The recent US economic data has triggered a hawkish repricing in rates, with Fed funds futures now nearly fully priced in for a July cut of 24bps. While June remains a possibility, it is on the table with uncertainty. The total of -67bps of easing priced in for the year reflects the market’s reaction to the strong job growth, low unemployment, and resilient economic activity in the US. It is evident that the US equity market is also thriving, with all-time highs being tested. The repricing in rates was expected given the robustness of the US economy, but the extent of the pricing reveals the cautious sentiment prevailing among investors.
The push higher in the USD/JPY pairing, which is now approaching the ¥152.00 handle, indicates the market’s response to the US data. Traders are watching closely how the Bank of Japan (BoJ) will react to this development, especially considering the potential intervention to rescue the Japanese yen (JPY). The BoJ’s response to the recent data will be crucial in determining the direction of the USD/JPY pairing and the overall market sentiment. It will be interesting to see if the BoJ will adopt a dovish stance in line with other central banks or take a different approach to monetary policy.
The coming week is expected to be crucial for market participants, with a bumper slate of event risks on the horizon. Three major central banks, namely the RBNZ, the BoC, and the ECB, are scheduled to deliver updates. In addition, the US CPI inflation print and the minutes from the latest FOMC meeting will provide further insights into the global economic outlook. The European Central Bank (ECB) meeting on Thursday will be closely watched, given the dovish sentiment surrounding the central bank. The market is anticipating no changes in the key benchmark rates, with only a meagre 9% chance of a cut. However, the overall pricing of -89bps for the year suggests that investors are preparing for a more dovish stance from the ECB in the coming months.
The recent euro area inflation data for March has highlighted further disinflation, with both headline and underlying inflation softening. The ECB’s current dovish tone is in line with market expectations of a rate cut in June, with the majority of ECB members leaning towards a dovish stance. ECB President Christine Lagarde’s comments on the disinflationary process in the eurozone and the need for additional data reflect the cautious approach of the central bank. The possibility of a 100bps rate cut, as suggested by ECB officials in recent interviews, indicates the potential for further easing measures in the future.
The recent economic data has had a significant impact on central banks and market sentiment. The repricing of rates in the US, the reaction of the USD/JPY pairing, and the upcoming central bank updates all point to a cautious approach by investors. The dovish tone of the ECB and the potential for further easing measures highlight the challenges faced by central banks in navigating the current economic environment. It will be crucial to monitor how central banks respond to the evolving economic data in the coming months.