April 13 (Reuters) – EUR/USD hit a 1-year high as markets coalesced around the Fed having maybe one more 25bp rate hike before a spate of rate cuts begin later this year in the wake of March US PPI, which fell far more than forecast while jobless claims inched higher.
The dollar’s initial slide on the data, in the wake of other somewhat disinflationary numbers of late, was curtailed by Treasury yields rebounding from earlier lows, in part because the Fed remains well favored to hike in May.
Data point to an economy that is cooling but not drastically enough to force the US central bank to abandon its focus on inflation just yet.
Markets, see the delayed impact of aggressive rate hikes, tighter bank credit after March’s record fall in smaller banks’ deposits and a shrinking pool of savings from the pandemic pointing to economic weakness later this year and next.
Weekly Fed bank data late Thursday and Friday will be checked for banking crisis fallout. But Friday’s March retail sales and April Michigan sentiment data will set the pre-May Fed meeting tone and likely extend dollar weakness.
EUR/USD rose 0.5% even with Reuters reporting ECB policymakers were converging on a 25bp May hike while markets still project a 41% probability of a 50bp increase and a total of 78bp of tightening by October.
Two-year Bund-Treasury yield spreads are their least negative since 2021 and EUR/USD prices are now well clear of the 100-week moving average with room to run.
Sterling rose 0.3% after making new 10-month highs. Fed rates are seen falling below the BoE’s by November. Longer-term charts suggest a rise to roughly 1.29 is plausible.
USD/JPY fell 0.3% after recovering with Treasury yields from a dive toward this week’s lows.
Aussie surged 1.4% amid risk-on flows, strong jobs data and China growth hopes.
(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)