Hawkish ECB Comments Boost Risk Of A 50 Bp Hike Next Month

As expected, the European Central Bank left interest rates unchanged at its last meeting. Still, ECB President Christine Lagarde’s comments afterward suggested that the bank is gearing up to take a more hawkish stance next month. As a result, the market is now pricing in a higher chance, 30%, for a 50 basis point rate hike in December, and the euro rallied strongly in response. Here’s what else is happening in the global markets:

US Producer Prices Decline

US producer prices declined by 0.5% in March, following a soft CPI report earlier in the week. The Fed fund futures market now sees the year-end rate at 4.33%, and while it is still pricing in a 70% chance of a hike in May, the dollar has tumbled to new lows for the year against the euro, sterling, and Swiss franc. US equity indices are rallying strongly, up more than 1%, which has carried over to Asia-Pacific and European trading. The MSCI Asia Pacific Index is at its best level in two months, and Europe’s STOXX 600 is up for the fifth consecutive session and approaching the year’s high set in February.

Brazil’s President Lula Criticizes Dollar Dominance

Brazil’s President Lula has criticized the dominance of the US dollar as the world’s reserve currency, suggesting instead that yuan bonds would be a better option. However, his central bank keeps 80% of its reserves in dollars, and Brazilian companies like Vale and Bunge rely on the dollar for their international trade. Moreover, reports that the yuan’s share on SWIFT has more than doubled to 4.5% since Russia invaded Ukraine are factually incorrect. The yuan’s share on SWIFT stood at 2.19% in February, rising to 2.23% in March.

Oil and Gold Price Movements

Gold reached almost $2049 yesterday before consolidating today with a heavier bias, finding support just below $2032. June WTI oil had set a new high for the year on Wednesday, reaching almost $83.40, and it has since consolidated around the $81.20 mark.

Related Facts

• The Fed will release the minutes of its March meeting later today, which may clarify the bank’s thinking regarding inflation and interest rates.
• The US dollar’s decline has helped lift commodities, with copper reaching its highest level in almost a decade.

Key Takeaway

The global markets continue to be influenced by shifting expectations around interest rates, inflation, and currency movements. The ECB’s upcoming meeting will be closely watched to see whether the bank takes a more hawkish stance and what impact this might have on the euro and broader markets.

Conclusion

The global economy remains highly interconnected, with events in one region potentially reverberating across borders and impacting multiple asset classes. As a result, investors need to stay alert to potential developments in a fast-moving environment where the landscape can shift quickly and unexpectedly.