Strong Yields Boost Dollar Awaiting ECB

The US dollar is higher across the board against major pairs. US 10-year treasury bonds are above the 3 percent level making dollar shorts more expensive. Higher yields are a reflection of interest rate hike expectations, which Fed members have stoked with their latest comments. Rising inflation and steady economic growth are behind those the policymakers comments. The European Central Bank (ECB) will headline the economic calendar on Thursday, but as European growth decelerates investors are expecting the rhetoric to be on the dovish side with little insights into the central bank’s plan.

• Despite a string of gains USD still vulnerable
• Fed could hike rates 3 more times in 2018
• ECB to be cautious on end of QE comments

Interest Rate Differentials Pushing US Dollar Higher

The EUR/USD lost 0.45 percent on Wednesday. The single currency is trading at 1.2176 ahead of the release of the European Central Bank (ECB) interest rate statement on Thursday, April 26 at 7:45 am EDT. The central bank is not expected to announce any major changes to its monetary policy or drop hints regarding what’s next after end of its quantitive easing program in September. The Fed by comparison has been hawkish and several members have talked up the possibility of a fourth rate hike in 2018. Th ECB is not expected to hike rates until 2019.

The US dollar continues to improve from its terrible start to the year. The rising yields in US bonds have pushed the currency to three month highs as they broke above the 3 percent level. The next stage will be to see if this is a sustainable move without strong sell offs in the stock market. The ECB can afford to be patient given the strong momentum built by the economy, but as that wanes with more disappointing releases it could delay even further its rate normalization schedule.

The CME FedWatch tool increased the probability of three more rate hikes this year to 47 percent upgrading it from 33 percent based on Fed fund rate futures. With the ECB expected to be dovish on Thursday as the economy is losing steam, the interest rate divergence favours the US currency specially since the fourth rate hike was not fully priced in at the beginning of the year.

The economic calendar heading into he end of the week will be focused on growth with the release of the US first estimate of GDP in the first quarter of 2018 on Friday, April 27 at 8:30 am EDT. The Bureau of Economic Analysis is forecasted to announced a 2.0 percent gain. This being the first version of the quarterly data it carries the most weight and it could validate the steady growth expectations that the Fed has on the US economy.

Yen Lower with the BoJ Not Expected to Change Easing Monetary Policy

The USD/JPY gained 0.46 percent during the trading session. The currency pari is trading at 109.31 with the recovery of the US dollar and the subdued geopolitical frictions leading the yen lower. The Japanese currency had a strong start to the year despite the ever present concerns about low inflation but the Bank of Japan (BOJ) remains unconvinced that it needs to reduce its stimulus program which has pushed the JPY lower.

The central bank is not expected to tinker with its monetary policy, but the introduction of new deputy governor Masazumi Wakatabe thought to be in favour of adding even more stimulus to reach the 2 percent inflation target could prove more telling down the line if the Japanese economy struggles. Two days ago BOJ Governor Haruhiko Kuroda said that the inflation reach would reach the elusive 2 percent target within five years, and only then would stimulus would be reduced.

The Bank of Japan (BOJ) will release its monetary policy statement and its outlook report on Thursday at midnight and will follow up with a press conference on Friday, April 27.

Market events to watch this week:

Thursday, April 26
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
8:30am USD Core Durable Goods Orders m/m
10:00pm JPY BOJ Policy Rate
10:00pm Monetary Policy Statement
Midnight JPY BOJ Outlook Report
Friday, April 27
Tentative JPY BOJ Press Conference
4:30am GBP Prelim GDP q/q
8:30am USD Advance GDP q/q

*All times EDT

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