Headlines

* US dollar trades mixed after US inflation cools

* BoC remains resolute in the face of tight jobs market

* FOMC minutes showed officials predicting a “mild recession”

* Australian employment surges as labour market weathers rate hikes

* Asia stocks trade mixed as traders assess Fed’s tightening path

FX: USD weakened for a second day, down 0.60% on the day. The DXY is back near the April and cycle low at 101.41. This year’s bottom at 100.82 is now key support. The US Treasury 2-year yield dropped below 4% after softer headline CPI data but elevated core prices.  The 10-year yield trades around 3.40% with last week’s low at 3.25%. Fed pricing for the May rate hike ultimately ended modestly lower at 66% from 75% before the CPI release.

EUR touched the widely watched 1.10 mark before closing at 1.0991. Near-term support sits just below at 1.0969/73. The y-t-d top is at 1.1032. GBP advanced beyond the January high at 1.2447 to close at 1.2484. Cable’s y-t-d high is at 1.2525. USD/JPY finished lower but continues to trade around the 50- and 100-day SMA at 133.18/26.  The AUD closed higher with bulls trying to get closer to the 200-day SMA at 0.6742.  The aussie is outperforming this morning on a healthy labour market report, driven by full-time employment. USD/CAD is falling for a fourth straight day as it nears the April low at 1.3405. Its 200-day SMA is just below at 1.3396. The BoC kept rates unchanged but pushed back against the pricing of rate cuts for this year.

Stocks: US equities closed lower after fading the post-US CPI rally. Tech, communications and consumer discretionary led the declines with the Nasdaq 100 finishing down 0.89%. The Dow lost 0.11%. The benchmark S&P 500 was lower by 0.41%. Investors appeared spooked later in the day after Fed officials predicted a recession this year.  China internet ADRs were sold with JD.COM the worst performer on the Nasdaq. American Airlines plunged 9.5% after Q1 earnings disappointed due to high operating costs.

Asian stocks were also mixed after initially opening lower. The Nikkei 225 dipped below 28k before trimming losses. The Hang Seng underperformed amid losses in Alibaba. The FT reported that Softbank is looking to sell its remaining stake in the company.

Gold shot higher to $2028 before closing at $2014. Prices continue to be supported by softer US Treasury yields and a sliding dollar. ETF purchases and central bank buying underpin support. The April high is at $2032, the March 2022 top at $2070.

Data Breakdown – Fed rate hike in play, then a pause

The main risk event of the week saw cooler than expected headline US consumer price inflation. It rose 0.1% month-on-month in March, below the 0.2% rate expected. But core CPI, excluding food and energy, continues to run hot, rising 0.4%, which was in line with estimates. That means the annual rate of core inflation rose to 5.6% from 5.5% despite the headline rate dropping from 6% to 5%. The core is key for the Fed as it is still running at more than double the monthly rate that economists cite as needed to be averaged over time to bring the annual rate of core inflation back to the 2% target. That said, a lot of the current price pressures is down to shelter which is backward-looking and set to turn lower over the coming months.

Yesterday also saw the release of the FOMC minutes. Fed officials gave a nod to the recent stress in the banking sector as tighter lending conditions are a material factor. They typically end up with a recession and higher unemployment that result in rate cuts. In fact, the “r” word was explicitly mentioned, with a mild recession now part of the Fed’s baseline scenario. The window for a soft landing is closing.

Chart of the Day – EUR/USD so close to 1.10

One of the key drivers for trading FX is always interest rates and the differences between two countries or regions. The narrowing eurozone / US spreads have definitely led EUR/USD over the past few weeks. More hawkish ECB commentary is also helping. The bank is nailed on to hike rates by 25bp at its May meeting, with the ECB hawks wanting a bigger move. Another similar sized rate rise is likely in June.

EUR/USD needs to break the psychological 1.10 barrier. The February top is at 1.1032. Trend oscillators across various timeframes are indicating the move higher still has legs. Momentum indicators are also bullish. Upside targets include 1.1184/98. US retail sales numbers are released tomorrow so the weekly close will be crucial.