Traders eye Inflation, central banks & US bank earnings

Wall Street finished mildly lower, Asian shares rose overnight, and Europe points to a mildly softer start with inflation, central bank decisions, and US earnings under the spotlight.

•         UK CPI rises by a higher than expected 7% YoY, GBP/USD still struggles around 1.30
•         The loonie strengthens as the BoC is set to hike rates by 0.5%, possibly more
•         US banks kick off earnings season but expectations are muted

Risk appetite recovered slightly yesterday after US inflation was not as bad as feared. While the headline CPI number rose to a higher than expected 8.5% YoY, core CPI rose to a less than forecast 6.5%. Fed Governor Lael Brainard highlighted this as a welcomed development that showed that inflation was peaking.

After initially falling following the CPI print, the US Dollar Index powered higher, settling +0.4% and marking its 9th consecutive day of gains. The data boosted expectations of a 50-basis point rate hike to 87%, up from 81% before the release.

RBNZ

Concerns over inflation have picked up substantially. The RBNZ hiked rates by 50 basis points overnight in an attempt to tame 30-year high inflation. This marked the fourth straight meeting where the central bank hiked rates, with Governor Adrian Orr saying it is preferential to raise steeply now. The kiwi had rallied ahead of the central bank meeting but then fell on the RBNZ’s more hawkish stance.

UK CPI

UK inflation surged to 7% YoY in March, up from 6.2% in February and above forecasts of 6.2%. The effects of the Russian war have pushed the cost of living to a 30 year high, with energy, food, and fuel driving up prices and piling pressure on the BoE to hike interest rates at the May MPC meeting. The BoE has said that it expects inflation to rise to 8% in April and possibly higher later in the autumn. 

The pound has barely risen versus the US dollar following the release and continues to struggle around 1.30, and GBP has fallen against the euro. Whilst the BoE needs to raise interest rates to rein in inflation, with GDP growth stalling in February, the fear that the central bank could tip the UK into recession is hitting demand. The FTSE is also heading for a softer start.

BoC

Sticking with inflation and central banks, the BoC is also expected to raise interest rates today. The BoC meets as inflation continues to rise at 5.7% in Canada and as the unemployment rate dropped to 5.3% in February, a record low. While the central bank is broadly expected to go ahead with a 50 basis point rate hike, some even suggest that a 75 basis point hike could be on the cards.

USD/CAD faced rejection at the 50 sma, 1.2660 and is falling away from that 3-week high ahead of the meeting. A hawkish BoC could see the pair fall towards 1.2550.

US banks

US banks will kick off earnings season today, with JP Morgan firing the starting gun. Bank stocks have been out of favour so far this year, underperforming the broader market. Less deal-making, tough comparisons from last year when bad loan reserves were released, and exposure to Russia are likely to overshadow higher interest rates lifting net interest income.