The dollar index fell from crucial resistance versus the euro and yen on Wednesday, tracking Treasury yields lower as investors shrugged off unexpectedly strong producer prices nL2N2WA26I to mull the possibility that markets had already achieved peak Fed and U.S. inflation pricing.
With markets already projecting the fed funds rate above 2.5% by year-end and roughly 3% by end-2023 -- including a 50 bps hike on May 4 and possibly another in June -- the 11.2% annual PPI rise failed to roil investors, even following Tuesday's febrile 8.5% CPI increase.
That leaves the ECB as the next focus, with hikes of 70 bps priced in by year-end and rates stopping near 1.5% next year.
Euro zone inflation came in at 7.5% in March, with a peak still seen months away nL2N2VZ0L5, thus investors will scrutinize Thursday's ECB meeting for hints of more deliberate policy normalization policy.
Five-year/five-year inflation pricing hit a record dating back to 2013 nL5N2WB1QC.
Two-year Treasury yields fell 8 bps, allowing 2-year Bund-Treasury yield spreads to extend their recovery from last week's -2.58% trend low to -2.24%, and the EUR/USD to rebound from Wednesday's 1.0809 low on EBS, just above March's 1.0806 trend lows, to nearly 1.0900.
EUR was up 0.5% after its fall to a 1-month low and near Tuesday's 1.09045 EBS high.
Bullishly oversold and diverging daily RSIs offer support, but rebounds will need further Bund-Treasury yield spread support to endure.
USD/JPY was up just 0.13% after an early nearly 20-year peak at 126.32 that perfectly completed the 161.8% Fibo-projected objective off last year's base nL2N2WB1CE.
Prices soared roughly 10% just since last month's lows on Fed-BOJ divergence, leaving it overbought from daily through monthly RSIs.
Japanese Finance Minister Shunichi Suzuki said on Wednesday that sharp currency moves were "very problematic" nL3N2WB1MP.
With handsome long USD/JPY gains for specs ripe for harvesting if the 126.23 Fibo can't be cleared and the MOF injecting some downside risk, though not the BOJ thus far nL2N2WB0CR, the uptrend remains on correction watch.
Sterling was up 0.8% in a sharp turnaround from new and fleeting 2022 lows at 1.2973 that followed UK inflation being reported at a 30-year high nL5N2WB138.
The subsequent rebound above 1.3100 and to its highest in six sessions came largely courtesy of falling Treasury yields versus steadier gilt yields.
As with other dollar pairings, overbought pressures are aiding its retreat.
The RBNZ hiked rates a rare 50 bps, as did the BOC, but the New Zealand dollar fell 0.9% and the Canadian dollar was up 0.65% versus the U.S. dollar.
RBNZ guidance was seen more dovish than expected nL2N2WB03M and the BOC's more hawkish nL2N2WB0QL and helped by higher energy prices.
Bitcoin and ether again followed the lead of firmer stocks.
Thursday features the ECB meeting and U.S. retail sales.
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