Dollar on the back foot

Optimism that an end to the conflict in the Middle East may be in sight, following comments by Iran’s President that his country “has the necessary will to end this war”, triggered a decline in oil prices and a strong rally in US stocks into the New York close. Asian equities are also sharply higher overnight, with Japan’s Nikkei up more than 5%. Not surprisingly, the dollar has given up some ground in the currency markets. EURUSD and GBPUSD have rebounded to around $1.1590 and $1.3280 respectively, from lows yesterday of about $1.1450 and $1.3170. EURGBP continues to edge higher, moving back above the £0.87 level for the first time since early March.

Government bond yields, which ended lower yesterday, are heading further south this morning as the market continues to pare back expectations for central bank rate hikes. German 2- and 10-year yields have opened 7-8bps lower this morning, while equivalent UK yields are down around 12-15bps. In equity markets, the S&P 500 in the US closed almost 3% higher, while the STOXX Europe 600 is up more than 2.5% at the start of play today.

Headline inflation in the Euro area came in a bit lower than expected in March at 2.5%, albeit accelerating from 1.9% in February on the back of higher energy prices (which rose by almost 7% on the month). Core inflation – i.e. excluding energy and food prices – was also a touch lower than expected at 2.3%, down from 2.4% in February, with core goods inflation and core services inflation both edging lower last month (to 0.5% and 3.2% respectively).

ECB member Rehn says the central bank would have to respond to second-round inflation effects stemming from higher energy prices by raising interest rates, but he notes that the ECB should tread carefully and make its decisions on a meeting-by-meeting basis.

For the day ahead, economic data scheduled include the ISM manufacturing index (March), ADP employment report (March) and retail sales (February) in the US, and unemployment (February) in the Euro area. Final readings for the March manufacturing PMIs are also due in the main economies.