ECB signals June interest rate cuts, dollar index jumps to 5-month highs 

On Friday, the euro fell to its lowest point against the U.S. dollar in five months, a reaction to signals from the European Central Bank (ECB) about potential rate cuts in June. This move came after a hotter-than-expected inflation report in the U.S., which may delay the Federal Reserve's interest rate cuts until later this year. 

Amidst a broad rally by the dollar, the Japanese yen plummeted to a new 34-year low, prompting investors to watch for any intervention signs from Tokyo. 

The EUR to USD pair declined to $1.0647 and was last down 0.76%. The euro appears poised to lose close to 1.8% against the dollar this week, marking its largest weekly drop since September 2022. 

Hot inflation print pushes back US cuts, ECB signals it’s still on track for summer 

Investor expectations for Federal Reserve rate cuts were quickly reined in after a hot U.S. inflation report on Wednesday, pushing the expected start date from June to September. 

On Thursday, however, the ECB hinted that it was still likely to start cutting interest rates in the summer, as inflation rates in the eurozone have fallen more sharply than in the U.S. 

The Swiss National Bank was notably the first in Europe to cut interest rates on March 21, which sent the Swiss franc lower and signaled that other central banks may follow suit. 

Jane Foley, head of FX strategy at lender Rabobank, commented on the dynamics to Reuters: 

"The comments that we've had from ECB officials are that June is still on the cards and maybe more moves after that. They seem to be acknowledging that there will be a divergence from the Fed and I think that was reassurance for speculators this morning ... hence the move in the euro”. 

Diverging interest rates boost dollar index as Fed may avoid cutting this year 

The dollar index, which measures the strength of the U.S. currency against six peers, reached a five-month peak at 105.94. It appears set for a 1.5% gain this week — its biggest five-day rise in one and a half months. 

Diverging interest rate expectations have widened the gap between U.S. bonds yields and German eurozone benchmark yields to its largest since 2019, making U.S. bonds more attractive and further boosting the dollar.  
 
Some market commentators, such as George Catrambone, head of fixed income for the Americas at German asset management firm DWS Group, said the Fed may even avoid interest rate cuts in 2024 altogether “if we continued to get data like this”. 

The British pound was another victim of dollar strength, hitting its lowest level since mid-November and falling 0.68% to $1.2469. 

The dollar's strength also pressure on the Japanese yen, driving the U.S. currency to a peak unseen since mid-1990 at 153.39 yen before a slight retreat to 153.26, trading flat on the day. 

Dollar index forecast: ING says DXY can “comfortably eye” 106.00 

In a daily overview of the forex markets on April 12, Francesco Pesole, FX strategist at the Dutch bank ING, wrote that the U.S. and the rest of the world’s story have turned more positive for the greenback: 

“The hot US CPI was the trigger to a substantial dollar rally, but the dovish (even if moderate) shift in the European Central Bank and the Bank of Canada messaging has now made that rally more sustainable. Both banks have given a nod to market bets for a rate cut in June, and rightly so given the considerably more encouraging domestic inflation outlook than in the US. As things stand now, the Federal Reserve looks unlikely to match that same dovishness, and the case for a growing divergence between an immobile FOMC and a bunch of dovish central banks is getting stronger. 

That implies a stronger dollar. We argue that there is plenty of evidence now for markets to break the link between the pricing for Fed and other central banks (which ECB President Christine Lagarde said loud and clear yesterday), but we also understand the assumption of ‘Fed dependence’ in rate expectations could last until we actually see cuts in those other major economies. That hardly means dollar downside risks, but if anything, a more gradual or delayed USD appreciation. [...] 
 
Geopolitics has played a seemingly secondary role for FX for a while now, but rising tensions between Iran and Israel can spill into even higher oil prices – all to the benefit of the dollar in the near term. DXY can comfortably eye 106.00 now, but today may be too early for a move to that level”. 

At the time of writing on Friday, April 12, the DXY dollar index was trading up close to 0.6% at 105.9. The index looks set to gain over 1.5% on the week.