Recession risks in the euro area are rising, with eurozone inflation seen running hot

•  Meeting minutes showed the Federal Reserve preparing to move aggressively to fight inflation
• The euro bucked the trend but was near a one-month low below $1.09
• Minutes from the Fed meeting showed "many" participants were prepared to raise interest rates

Forex market

The dollar hovered near two-year highs against a basket of major currencies today after meeting minutes showed the Federal Reserve preparing to move aggressively to fight inflation, while commodity currencies fell further from recent peaks. The euro bucked the trend but was near a one-month low below $1.09 as investors await European Central Bank minutes due later. 

Minutes from the March Fed meeting published on Wednesday showed "many" participants were prepared to raise interest rates in 50-basis-point increments in the coming months. They also prepared markets for a reduction in the Fed's balance sheet after the May meeting at a rate of $95 billion per month, the beginning of the reversal of the massive stimulus pumped into the economy after the COVID-19 pandemic struck. That's nearly twice as quick as was seen during the last balance sheet run down during the 2017-19 cycle. 

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All of the above points to the Fed applying a heavy foot to the brakes, which should be positive for the dollar. The Australian and New Zealand dollars fell between 0.3%-0.2% to sit around 2% beneath highs struck on Tuesday as the Fed's tone has offset a hawkish shift from Australia's central bank, and a pullback in commodity prices whacked them. 

An increasingly close-looking presidential election in France is another wildcard, and the risk of far-right candidate Marine Le Pen beating incumbent Emmanuel Macron has dragged on the euro and French debt ahead of Sunday's first-round vote. The euro scraped itself from a one-month trough of $1.0874 to hit $1.09 in early European trading. 

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The Japanese yen was pinned near a one-week low and last traded at 123.80 to the dollar. Inflation differentials and the resulting monetary policy divergence dynamics can underpin DXY resilience near term. High inflation is here to stay and the hawks are in the driving seat. This matters for DXY given the strength of relative rates in driving EURUSD and USDJPY recently. Sterling recovered some of its recent losses to trade at $1.31. 

Broad selling of equities and other risk assets this week has also hurt cryptocurrencies.

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Euro-EUR

The single currency traded lower as recession risks in the euro area are rising, with eurozone inflation seen running hot for the remainder of 2022 and the European Central Bank likely to increase its deposit rate by year-end, a Reuters poll showed. While inflation hit another record high of 7.5% in March, it is still months from a peak. Overall, the EUR/USD traded with a low of 1.0898 and a high of 1.0987 before closing the day around 1.0903 in the New York session.

Japanese Yen-JPY

The Japanese Yen fell as the dollar hovered near two-year highs against a basket of major currencies today after meeting minutes showed the Federal Reserve preparing to move aggressively to fight inflation, while commodity currencies fell further from recent peaks. High inflation is here to stay and the hawks are in the driving seat. Overall, the USD/JPY traded with a low of 122.35 and a high of 123.65 before closing the day around 123.58 in the U.S session.

British Pound-GBP

The British Pound held near a three-week low versus the dollar as the latest comments by Fed officials highlighted a growing divergence between the U.S and British central banks on how to tackle inflationary pressures. Against the euro, the sterling was little changed. A hawkish stance from the Fed had bolstered the dollar and contrasts with the Bank of England. Overall, the GBP/USD traded with a low of 1.3064 and a high of 1.3165 before closing the day at 1.3070 in the New York session.

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Canadian Dollar-CAD

The Canadian Dollar was little changed yesterday as oil prices rose and investors awaited potential clues on the outlook for the Federal Reserve's bloated balance sheet. The price of oil, one of Canada's major exports, rose as the threat of new sanctions on Russia raised supply concerns, countering fears of weaker demand following a build-in U.S crude stockpiles. Overall, USD/CAD traded with a low of 1.2400 and a high of 1.2495 before closing the day at 1.2483 in the New York session.

Australian Dollar-AUD

The Australian Dollar lost ground today as markets wagered on an ever-more aggressive cycle of U.S rate rises that would threaten both the outlook for global growth and the Bull Run in commodities. A very hawkish set of Fed minutes added to the frenzy to price in rises in U.S interest rates. Investors have also priced in more tightening by the Reserve Bank of Australia (RBA), though not quite to the same extent. Overall, AUD/USD traded with a low of 0.7358 and a high of 0.7416 before closing the day at 0.7410 in the New York session.

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Euro-Yen EUR/JPY

EUR/JPY is trading above 14, 50 and 100 days moving average. Fast stochastic is giving a bullish tone and MACD is also issuing a bullish stance. The Relative Strength Index is above 61 and lies above the neutral zone. In general, the pair has gained 0.04%.

Sterling-Yen GBP/JPY

Currently, GBP/JPY is trading above 14, 50 and 100 days moving average. Fast stochastic is issuing a bullish tone and MACD is also indicating a bullish stance. The Relative Strength Index is above 60 reading and lies above the neutral zone. On the whole, the pair has gained 0.36%.

Aussie-Yen AUD/JPY

Currently, the cross is trading above 14, 50 and 100 days moving average. Fast stochastic is giving a bullish tone and MACD is also indicating a bullish stance. The Relative Strength Index is above 76 reading and lies above the neutral region. In general, the pair has gained 1.13%.

Euro-Sterling EUR/GBP

This cross is currently trading above 14, 50 and below 100 days moving average. Fast stochastic is indicating a bullish tone and MACD is also issuing a bullish signal. The Relative Strength Index is above 53 and lies below the neutral region. Overall, the pair has lost 0.30%.

Sterling-Swiss GBP/CHF

This cross is trading below 14, 50 and 100 days moving average. Fast stochastic is issuing a bearish stance and MACD is also indicating a bearish tone. The Relative Strength Index is above 45 and lies below the neutral region. In general, the pair has gained 0.05%.

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