The market seemed to overreact to the central bank meetings this week. The market heard Fed Chair Powell as more hawkish than the and took the dollar sharply higher. Yesterday, it overreacted to the Bank of England and European Central Banks and sold the greenback aggressively. The swaps market is discounting three rate hikes this year by the ECB and BOE, and about three basis points of tightening by the Federal Reserve.
Still, after yesterday’s sell-off the has bounced back. The fog of war seems to contribute to the desire for short-term market participants not wanting to be short dollars into the weekend. Even though the US and Israel say that they will not strike Iranian oil infrastructure, there is little sign of de-escalation and yesterday, US Treasury Secretary Bessent made a reference to the possibility that Kharg Island could be taken over by the US. Adding to the mix is today’s “triple-witching” that see a relatively large, $5.7 trillion of options on individual stocks, indices and exchange-traded funds expire. This comes amid a further sell-off in stocks and bonds.
Prices
G10
• After practically no follow-through euro selling yesterday and the sharp drop during Fed Chair Powell’s press conference on Wednesday, the rallied strongly yesterday. It reached a six-session high, almost $1.1615. ECB President Lagarde seemed to take a wait-and-see stance and expressed no sense of urgency, but unnamed hawks played up the risk of a hike as early as next month, and today the Bundesbank’s chief made the same point. And it is not just one hike but now the swaps are pricing in nearly three hikes before the end of the year. However, with the weekend at hand, given the fog of war, the short-term market does not want to be short dollars. The euro has held below $1.16 today and was sold $1.1535 area ahead of the North American session. This risks a test on $1.15, where options for 1.5 bln euros expire today.
• The rose to a seven-session high yesterday as the greenback unwound the Powell-inspired gains. The dollar rose to within a whisker of JPY160 on Wednesday and early Thursday before being sold to JPY157.50 in the North American afternoon. The 20-day moving average, which the dollar has not traded below since February 24 (~JPY157.75 today) was frayed. However, market seemed to overreact yesterday, and with Tokyo markets closed for the national holiday, the greenback recovered to around JPY158.90 today. There are $920 mln options at JPY158.50 that expire today.
• also recovered smartly yesterday. After it slipped below $1.3250 in the early going, it poked above $1.3465, its best level since March 10. It took out the 20-day moving average (~$1.3405) for the first time since the middle of last month. on a set of five sessions that frayed the 20-day moving average (~$1.3400 today). There was no follow-through sterling buying today and it mostly held below $1.3440 so far today. Nearby support is around $1.3345-55. The swaps market swung from practically flat Wednesday to pricing in an 80% chance of a hike by the Bank of England next month. Before the war the market had a cut in April fully discounted. Three hikes before the end of the year are fully discounted.
• The was the weakest currency in the G10 yesterday. It was practically flat. It was the first session since late January that the US dollar did not trade below CAD1.3700. It is holding above CAD1.37 so far today in quiet turnover. While the greenback made a marginal new two-and-a-half-week high yesterday, it stalled near CAD1.3750, while the month’s high was a little above it. It is not clear that the consolidation pattern has ended. There are nearly $1 bln roughly divided between three strikes, CAD1.3725, CAD1.3740, and CAD1.3750 expiring today.
• The held $0.7000 and recovered to almost nearly $0.7110 in the North American afternoon yesterday. Tuesday and Wednesday’s highs were around $0.7120-25. It is trading a bit heavier today, and has been sold to session lows, slightly below $0.7055 in Europe. Nearby support is seen in the $0.7020-40 area.
EM
• Despite the risk-off mood, the recovered from a four-day low to settled higher on the day. The US dollar reached almost MXN17.96 before being sold slightly below MXN17.68. It has mostly traded between MXN17.50 and MXN18.00 this month and settled a little north of the mid-point. The greenback is trading with a firmer bias and is approached MXN17.83 in Europe. The Brazilian real gained slightly more than the Mexican peso yesterday (~0.85 vs. ~0.65). The two led Latam currencies higher yesterday.
• The dollar turned lower after reaching a three-day high against the , near CNH6.9076 yesterday. As the greenback was sold more broadly it fell to new session lows around CNH6.8870 in the North American afternoon. It is trading inside yesterday’s range. It settled last week near CNH6.9065. We had thought the dollar fix might be raised this week, but instead, the PBOC set the dollar’s reference rate at a new multi-year low today (CNY6.8898 vs. CNY6.8975 yesterday, and CNY6.9007 at the end of last week.
• Indian markets re-opened after yesterday’s holiday and the was sold aggressively. The rupee fell by as much as 1.2% today, the most since February 2022. Foreign selling of assets took a toll and lifted the dollar to a record INR93.76. The INR95 area may be tested next week.
Other Markets
• Asia Pacific equities were mostly lower, and Tokyo markets were on holiday. South Korea’s Kospi bucked the trend and posted a small gain as has the Indian indices. The Stoxx 600 in Europe is little changed after it fell 2.4% yesterday. US index futures point to a lower opening. The settled below its 200-day moving average yesterday for the first time since May 2025.
• Bonds also are under pressure. Benchmark 10-year yield are 4-7 bp higher in Europe, led by the UK Gilts and Italian BTPs. The is up five basis points to 4.30%. The high yield was around 4.32% yesterday, the highest since last August.
• is little changed as it consolidates after the ~$365 loss over the past two sessions. is trading heavier and it could be the fourth consecutive session of losses of more than $1 an ounce.
• May has been confined to the lower end of yesterday’s range, but is near session highs, above $96, ahead of the start of the North American session. Yesterday’s push above $100 briefly marks the week’s high. The May-July Brent futures contracts remain above $100.
Data
• Canada reports January today. Based on preliminary data, StatsCan tipped a sharp 1.5% gain after a 0.4% decline in December. Excluding auto sales, a 1.2% jump is projected by the median forecast in Bloomberg’s survey after a 0.1 rise at the end of last year.
• The UK reported February government finances today and they were worser than expected. Still, the surge in interest rates renders the data moot. The UK 10-year Gilt yield is up 70 bp since the war began and the two-year Gilt yield has risen by about 100 bp.
• The eurozone reported January’s trade and current account surpluses of 12.1 bln and 37.9 bln euros, respectively. It is driven by Germany, of course. It is notable that the IMF estimates that Germany’s current account surplus was 5.8% of GDP in 2024 and 4.5% last year. It is projected to rise to 5.1% this year. The IMF estimates that China’s current account surplus was 2.3% of GDP in 2024 and 3.8% in 2025. It forecasts a 2.8% surplus this year. There are critics who say that China’s surplus is larger than the IMF says but while many IMF projections are debated by private sector economists, they offer a consistent baseline view.
• As widely anticipated, Chinese banks left their one- and five-year loan prime rates steady at 3.0% and 3.5%, respectively. They were last changed in May 2025, when they were lowered by 10 bp.
