EUR/USD struggles not to fall below the 1.0800 barrier

Market

US markets yesterday enjoyed an eye‐catching ‘risk‐on rebound with higher equities, higher yields and a stronger dollar. Europe this time lagged the move in the US. Headlines of US administration potentially turning to a more targeted/selective approach when introducing reciprocal tariffs on April 2 was said to ease worries on US growth. Even so, there is still a lot of noise on the US tariffs strategy as the US president indicated that tariffs on specific sectors like autos might be announced soon. Whatever, yesterday’s US reflation trade accelerated after a stronger than expected US March PMI. The composite index jumping from 51.6 to 53.5 gave some comfort against recent stagflation fears. Yet, details were mixed. The rebound was solely driven by services (54.3 from 51.0). Activity in the manufacturing sector dropped back in contraction territory as front‐running of tariffs faded. Business also turned increasingly cautious on the economic out outlook. Costs rises both related to tariffs, but also to wage growth are accelerating sharply. Whatever the news flow, US markets yesterday saw the glass half full. US equities rebounded up to 2.27% (Nasdaq). US yields jumped between 9.2 bps (5‐y) and 7.4 bps (30‐y) across the curve. Joining Powell’s debate on the temporary inflationary impact of tariffs, Fed’s Bostic indicated that he sees only room for one rate cut this year as tariffs might slow the disinflation process. As indicated, European markets were not able to follow the US risk‐on. EMU equities failed to maintain earlier gains, even as a more moderate approach on tariffs (if it were to occur) also should be good news for export‐oriented Europe (Eurostoxx 50 ‐0.15%). The EMU PMI’s also didn’t convince investors. The headline composite index improved only marginally from 50.2 tot 50.4. The outlook improved, but investors apparently had hoped for a more outspoken reaction already to the fiscal U‐turn. EMU yields basically closed unchanged at the end of the day. Also UK yields hardly reacted to a stronger than expected UK PMI (52.0 from 50.2). The upcoming budget update and several key data probably prevented an more pronounced reaction. On FX markets, the dollar extended the tentative bottoming/rebound that developed last week (DXY close 104.25). EUR/USD struggles not to fall below the 1.08 barrier. Sterling managed to limited the damage against the dollar and further rebounded against a soft euro (close EUR/GBP 0.836).

This morning, Asian markets are trading mixed and don’t really extend yesterday’s WS risk rally. Markets might keep more of a cautious wait‐and‐see approach with the end of the quarter and the April 2 tariffs deadline coming ever closer. Data releases today include the German IFO business climate, the Philly Fed non‐manufacturing activity index and US consumer confidence (conference board). Especially for the latter, more signs pointing to a stagflationary mindset might complicate a continuation of yesterday’s US reflation move. We also look out whether recent USD bottoming has further legs. DXY 104.4 marks first minor resistance. A sustained break below EUR/USD 1.08 also might indicated some further EUR/USD retracement with next support at 1.0763 (23% Retracement Feb low March top). The previous range top stands at 1.063.

News and views

Iwona Duda of the Polish Monetary Policy Council said that rates are set to stay on hold in the coming months but flagged the July inflation projections as being key for potential rate cuts afterwards. Her comments came after a series of weaker than expected data, including yesterday’s retail sales, prompted several other members to raise the possibility of cuts around mid‐2025. But Duda said that “Only the July projection can provide arguments decisive for the prospects of interest rate cuts, both in terms of timing and scale.” Any reduction should happen cautiously and be small (i.e. 25 bps), she added. Duda warned that some elements in core inflation prove sticky and is worried about the impact of energy prices once government caps are phased out. She also noted a continued lax fiscal policy and a strong job market. PLN strengthened throughout the day yesterday with EUR/PLN moving towards 4.175.

The Turkish finance Simsek and central bank governor Karahan are scheduled to meet with foreign investors later today. They’ll try to sooth market concerns in the wake of president Erdogan’s key opposition figure Imamoglu. That triggered a massive sell‐off in Turkish assets that required government intervention to bring it to a halt. Measures included an emergency rate hike to 46%, FX interventions and a ban for shorting Turkish stocks. Additional moves are being considered, with news of a potential lower tax on Turkish lira deposits floated yesterday. It is hoped this will support the currency and dissuade locals from converting their savings into dollars or other FX. USD/TRY shot up to a record high above 41 shortly after Imamoglu’s arrest before paring gains to around 38. EUR/TRY trades around 41 compared to the 43 levels seen at the volatility peak.

Download The Full Sunrise Market Commentary