Powell’s “blunt” comments
Despite the DXY Index’s 1% fall to a three-year low of 99.26 overnight, we are cautious and mindful that the DXY has yet to break below the intra-day low of 99 seen on April 11. Unlike last week, no de-dollarisation fears were inferred from investors dumping US Treasuries while exiting US equities. Yesterday, investors sought safety in bonds, driving the US Treasury 10Y yield lower a third day by 5.6 bps to 4.277% amid the 2.2% decline in the S&P 500. Markets may reverse again before US stock markets close on Good Friday; the US bond market will close early today in observance of Maundy Thursday.
Fed Chair Jerome Powell affirmed that Trump’s significantly higher-than-expected tariffs would lead to stagflation and pose a challenge to the Fed achieving its dual mandate of price stability and full employment. Apart from the blunt tone, Powell’s comments did not deviate from his colleagues’ narrative for an extended pause. The Fed sees tariffs lifting prices but will refrain from hiking rates as long as long-term inflation expectations stay anchored amid a rising unemployment rate on a slowing economy.
Powell said the Fed was ready to provide dollars overseas, a tacit reaffirmation of the USD’s dominant role as the world’s reserve currency. This comment also implied agreement with Fed Governor Christopher Waller’s recent assessment to look past high inflation and cut cuts if a recession becomes imminent.
ECB preview
Looking beyond its 1% rebound overnight, EUR/USD is still within its three-day range between 1.1260 and 1.1430, and below last Friday’s intra-day high of 1.1473. Apart from the European Central Bank cutting its deposit facility rate by 25 bps to 2.25% today, we expect some concern from ECB President Christine Lagarde regarding the EUR’s recent appreciation as a factor holding inflation down and adding to the headwinds posed by US tariffs. The accompanying ECB Survey of Professional Forecasters should also reflect downgraded growth expectations, affirming that the defence and infrastructure spending under the “ReArm Europe” Plan would not offset the immediate headwinds due to the negative impact of US tariffs.
JPY bulls should be cautious about the US-Japan trade talks
US President Donald Trump has inserted himself into the US-Japan trade negotiations over April 16-18. Trump’s involvement underscored the high stakes and his desire to validate his tariff strategy to achieve trade fairness and reduce deficits. In the discussions, Trump emphasized tariffs, military cost-sharing, and broader trade fairness.
Describing the US tariffs as a national crisis, Japan Prime Minister Shigeru Ishiba told parliament that “haste makes waste,” indicating no rush to reach a deal by making big concessions. Tokyo was also resistant to the US request to include the JPY in the talks, which it preferred to address in separate discussions between their finance ministers. Japan advocated removing additional tariffs such as the 25% duty on autos, auto parts, steel and aluminium, highlighting their detrimental impact on domestic industries and company profits.
The Nikkei 225 Index fell 19.4% to 30793 between March 26 and April 7 before recovering to 34087. The OIS futures do not expect the Bank of Japan to deliver more rate hikes in 2025; the 10Y JGB yield fell to 1.29% from its 1.59% peak in late March. Having fallen sharply from its 159 high in January, USD/JPY is approaching the 140-support level held at the end of 2023 and September 2024.
Quote of the Day
“The great hope of Easter is hope.”
Basil Hume
April 17 in history
The damaged Apollo 13 spacecraft returned to Earth safely in 1970.
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