Overnight Headlines

* Fed’s Rosengren sees risks on both sides of inflation outlook

* Fed’s Bullard: 75% vaccinations would allow for a taper debate

* Treasury Secretary Yellen plans to spare China from currency manipulator label

US equities edged modestly lower Monday closing just off record highs in a quiet, narrow range session. Traders held off any big bets as focus turned squarely to key US data releases and bank earnings. Asian stocks are broadly positive after China’s exports grew at a strong pace during March and imports rebounded.

USD is in the green, rising form near three-week lows against its major rivals. Boston Fed President Rosengren said the US economy could see a significant rebound this year thanks to accommodative policy, though the labour market still has much room for improvement.

US bond yields edged higher following the first 3-year and 10-year Treasury auctions in a couple of weeks, which drew slightly lower demand compared to similar auctions previously. Tonight sees a 30-year auction which will be watched closely by investors amidst fears of stretched valuations.

Market Thoughts

Traders are wating for the US inflation numbers for March, with the reaction being an important gauge of how much the rise in inflation is already priced by markets. The latest reading for the annual consumer price index was 1.7%; Bloomberg’s survey of forecasters’ predictions for this month range from 2.3% to 2.7%. Recent producer price figures and other high-frequency indicators have raised expectations with base effects increasing abruptly in annual growth.

While this inflation print isn’t the Fed’s preferred measure, the key question is how much the markets believe in the central banker’s narrative that the rise in inflation is mainly transitory in nature. Many economists see the chance of CPI being closer to 3% in the coming years which raises the chances of a late 2022 Fed rate hike. This is in fact in line with market expectations which fully price in 0.25% by December 2022. All things equal, this should propel US bond yields and the dollar higher.

Currency Major

EUR strengthened slightly yesterday, trading to an intraday high of 1.1919 before closing a touch lower. The dollar is on the front foot this morning as traders look to the all-important CPI data release. The world’s most popular pair is being driven by the USD currently and how Treasury yields react to this week’s supply should also provide direction in the near-term.

Prices have traded in a tight range over the last few sessions around the 200-day moving average. Expectations are for a strong US inflation number and a beat could see EUR/USD move lower in line with the longer-term trend towards 1.18. But if the bond market looks through the high print, a potential bullish flag is forming which could push the pair north towards 1.1991.

Key Events

As well as the US data at 12.30 GMT, we get the German ZEW business survey which is likely to have stabilised after new restrictions and a few strong readings over the last few months.