EUR/USD flirting with the 1.1900 level as week draws to a close

• EUR/USD has reverted back towards the 1.1900 figure from earlier session lows around the 1.1870 mark.
• EUR/USD has traded as a function of rate differentials on Friday.
• US PPI came in much hotter than expected, adding upside risk to next week’s CPI report.

EUR/USD has reverted back towards the 1.1900 figure from earlier session lows around the 1.1870 mark. The pair, which still trades lower on the day by about 15 pips or just over 0.1%, is likely to consolidate within its recent 1.1860-1.1920ish intra-day parameters over the next few hours as FX volumes drop ahead of the weekend. For now, the pair has managed to move back to the north of its 200-day moving average, which currently resides at 1.1885.

Driving the day

EUR/USD has traded as a function of rate differentials on Friday, moving lower in tandem with a rise in US government bond yields (when 10-year yields went as high as 1.68%) before rising from lows as US yields pulled back from highs (when 10-year yields dropped back to 1.65%). No major catalysts seem directly to be causing the choppy bond market conditions, though there are a few developments worth noting, particularly out of the US.

Firstly, the March Producer Price Inflation report for the month of March was released on Friday; the YoY rate of PPI was 4.2% in March (its highest since September 2011), a jump of 1.4% from February and well above expectations for a reading of 3.8%. The Core PPI was also higher than expected, rising to 3.1% YoY from 2.5% in February, above expectations for a 2.7% reading. According to ING, the latest PPI report adds upside risk to next week Consumer Price Inflation (CPI) report (also for the month of March).

They expect CPI to come in at 2.4% YoY in March, but then to rise towards 4.0% over the summer “as prices in a vibrant, re-opened, stimulus fuelled economy contrast starkly with those of twelve months before when the economy was largely in lockdown”. The bank disagrees with the Fed, who thinks that inflation will then moderate; “we think that pandemic-related scarring and supply constraints will keep inflation elevated for longer than they do”. ING conclude that “inflation could stay closer to 3% for much of the next couple of years and in an environment of strong growth and rapid job creation it adds to our sense that risks are increasingly skewed towards a late 2022 rate hike rather than 2024 as the Fed currently favours”.

Elsewhere, various Fed speakers have been on the wires on Friday, though not with much impact on FX markets. Fed Vice Chair Richard Clarida stuck to the usual dovish script and echoed Chairman Jerome Powell’s remarks on Thursday, saying that the Fed wants to see “actual” progress towards its goals before tightening policy. He also played down concerns about inflation, highlighting that while next week’s CPI inflation reading is likely to be high, this is likely a “transitory” increase in prices. However, he did add something new compared to what Powell has said on inflation, saying that if inflation has not declined by the end of the year, it may no longer qualify as transitory. On the recent labour market data, he welcomed the strength but reiterated the Fed’s stance that there remains a long way to go.

Elsewhere, one of the more hawkish Fed members Robert Kaplan also gave remarks. Kaplan noted lingering concerns about the impact of the Covid-19 and the dangers of variants, but said that once the pandemic storm has been weathered, he wants to err on the side of removing extraordinary policy measures sooner rather than later (i.e. by the sounds of it, Kaplan will be one of the soonest to push for QE tapering). For reference, Kaplan is one of the FOMC members predicting a rate hike by the end of 2022.

Looking ahead, the main event to focus on next week will be the US March Consumer Price Inflation report, though the US March Retail Sales report will also likely be a market mover. A few Fed speakers are also scheduled.