The strengthening of the euro and the yen, which continues today for the second day in a row, is reflected in the DXY dollar index. Their shares in DXY are 57.6% and 13.6%, respectively. For reference - the shares of other currencies in DXY: the pound 11.9%, the Canadian dollar 9.1%, the Swedish krona 4.2%, the franc 3.6%.
The euro and yen rose on Tuesday and continue to strengthen today, including against the dollar. The reason for this was the results of the negotiations between the representatives of Russia and Ukraine, which ended yesterday in Istanbul. The parties announced progress in the negotiations. On Wednesday, Russia will submit its counter proposals, but for now, the advance of Russian troops in the Kiev and Chernigov directions has been temporarily suspended. Meanwhile, military tensions in Ukraine persist, while significant differences remain between the parties.
Market participants hope that the decisions of the authorities will help to complete the special military operation on the territory of Ukraine as soon as possible, which, in turn, will contribute to the easing of sanctions against Russia.
In the meantime, sanctions restrictions remain in place, while European companies refuse to switch to paying for Russian gas in rubles, which could lead to a complete halt in the supply of gas to Europe from Russia.
As the head of the European Central Bank, Christine Lagarde, said today, "the longer the conflict lasts, the higher the economic costs will be, and the more likely we will find ourselves in worse scenarios". She also said that "in the context of the ongoing conflict, we will take whatever action is necessary". But what this means is not yet clear. She also noted that the ECB will complete its Asset Purchase Program (APP) in the third quarter, as planned.
The market reacts rather sluggishly to the statements of ECB officials, paying more attention to the situation in Ukraine and the relationship between Europe and Russia.
So, against the backdrop of progress in the Russian-Ukrainian negotiations yesterday, 2-year German government bonds rose by 10 basis points at once, for the first time since 2015.
Today, the euro and the EUR/USD pair may receive additional support from preliminary data on consumer price inflation in Germany for March, which will be published at 12:00 (GMT).
It is expected that annual consumer inflation in Germany rose by +6.7% in March (against +5.5% in February). The German economy is the engine of the entire European economy, and new signs of rising prices will reinforce expectations of an increase in the ECB's key interest rate this year.
“If there is no sharp escalation of the conflict in Ukraine, the first increase could occur by the end of this year”, ECB spokesman and Slovak central bank governor Peter Casimir said on Wednesday. "APP could end in the 3rd quarter" and "a rate hike could happen after that", said Madis Müller, another ECB spokesman.
Expectations of a soon tightening of the ECB's monetary policy are currently the second most important factor (after the situation in Ukraine) influencing the dynamics of the euro. Accordingly, the growth of these expectations and progress towards the settlement of the military conflict in Ukraine, where Russia is conducting a military special operation, contribute to the strengthening of the euro and the growth of EUR/USD.
Market participants who follow the dynamics of the dollar and the EUR/USD pair will also pay attention today to the publication at 12:15 and 12:30 (GMT) of the important macro data for the United States - the ADP report on the level of employment in the private sector and US annual GDP for the 4th quarter (final release).
It is expected that the growth in the number of employees in the US private sector in March was +450,000 (against an increase of 475,000 in February, 509,000 in January 2022, 807,000 in December, 534,000 in November, 571,000 in October 2021). The market reaction may be negative, and the dollar may decline if the data also turns out to be worse than the forecast.
In turn, data on GDP are one of the key data (along with data on the labor market and inflation) for the Fed in terms of its monetary policy. In the previous 3rd quarter, GDP grew by +2.3%. Positive data on GDP will support the dollar and US stock indices. The first estimate was +6.9% and the second +7.0%.