The US dollar strengthened and the USD/JPY pair reached new highs

The publication of the March inflation report from the United States shook financial markets. The US dollar strengthened against most currencies, and the USD/JPY pair reached new highs not seen since 1990.

The high inflation reading significantly reduces investors' expectations for interest rate cuts in the US this year. Even though minutes FOMC have shown readiness to normalize monetary policy this year, however a clear rebound in inflation may result in interest rates not being reduced at all.

The Fed wants to avoid a second wave of inflation

CPI inflation in the US increased to 3,5% y/y for March and remained at 3,8% y/y for the core measure. These may not seem like very high levels, but the peak of inflation in the US was well below 10%. At this point, after two strong readings from the beginning of this year, which could have suggested some noise in the data, another strong reading is coming, related not only to high prices oil. Hot inflation in services and rising energy prices may mean that the Fed will no longer be willing to lower interest rates in the near future.

The Fed wants to avoid the scenario of the late 70s, when the second, stronger wave of inflation began. Premature cuts, with rising inflation, could lead to a repeat of this situation. At this point, market expectations indicate that the first reduction could take place only in September, and additionally there are less than two discounts! It is worth mentioning that in March, the median expectations of Fed members indicated 3 cuts, although taking into account the current data, these expectations could have changed dramatically.

USD/JPY highest since 1990

In addition to the inflation publication, we also learned about the minutes of talks from the Fed's March meeting. In these notes, we could read that most Fed members want to normalize monetary policy this year, but need more certainty that inflation is heading in the right direction. After yesterday's CPI readings, it is difficult to indicate that such evidence will appear in the near future. Therefore, it cannot be ruled out that The US dollar has not yet said its last word. Moreover, yields on US 10-year bonds are back above 4,5%, which is the highest level since November last year.

The EUR/USD pair has rebounded from the lows from earlier this month, but is just shy of the lows of 1,0700 from the first half of February. On the other hand USD/JPY pair it broke the level of 153, being the highest since 1990. It is speculated that intervention by the Bank of Japan could occur only at the level of 155.

A moment after 10:00 we were paying PLN 3,9672 for the dollar, PLN 4,2642 for the euro, PLN 4,3421 for the franc, and PLN 4,9845 for the pound.

Source: Michał Stajniak CFA, XTB