ll see come 1230 GMT.

The February reading was +7.9% y/y and consumer inflation in the US is estimated to jump up further in March to +8.4% y/y. The monthly reading is expected to reflect a rise of 1.2% after a 0.8% monthly increase in February.
In short, inflation is expected to run hot as it has been in the past few months. The Russia-Ukraine war has just exacerbated conditions globally and the recent lockdown in Shanghai certainly won’t help with the situation.
But what is the market anticipation coming into today and where is the action going to be?
Let’s first take a look at the forecast distribution for today’s estimate:

As you can see, there’s quite a skew towards being above the expected +8.4% y/y estimate. While this is just a forecast, it does point to some expectation that there are certain quarters of the market expecting higher inflation numbers. As such, I’d wager anything above +8.7% y/y or closer towards +9.0% y/y to produce a stronger „beat“.
Meanwhile, a reading closer towards +8.0% y/y is likely to help soothe the market a little that at least the inflation ‚blow up‘ isn’t as uncontrollable as feared.
As for the reaction, the bond market is the first place to look at. The recent selling is continuing as yields are running higher and a beat on estimates will surely spur further momentum in that. In turn, the dollar is likely to catch a further tailwind – especially against the yen.
On the flip side, the opposite reaction to the above will apply; all else being equal that is.

Prior 95.7US small business sentiment declines as inflation worries continue to mount. The share of business owners reporting that inflation was their single most important problem was the largest since 1981, some 31% – up 5 points from February. The share of owners raising average selling prices also increased 4 points to 72% in March – a record high. NFIB noted that price increases were seen across all industries.

The reserves would only be enough to last until late summer or early fall and German households would have to give up on heating privileges in the event of a gas supply emergency.Well, with wholesale prices also soaring today, I doubt lawmakers will have much appetite to change their stance on an embargo on Russian oil and gas for now. The EU will continue to try to apply pressure on that front but Germany will likely stand its ground and the above situation also speaks for itself.

Prior -21.4
Economic sentiment -41.0 vs -48.0 expected
Prior -39.3

The headline reading is the lowest since May last year with ZEW noting that the current economic situation reflects pessimism and experts assume that conditions will continue to deteriorate. But there was a decline in inflation expectations, giving some cause for ohpe. That said, the prospect of stagflation remains over the next six months.

The ongoing worries surrounding global growth isn’t really helping the mood in oil at the moment and we’re taking quite a shave off the top after the spike towards $130 amid the Russian invasion of Ukraine in early March.The uneasy situation surrounding Shanghai isn’t helping with the outlook as China remains a major uncertainty at this stage. The technicals point to some support around $95 and the 15 March low at $93.56 but a drop below that is where things could get uglier for oil, despite a 4% decline to start the new week already.There won’t be much support towards $90 next before the 100-day moving average (red line) @ $88.51 currently comes into play.I outlined my thoughts on the oil market in this post last week. I still stand by the more bullish structural view with dip buys around $80 to $85 being where the value is at, barring major demand destruction.

Not much has changed since my earlier post at the start of the day here.
The bond market remains in charge of trading sentiment at the moment and the yen is being punished for it in European morning trade. USD/JPY is up 110 pips on the day now to 125.40 as buyers seek a firm breakout above the 125.00 level.
Here’s a look at Treasury yields:

2-year Treasury yields +6.4 bps to 2.584%
5-year Treasury yields +6.5 bps to 2.822%
10-year Treasury yields +5.6 bps to 2.771%
30-year Treasury yields +2.8 bps to 2.774%

And it doesn’t just stop there. It’s a global push as we are seeing 10-year German bund yields are at its highest since 2018 while 10-year French bond yields are at their highest since 2015. Meanwhile, 10-year JGB yield are also approaching the BOJ’s implicit yield cap at 0.25% once again.

The week ahead has
several events that have the potential to move the market. In France, the
presidential election is in the spotlight. Following the first round this
weekend, incumbent president Emmanuel Macron will face Marine Le Pen in the
election runoff.

 

There are fears that
Le Pen, who is seen as a representative of the extreme right, could receive
strong support, and a potential win might negatively impact France’s
relationship with the EU and NATO in the long term. With France being the
second largest economy in the EU, potential polls favouring Le Pen in the
runoff could have some impact on the European markets and the euro.

 

This week will also
see the release of several surveys in Europe, the US CPI m/m, the US PPI, the
RBNZ rate statement and official cash rate, the CPI y/y for GBP. The BOC and
ECB will both have press conferences and some comments from BOJ Gov Kuroda and
FED members are also expected. Friday is a bank holiday in Europe so low
volatility is expected as traders are heading into the Easter holiday.

 

The US CPI is
expected to rise again and it’s likely to add to FED hawkishness which could
boost the USD. The DXY is at the highest level in two years, and it could go
higher in the near term. 

 

RBNZ seems committed
to raising rates aggressively to keep inflation under control. Some analysts
believe there’s a possibility they overtighten and if this happens the bank
could be forced to reprioritize to limit the negative growth effect.

 

In the medium term
the prospects for NZD are bullish, but in the short term the NZD/USD H1 chart
looks good for selling opportunities. A correction is expected, and the first
level of resistance is at 0.6905. If rejected the next target could be
0.6729. 

At the next ECB
meeting the bank’s policy is expected to remain unchanged, but analysts at
Barclays believe that high inflation will likely pressure the ECB to signal its
future policy plans.

 

The stagflation
narrative in Europe seems to be the main theme at the moment with fears that an
economic slowdown in China and rising commodity prices will put pressure on the
euro area.

 

Citi analysts point
out that Europe „is facing the worst terms of trade shock since the 70s,
which opens up the risk of European recession this year — albeit their base
case is that this is narrowly avoided.“ If the ECB begins its policy
normalization it could support the Euro „if it slows structural outbound
European sovereign yields vs FX hedged USTs.“

 

EUR/USD has prospects
for further depreciation. From a technical perspective on the H1 chart we can
see a bullish divergence which means the pair can have a bigger correction
until 1.0970. If that level holds it can continue its descending trend with the
next targets at 1.0825 and 1.0760.

 

 

For the Canadian
dollar, analysts at Citi now expect 50 bp hikes from the BOC in April, June and
July this year, followed by 25 bp increments to reach 2.7% by the end of the
year. The CAD will also be supported by high commodity prices for the near
future.

 

However, the USD/CAD
closed near the 1.2600 level of resistance last week, and even if the overall
outlook is bearish, it’s possible that the pair could climb higher until the
end of the month. The next level of support is at 1.2525 and if rejected the
pair can go to test the resistance at 1.2650.

 

Despite favourable
conditions for the CAD, the USD was strengthened by the rising US yields and
more US data points like the CPI, PPI and Retail Sales are expected to show
gains for March, which will further support the USD.

 

According to analysts
at Scotiabank, the upcoming BOC policy statement, the monetary policy report
and Governor Macklem’s press conference will have a hawkish undertone for the
CAD, but „there’s a risk that either a) policy makers fail to deliver what
is already priced in for the next week or b) do not prove sufficiently hawkish
guidance to justify what the swaps curve have priced in for the coming
months.“ The analysts advise a neutral stance on CAD until more
developments this week.

 

 

As for other
currencies, GBP remains bearish in the near future with the mention that there
are usually some strong seasonal performances for GBP in April that may be
linked to fiscal and dividend impacts. For the last few years, the GBP/USD has
had a bullish seasonality in April. Whether this will repeat this year it
remains to be seen. In terms of monetary policy, it is more likely for the BOE
to have a hawkish message than the ECB, BOJ and even SNB. Inflation in the UK
is likely to rise further to 6.5% year over year.

 

Nothing new is
expected from Kuroda this week as it seems a weaker JPY is not seen as a
problem for now. I expect that USD/JPY will enter a consolidation phase in the
week ahead and the JPY to remain weak until something new comes that could
change the narrative. 

 

The SNB is not yet signalling
a dovish stance despite further CHF strength. In the future, „a push below
parity vs EUR, if seen, may trigger political pressure on the SNB to weaken CHF
via modest FX intervention,“ City analysts say.

 

This article was
written by Gina Constantin.