Dollar decline extends amid month/quarter-end selling, Russo-Ukraine optimism, falling US yields

What you need to know on Thursday, March 31:

The main story in FX markets on Wednesday was a continued weakening of the US dollar, where the DXY dropped a further 0.6% to the 97.80s, where it now probes mid-March lows more than 1.5% below earlier weekly highs. Wednesday’s US data releases (ADP jobs and final Q4 GDP and Core PCE estimates) were robust, which alongside further hawkish Fed speak helped solidify expectations for a 50 bps rate hike from the bank in May.

But this wasn’t enough to shield the US dollar from a bearish combination of 1) unfavorable moves in rate differential amid downside in US yields, 2) month/quarter-end selling and 3) optimism regarding Russo-Ukraine peace talks. Regarding the latter, though skepticism about apparent progress in the talks this week remains elevated in wake of Russia’s continued offensive in Ukraine, FX markets seem to be pricing in a more favorable geopolitical outlook.

“The conflict may be moving to a more localized phase with some of the more extreme tail risk scenarios reducing in probability,” analysts at JPMorgan said on Wednesday in a note where they also recommended buying EUR/USD. For reference, EUR/USD hit its highest levels since the beginning of the month to the north of the 1.1150 mark on Wednesday, up 0.7% on the day and up 1.9% versus earlier sub-1.0950 weekly lows. The euro got some independent impetus from continued upside in short-end Eurozone yields as traders continued upping bets on ECB tightening in wake of the latest Spanish and German preliminary March HICP inflation figures, which surprised to the upside again.

In terms of the rest of the G10, while the euro was a strong performer, it was by no means the best, with the Swiss franc and Japanese yen taking that crown. USD/JPY dropped 0.8% to back under 122.00, a direct function of the drop in US yields on the day, leaving it now more than 2.5% below earlier weekly highs as traders weighted recent Japanese policymaker commentary regarding recent yen weakness. USD/CHF, meanwhile, saw an uncharacteristically large 0.9% drop from above 0.9300 to the low 0.9200s, leaving it only within a few pips of testing its 200-Day Moving Average.

In terms of the rest of the major G10 currencies, the kiwi was a beneficiary of strong domestic data (New Home Building Consents and Business Sentiment), with NZD/USD rallying slightly over 0.5% back to the upper 0.6900s. Its antipodean counterpart the Aussie failed alongside the loonie to benefit from higher energy prices, with AUD/USD trading in uninspired fashion in the 0.7500 area (still close to multi-month highs) and USD/CAD languishing just under 1.2500 and near-annual lows .

Finally, sterling was a middle-of-the-road performer, with GBP/USD rallying back into the mid-1.3100s but failing to hold above its 21-Day Moving Average for a sixth successive session, as EUR/GBP hit its highest level in more than three months near 0.8500.

Ahead, while FX market focus will remain transfixed on geopolitical developments and any associated impact on risk appetite/the commodity complex, economic data will also remain a key driver, with traders simultaneously also continuing to weigh up G10 monetary policy divergence. The OPEC+ meeting, US February Core PCE and Canadian January GDP figures are the main events to watch in the coming session, ahead of the release of the US labor market report on Friday, which is the most important event of the week. Eurozone HICP inflation figures are also out on Friday and should show a steep rise as the national figures out of Spain and Germany did on Wednesday.

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