Lindner says that Germany must „find an exit from crisis mode“, noting that it is possible to return to the ‚debt brake‘ next year.But if there’s one thing that we’ve learnt during the pandemic is that fiscal spending knows no bounds and the numbers don’t really matter at the end of the day. If the rest of the world continues to get away with it, Germany might as well too.For some context, the ‚debt brake‘ is meant to work in the sense that Germany’s fiscal deficit should not exceed 0.35% of its GDP but has since been suspended due to the pandemic situation.

Just a couple to take note of for the day, as highlighted in bold.That being for USD/CAD at 1.2950 and 1.3000, which is arguably trapping price action ahead of the US CPI report release later in the day. The key risk event will eventually dictate sentiment and the market will reaction accordingly but for now, the expiries will perhaps play a role in keeping price action more limited.For more information on how to use this data, you may refer to this post here.

The focus on the day ahead of the US CPI report release is whether or not we’ve hit ‚peak inflation‘. In essence, it’s easy to argue that we are likely to see weaker inflation readings in the months ahead and that is perhaps all that markets care about – at least for now.But in the big picture view, I think one needs to make a distinction on what happens to the inflation outlook thereafter. A ‚peak‘ suggests that we are likely to see inflation pressures fall back down and towards central banks‘ 2% target in some pattern (one way or another). However, in all likelihood, we should see inflation hit more of a ‚plateau‘ instead in my view.There’s no easy solutions to the world’s problems in resolving the issues that have caused inflation pressures to skyrocket in the past year. And those issues aren’t going away just yet.While it is plausible to expect less hot inflation numbers moving forward, it doesn’t mean that we will see inflation pressures cool significantly.And that may present itself to be a problem for central banks in the latter stages of the year or early next year perhaps.While it is easy to hike rates when inflation is high and argue that it will eventually come back down to 2% some day, it isn’t so easy when that some day keeps getting pushed back further and further.At some point, policymakers may need to acknowledge that inflation pressures are going to be more persistent and sticky and if they are to try and combat that further, it may require tighter policy for longer. And in the case of the Fed, that could mean guiding the Fed funds rate to a higher terminal rate than expected.So, have we seen peak hawkishness by central banks? Maybe, at least in terms of what is priced in based on ‚peak‘ inflation. But what happens when markets start to turn towards an inflation ‚plateau‘ instead? That is going to be an interesting shift in perspective and pricing.Naturally, economic conditions will also factor into the equation for central bank policy moves but that will challenge their resolve in trying to defeat the inflation monster. I mean if the economy crumbles while inflation is still high with Fed funds rate at 3% or higher, the Fed will arguably have to admit that there has to be a policy mistake somewhere. That’ll be quite the moment.

Headlines:Risk on the mend but is it just a fleeting moment?EU’s Borrell: We continue to discuss sanctions, there are still some difficulties pendingUS April NFIB small business optimism index 93.2 vs 93.2 priorGermany May ZEW survey current conditions -36.5 vs -35.0 expectedUAE energy minister: Oil market is balanced, no need to pump moreMarkets:JPY leads, NZD lags on the dayEuropean equities higher; S&P 500 futures up 0.6%US 10-year yields down 8 bps to 2.998%Gold up 0.5% to $1,862.68WTI crude down 1.0% to $102.05Bitcoin up 2.5% to $31,700It was a quiet session for the most part as risk sentiment bounced back or at least steadied a little in the aftermath of yesterday’s bloodbath.European indices are settling higher though gains are still barely halving yesterday’s drop while US futures are up slightly but without any real conviction to turn around the sharp decline in Wall Street yesterday.It is still early in the day so the latest bounce may yet be a tentative one. The bond market is seeing some added bids, continuing from yesterday with 10-year Treasury yields testing 3% again at the moment.In FX, the dollar is keeping more mixed but is little changed overall amid some pushing and pulling. The greenback was weaker early on as risk recovered but is holding its ground for the most part now ahead of US trading.EUR/USD is not much changed, lingering around 1.0550-60 levels while GBP/USD is up just 0.1% to 1.2340 currently.USD/JPY is seeing a slight retreat from 130.20 to just below 130.00 as bond yields also fall back a fair bit. Elsewhere, AUD/USD is keeping flattish around 0.6950-60 levels mostly while USD/CAD is seen flirting with a firmer break of 1.3000. Both the aussie and loonie are looking vulnerable but amid a steadier risk mood are able to hold on for a bit more at the moment.

Resolutely focused on restoring price stabilityWe have a „sizzling“ hot labour marketFed task is difficult but not insurmountableFed actions will cool demand and factors contributing to supply shortages will be resolvedFed needs to be data dependent, adjust policy actions as circumstances warrantIt sounds like the string of 50 bps rate hikes is still the right call for the time being at least. Williams also adds that he expects PCE core inflation to be around 4% this year before falling to 2.5% next year. That is likely an outlook shared by most Fed policymakers and how they are going about the outlook for the Fed funds rate at the moment at least.

The struggle for solidarity continues for Europe. Borrell says that he hopes this can be resolved by next week’s foreign affairs council meeting but I don’t think one should hold their breath.

Prior 93.2US small business confidence was unchanged last month after three straight monthly declines but high inflation pressures and worker shortages continue to weigh on sentiment for the most part. Of note, 32% of businesses reported that inflation was their single most important problem – the largest share since Q4 1980.

There’s just one particularly significant one to take note of for the day, as highlighted in bold.That being the large chunk for USD/CAD at 1.2935, although it may not serve as too much of an attraction to price action considering that dollar bulls are pushing the boundaries of 1.3000 since yesterday. The lack of technical significance won’t help with the expiry level.If anything else, just be mindful that there will be some large expiries rolling off tomorrow as well for USD/CAD with the ones to watch being perhaps between 1.2950 and 1.3000.For more information on how to use this data, you may refer to this post here.

Headlines:Dollar in cruise control in European morning tradeTreasuries selloff deepens, yields continue to break higherRussia says that peace talks with Ukraine have not stopped, being held remotelyEurozone May Sentix investor confidence -22.6 vs -20.8 expectedSNB total sight deposits w.e. 6 May CHF 750.9 bn vs CHF 744.4 bn priorFrance March trade balance -€12.4 billion vs -€10.3 billion priorMarkets:USD leads, AUD lags on the dayEuropean equities lower; S&P 500 futures down 2.1%US 10-year yields up 4.9 bps to 3.173%Gold down 1.4% to $1,858WTI crude down 2.5% to $105.61Bitcoin down 3.8% to $32,756We’re starting the new week from how we left things off at the end of last week and for most of April trading.Buy the dollar, sell everything else. That is the the overarching theme today, even in the commodities space. The greenback is running rampant with USD/JPY trading above 131.00, GBP/USD having dipped to fresh lows since June 2020 below 1.2300 (before recovering some ground) and AUD/USD testing a break below 0.7000 for the first time since the end of January.EUR/USD fell to test 1.0500 again before keeping around 1.0520-30 levels now, down 0.2% on the day.Elsewhere, bonds are still selling off on the long-end of the curve as 10-year Treasury yields climb towards 3.17%. That is weighing heavily on tech sentiment and stocks in general as the selloff in equities deepens. S&P 500 futures and Nasdaq futures are down over 2% and European indices are also following suit with similar losses.In the commodities space, gold is down over 1% to $1,858 while oil is also down over 2% with Brent nearing $110 again.It’s pretty much markets being in a sell everything mode and that includes Bitcoin, which is down to its lowest since July last year below $33,000.

The calendar for the
week after the NFP is usually light in economic events, but this doesn’t mean
there can’t be opportunities in the FX market. 

 

Traders will be
paying attention to the US inflation which will be in the spotlight with
expectations to keep rising. The US PPI m/m data will also be closely
watched. 

 

The UK GDP is also
coming Thursday and is expected to reflect a slower economic growth. Even if
the UK economy has been resilient overall since the beginning of the year,
elevated energy prices had a negative impact, especially on consumer purchasing
power. Services activity and retail sales were also affected. 

 

At the last FOMC
meeting the federal funds rate rose 50 basis points with another rate hike
expected in June. Meanwhile, some Fed speakers are scheduled to deliver remarks
this week.

 

The war in Ukraine
remains a major concern for the euro area and will influence the market for the
foreseeable future.

 

EUR/USD expectations

 

The euro has room to
weaken further as the Euro area will be influenced in the near future by the
economic slowdown in China. There is a risk of recession and the French
parliamentary elections in June could also have an impact. Even if expectations
for the ECB to raise rates are growing and some members like Villeroy mentioned
that above-zero rates by year-end are „reasonable“, a rate hike in
June is still seen as unlikely according to analysts from Scotiabank, so unless
this becomes a strong possibility, there won’t be significant movements in the
market for EUR. 

 

EUR/USD closed the
week near the 1,0485 level of support. From a technical perspective on the H4
chart EUR/USD needs a correction somewhere around 1.0740 or even 1.08450 and if
no significant event happens this week, it could resume its downtrend and test
the next level of support at 1,0365. 

 

USD/CAD expectations

 

On the H1 chart
USD/CAD looks good for buying opportunities. The pair is close to the 1.2940
level of resistance and a correction is expected until at 1,2780 which is the
next level of support. If rejected, the pair
could test the resistance at 1.3000.

 

The USD is still
strong and usually supported by volatility and uncertainty. The pair is
expected to appreciate further, but there can also be an opportunity to sell if
the pair reaches 1.3000. The Fed tightening already appears to be priced in the
market, but the market could re-evaluate the Fed expectations and reprice them
lower if upcoming US data is soft.

 

There are no
significant economic events in the calendar this week for the CAD, but for the
USD comments from several Fed speakers are expected: Mester, Bostic, Williams
and Waller. In conclusion, USD/CAD looks bullish in the short term.

 

 

This article
was written by Gina Constantin.