The Morning Update

The USD steadies, oil prices slip, equity markets improve, and US yields are mixed on rates and earnings. The USD remains near 6-month highs, while European equities improve as the Fed and the ECB rate outlook diverge. On Tuesday, Fed Chair Powell said the restrictive rates policy needs more time to work. Powell told a forum in Washington, "The recent data have clearly not given us greater confidence and instead indicate that it likely to take longer than expected to achieve confidence." In Europe, the eurozone inflation steadied in March, helping to reinforce expectations that the European Central Bank will cut key interest rates in June, supported by a slowdown in wage growth, cheaper imports from China, and low gas prices after a mild winter. Geopolitical tensions in the Middle East continue, with Saudia Arabia and the UAE calling for "self-restraint" as Israel is weighing a response to the Iranian attack. Elsewhere, oil prices hold below $90 a barrel, European natural gas weekend after four days of strengthening, and silver prices rallied. Today, we see limited economic releases with just the Fed's Beige Book in focus. The EU Leaders Summit & IMF Meeting starts today, with investors monitoring senior central bank policymakers' comments from BoE Governor Bailey, ECB's President Lagarde, and Fed's Mester & Bowman, which will help provide intraday direction to currency markets.

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In the news. Biden calls for higher tariffs on China steel & aluminum. US & allies plan more Iran sanctions; Israel war cabinet to meet again. ASML Q1 bookings missed forecast, but China sales hold up. European shares lifted by Adidas & LVMH on healthy earnings. The US signals that Venezuela's oil sanctions relief is at risk as the deadline looms. China warns the West of 'survival of the fittest' as manufacturing boosts its economy. In response to China's build-up, Australia increases defense spending by $32 billion.  TC Energy pipeline rupture sparks wildfire near Edson Alta.

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In currency markets. Currency markets remain under pressure on geopolitical concerns and the prospect of the US vs. peers increasing interest rate differentials. Euro, AUD, CAD & NZD hold near 5-month lows vs USD. GBP tests a one-month high vs Euro. South Korea and Japan signal readiness to respond to excessive FX volatility. CNY holds steady, while Asian currencies have firmed by 0.2% on average compared to USD. Trading currencies improved with NOK flat, JPY & CHF up 0.1%, SEK firmed by 0.2%, AUD strengthened by 0.4%, and NZD & MXN rallied by 0.6 against the USD.

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In commodity markets. Oil prices weakened by 1%, natural gas prices tumbled by 3%, gold prices slipped 0.1%, silver & wheat prices rallied by 0.65%, copper prices rose by 0.4%, and soybean prices are flat.

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CAD improves in early trading as the USD eases, but the loonie looks vulnerable to further weakness amid the prospect of diverging interest rate policies between the Fed & BoC. The loonie has weakened 2% in April vs. USD and is down nearly 1% vs. EUR & GBP as easing oil prices further pressure the loonie. Domestically, the Canadian budget prioritizes housing while taxing the highest earners, with a deficit projected at $39.8 billion. Intraday, the CAD & US economic calendar is light, so the focus will remain on the Fed's speech to help provide market direction.

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EURCAD holds steady as markets await the start of the EU Summit and ECB President Lagarde's speech to help provide direction to the single currency.

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EUR continues to battle near 6-month lows amid the prospect of the ECB easing rates in June. Euro finds support from an easing USD but struggles to make any significant upside gains with the prospect that the ECB will ease interest rates in June. Domestically, the EU Core & Harmonized Index of Consumer Prices Y/Y & M/M all came in as expected, and the focus shifted to ECB President Lagarde's speech for direction. In an interview with Lagarde on Tuesday, she said the ECB will cut rates soon, barring any major surprises. Our bias remains that the Euro has the potential for further weakness; a break of 1.0600 opens up the potential for a further move toward 1.0300 in May.

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GBPEUR holds steady in early trading, with the pound holding near monthly highs. Markets expect further GBP to strengthen into the end of Q2 with the prospect of ECB easing interest rates in June.

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GBP remains capped at 1.2500 following the Fed Chair's comments on higher US rates for longer. The pound edged higher amid a weaker USD, but it continues to struggle to breach 1.2500 with the increasing prospect of interest rate divergence between the US and the UK. Domestically, UK inflation eased from 3.4% (y/y) Feb to 3.2%, its lowest level in 2 years, but did not fall as much as expected. In other data releases, UK Retail Sales increased to 4.3%, while PPI data fell more than expected. In the bigger picture, the BoE is expected to maintain a cautious tone, but the lower inflation levels gave increased optimism that the BoE could ease rates into Q3.