GBP/USD tumbled to multi-month lows below 1.3000 amid policy divergence. The UK slapped new sanctions on Russian banks, oil and coal imports. Focus shifts to UK and US inflation amid looming Ukraine risks. GBP/USD booked the second straight week of losses, as bears refused to give in amid hawkish Fed-driven sentiment and risk-aversion. Cable touched its lowest level since November below 1.3000, as King dollar reigned supreme, partly buoyed by the US bond market rout. With UK and US inflation dropping next week, the downside risks for the currency pair remain intact. GBP/USD sold-off into policy divergence, Russian sanctions The risk-off flows and the dollar’s demand remained the central narrative this week, which revived the downside for GBP/USD after witnessing a consolidative phase a week ago. GBP/USD stood resilient at the start of the week, in the face of the heightening tensions between the West and Russia over Ukraine. Over the weekend, Ukraine accused Russia of mass killings of civilians in the Ukrainian city of Bucha. Russia declined committing any war crimes. These re-ignited tensions and prompted the US, Europe and the UK to propose additional sanctions against Moscow. Meanwhile, the greenback continued to cheer Friday’s upbeat US labor market report and hawkish comments from San Francisco Fed President Mary Daly, which fanned expectations of a 50 bps May Fed rate hike. Cable extended its renewed upside on Tuesday and tested 1.3100 following the Bank of England (BOE) Deputy Governor Jon Cunliffe’s hawkish remarks, citing that “further policy tightening might be appropriate to tame inflation.” The major, however, changed its course and tumbled towards monthly lows, as risk-aversion bolstered haven demand for the buck amid increased expectations that the European Union (EU) will call for a ban on Russian energy imports. The sell-off extended into Wednesday, as the pair hit fresh monthly lows below 1.3050 on the renewed US dollar’s strength, in the wake of the relentless rise in the Treasury yields across the curve. Fed Vice Chairwoman Lael Brainard’s calls for a bigger rate hike and the balance sheet reduction in May, added extra legs to the rally in the yields as well as the dollar. The pain for GBP bulls deepened after the Fed March meeting’s minutes delivered a hawkish surprise. The minutes revealed that the board members outlined plans to reduce the balance sheet by more than $1 trillion a year while hiking interest rates. This alongside the hawkish Fed commentary and upbeat US Services PMI data cemented a deal for a 50 bps lift-off in May, underscoring the monetary policy divergence between the Fed and the BOE. Adding further to the pound’s misery, the UK announced a full asset freeze on the largest Russian bank while announcing to end all imports of Russian coal and oil by the end of 2022. St. Louis Fed President James Bullard said on Thursday, the central bank needs to hike its benchmark short-term borrowing rate to about 3.5%, which propelled the US dollar index to the highest level since May 2020 and the yields to a three-year top. GBP/USD: Week ahead After a relatively data-light week, markets are bracing for an action-packed week ahead with top-tier economic data slated for release from both sides of the Atlantic. Nevertheless, it should be noted that it will be a holiday-shortened week, as the UK and European markets will be closed on Friday, in observance of Holy Friday. Monday sees the UK monthly GDP dropping alongside the country’s Manufacturing and Industrial output data. The EU is set to discuss further sanctions on Monday, with an oil embargo on Russia likely on the cards. Next of relevance for GBP traders will be the Kingdom’s labor market report due on Tuesday. The all-important US Consumer Price Index (CPI) will be also published later in Tuesday’s American session. That will be followed by the critical UK inflation data on Wednesday, with the rate already sitting at 30-year highs above 6%. The US Producers Price Index (PPI) will also hit that day. On Thursday, the US Retail Sales, weekly Jobless Claims and Preliminary Michigan Consumer Sentiment data will keep traders busy amid a data-dry UK docket. Apart from the economic data releases, the Fed commentary and the incoming updates on the Ukraine crisis will drive the market sentiment. GBP/USD: Technical analysis The Relative Strength Index (RSI) indicator on the daily chart continues to edge lower but holds above 30, suggesting that GBP/USD could suffer further losses before turning technically oversold. Additionally, the descending trendline coming from late February stays intact, confirming the bearish bias. If the pair makes a daily close below 1.3000 (psychological level, static level) and starts using that level as resistance, it could extend its slide toward 1.2900 (psychological level, static level) and 1.2800 (psychological level, static level). On the upside, 1.3100 (descending trend line,...

The first round of the French presidential election will be held on April 10, ahead of the runoff two weeks later. Opinion polls have narrowed significantly in recent weeks and a victory for President Macron doesn’t look so certain anymore. For the euro, this election seems like an asymmetric downside risk.  The rules Presidential elections in France consist of two stages. In the first round, candidates from all parties can participate. If one candidate manages to secure more than 50% of the vote, they instantly win. Otherwise, there is a second round between the two most popular candidates.  Nobody has ever won from the first round. That’s unlikely to change this time, since the field is very crowded with twelve candidates running. The frontrunners in opinion polls are the current president, Emmanuel Macron, and the opponent he defeated in the last election, the far-right Marine Le Pen.  In third place comes the leftist Jean-Luc Melénchon, followed by the ultra-nationalist TV pandit Eric Zemmour and the conservative Valérie Pécresse who are virtually tied in fourth and fifth place.  2017 repeat?  Therefore, it seems like Macron will be squaring off against Le Pen once again in the second round, only his polling lead is much smaller now. Back in the 2017 election, Macron won the final round in a landslide with 66% of the vote against Le Pen’s 34%.  This time, polls show Macron at 53% and Le Pen at 47% - a much tighter race. That is almost within the margin of error, so surprises are entirely possible. Macron enjoyed a boost in popularity recently thanks to his diplomatic efforts to prevent the war in Ukraine, but that spell has started to fade as the war drags on and the cost of living increases.  Le Pen has taken advantage of this situation. She has rebranded herself, focusing on economic problems such as rising prices rather than the immigration and anti-EU rhetoric she campaigned on previously. The new strategy is working - she has risen dramatically in polling surveys and she has a much better chance of getting elected than 2017.  Eurozone implications The main difference with 2017 is that an exit from the European Union or the euro is no longer on the agenda. That said, this race could still have massive implications for Europe.  Macron has spearheaded the push towards greater economic integration. He pushed for the creation of common debt instruments in the height of the pandemic to finance the Recovery Package and has routinely criticized the Eurozone’s strict fiscal rules.  He essentially tried to fix the two main problems with Europe’s economic architecture - the absence of Eurobonds and the rules that prevent governments from running large deficits, which ultimately enforce austerity on indebted nations.  Hence, Macron is clearly the most growth-friendly candidate. If he loses this election, there would essentially be a European leadership vacuum and the drive to reform could fade, keeping the economy stuck in slow gear. That would be bad news for the euro.   Think of it this way - back in 2017, euro traders worried about Le Pen getting elected because she wanted to exit the EU. This time, the question for markets is not whether Le Pen will be defeated, but rather whether Macron can stay in power.  Market nerves In the markets, the cost of hedging the euro has spiked lately as opinion polls continue to tighten. Implied volatility in euro/dollar options for the next one month has risen to 9%, reflecting growing demand for protection against sharp moves in FX markets.  The bond market tells a similar story. The difference between French and German 10-year borrowing costs has ballooned, which means investors are dumping French bonds faster than German ones as the political risk gets baked into the cake.  In the FX arena, the euro has tanked but it is difficult to blame election nerves for that. Between the ongoing war, escalating sanctions, surging energy prices, and the darkening economic outlook for the Eurozone economy, euro traders had a lot to digest.  Trading playbook All told, this event presents an asymmetric risk for the euro. A victory for President Macron is already the market’s baseline scenario, so if he really wins, the single currency is unlikely to receive a huge boost. It’s already the most probable outcome.  On the flipside, a victory for Le Pen could come as a shock, injecting a new air of uncertainty into European politics and generating a much greater negative FX impact. Investors have been hedging against this outcome but implied volatility in the euro is lower than it was back in 2017, while Le Pen’s chances are probably better now.  Of course the stakes are not so high this time, since she isn’t threatening to exit the euro. Still, if she does win, the drive...

EUR/USD - 1.0862 Euro's selloff from last Thursday's high at 1.1184 to 1.0866 in New York yesterday on continued USD's strength, then present break there in Asia suggests correction from March's 22-month bottom at 1.0807 has ended and bearishness remains for re-test of said support, break needed to extend decline to 1.0755/60. On the upside, only a daily close above 1.0938 would signal a temporary bottom is in place and risk stronger retracement towards 1.0961, break, 1.0988 later. Data to be released on Friday Japan current account, trade balance, consumer confidence, Eco watchers current, Eco watchers outlook. Italy retail sales. Canada unemployment rate, employment change, U.S. wholesale sales and wholesale inventories.  

Outlook: The markets took the Fed news remarkably well–suspiciously so. This is a market that thinks Musk buying Twitter stock is as important and interesting as Buffett buying Occidental Petroleum and HP, so perhaps we shouldn’t be surprised. The underlying problem is that we are not prepared for inflation to persist. Or maybe equity traders deduce higher prices mean higher earnings, so that’s good. The Fed is making it clear that inflation is the top priority (over employment) and to tame it, the planned hikes and quantitative tightening are going to be huge. The $95 billion is the equivalent of a 25 bp hike, according to Powell. So multiply that times 7 months (1.75%) plus the actual outright hikes expected (4 more at 25 bp each and 2 at 50 bp for a total of 2%) and it’s a stunning tightening, effectively 4.00% counting the 25 bp hike we already had. Fed funds was zero-25 bp only last month. As for the rate hikes, the Fed is sticking to the data-dependency story. The problem is that the inflation forecasts are so wonky. If we believe market-based expectations, inflation in five years should be 3.28% according to FRED as of late yesterday. The 10-year is the same number. But we are inclined to agree with Oxford Economics that inflation is going to be higher, deeper and last longer, with a decent probability of 4% into the next year. See below. If and when this sinks in, it won’t be a taper tantrum. It may well be a tsunami. The WSJ opines that inflation is a clear and present danger, and it won’t be be so easy for taper tantrum throwers to push the Fed off its plan this time. “The quantitative-tightening tantrum could go on a lot longer than the taper tantrum did.” Ah, but what does that mean for various markets? Before considering that, don’t forget China. Depending on how far the lockdown goes and how long it lasts, the retreat in the Chinese economy is most likely, on balance, deflationary. Activity is slowing down, sometimes to a halt, meaning demand for everything is also down, including oil and factory inputs. If Covid persists in China, and that’s a big if, commodity prices can fall. See the current readings from TradingEconomics. So far this is hypothetical and we do not have estimates of how much Chinese deflation can moderate Western inflation. Meanwhile, the cost of goods imported from China may well rise. In the days ahead, we shall see if financial market instability becomes an issue, as some Fed govs fret. If they are not going to retreat from hikes and QT, what are they going to do? The standard answer is to flood the markets with short-term liquidity. But not yet. VIX is low, showing complacency. Still, nerves are getting frayed, or should be. We see a little of that in the drop in risk-on currencies like the AUD and CAD. We have been arguing that recession is neither imminent nor inevitable. We have an inkling we may have to retract that. Demand will drop on rising prices and critically, capital investment will drop, too, on uncertainty alone. That could take the Atlanta Fed GDPNow forecast below zero in Q2 all too easily. The housing market is going to have a heart attack with mortgage rates already over 5% and the housing shortage getting worse, in part because the cost of construction has gone up. Lumber has come down lately but see the shocking chart from Trading Economics. And remember, neither the CPI nor the PCE deflator measure true house prices, but rather owner-equivalent rents. In other words, housing cost data is rubbish. The thing to watch out for now is fresh talk of inflation staying higher for longer and seeping into the core, with confidence in the Fed’s ability to control it starting to fade. The “institutional factor” is always the top factor in bonds and FX prices, whether it’s guidance, actions or overall credibility. The Fed delivered exactly what it said it would deliver, if a bit late, but the implications have yet to sink in. If risk-off builds, the beneficiaries will be the dollar, Swiss franc and gold. Sound familiar? This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes. To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!

Stock markets are back in the red on Thursday as further hawkish commentary from the Fed increases the odds of a recession over the next couple of years. The soft landing that the Fed so desires is easier said than done, especially in an environment when inflation is so high and energy prices are through the roof. And when you consider the kind of tightening that's being proposed, the economy is going to have to display incredible resilience to weather the storm. The central bank has quickly gone from fighting the market to standing shoulder to shoulder with it. The next few meetings are likely to deliver three super-sized rate hikes it seems and that could be ramped up further if we don't see some progress on inflation in that time. Policymakers are clearly spooked by the data we've seen over the last couple of months and when faced with dealing with soaring inflation and supporting the economy, there's only ever going to be one winner. They better hope any recession is mild and short-lived or the decision to drag their feet on starting the tightening cycle will look even more negligent. Oil below $100 after IEA and EIA Oil prices are slipping again today after falling more than 5% on Wednesday. The combination of the IEA reserve release and EIA inventory data sent prices tumbling yesterday and suddenly a world of double-figure oil looks possible. That wouldn't have been something to celebrate only a few months ago but a lot has changed since then. There are still plenty of upside risks to those prices despite the best efforts of those involved in the SPR release. But 240 million barrels is a substantial move that will help to offset the disruptions we've seen and allow time for US shale and OPEC+ to fill the void. Gold sideways as other markets react to the Fed The consolidation we've seen in gold in recent weeks has not been interrupted by the hawkish commentary we've had from the Fed over the last few days. While other areas of the market have reacted strongly to the comments, gold has been steady and if anything, the ranges have tightened. Perhaps this is a sign of the enormous uncertainty in the outlook or the combination of high inflation and economic risks associated with it, and events elsewhere. There's clearly a reluctance to let go of a safe haven and inflation hedge that's been so sought after this year. Bitcoin slips again after the Fed minutes Bitcoin has come under pressure alongside other risks assets as a hawkish Fed has sapped demand for the cryptocurrency. It fell more than 4% on Wednesday and is down a little shy of 2% today. The crypto conference in Miami could have driven some excitement in the space that may have benefited the price, or so goes the narrative anyway, but that doesn't appear to be happening this time around. I'm sure President Bukele is only seeing the positives in the latest downturn.  

EUR/USD - 1.0907 Euro's resumption of decline from last Thursday's 4-week peak at 1.1184 to as low as 1.0874 yesterday suggests correction from March's 22-month bottom at 1.0807 has possibly ended there and as 1.0937 has capped subsequent recovery in New York, consolidation with downside bias remains for re-test of said support, below would extend towards 1.0846 but 1.0807 should remain intact. On the upside, only a daily close above 1.0940/45 may risk stronger retracement of said fall towards 1.0988. Data to be released on Thursday: Australia AIG services index, exports, imports, trade balance, Japan leading indicator, coincident index, machine tool orders. Swiss unemployment rate, Germany industrial output, U.K. Halifax house price, EU retail sales. U.S. continuing jobless claims and initial jobless claims.