March’s CPI report from the US prompted a broad repricing of US interest rate expectations this week after the core measure showed a marked slowdown in the pace of domestic driven price growth. While the repricing was visible across the entirety of the Fed’s implied tightening timeframe, the most impactful repricing for markets was that of the terminal rate. As measured by overnight index swaps, the market-implied terminal rate fell from 2.557% last week to 2.426%, while in eurodollar markets (another measure of expected US interest rates), the yield on the December 2023 future fell from 3.3% to 3%. In tandem with the repricing in money markets, US Treasury yields also moderated across the entirety of the curve, with the largest move exhibited in the two-year tenor given the Fed’s hiking cycle is expected to peak in the next 2-to-3 years. The dilution of interest rate expectations in the US weighed on the dollar towards the end of the week, especially against currencies where market pricing of central bank tightening wasn’t as fully allocated across asset classes (GBP, EUR, SEK). Given the level of uncertainty over the persistence of the current inflation shock and the impact it will have on consumer expectations, bond and money market pricing of monetary policy tightening will likely continue to be the main driver of FX markets next week.
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Simon Harvey, Head of FX Analysis
Ima Sammani, FX Market Analyst
Jay Zhao-Murray, FX Market Analyst