FX.co ★ 15.04.2024: USD destined for strength but EUR- for weakness. Outlook for S&P 500, EUR, and Brent

The ECB has signaled that inflation in the euro area is beginning to slow down. Meanwhile, inflationary pressure in the US has been ebbing away very reluctantly. But the American economy is doing surprisingly well. Therefore, the Federal Reserve may revise its strategy towards a more aggressive one or even return to raising interest rates.

The US Consumer and Producer Price Index reports released last week came as a very unpleasant surprise to dovish optimists. So, many experts have postponed the start of rate cuts by the Federal Reserve until at least September.

The key inflation indicator for the US central bank was 2.8% on year in February. Analysts expect it to decline to only 2.5% by the end of the year. The target 2% for the regulator will only be reached next year.

The next data on core CPI will be released on April 26. It will show the dynamic of inflation, which does not take into account food and energy prices. Until then, the market is likely to keep hawkish forecasts of the Fed’s monetary policy.

Moreover, the hawkish prospects became so clearly visible that Wall Street finally responded to it. The S&P 500 ended last week with its biggest drop this year. The index closed on Friday down almost 1.5%, with chipmakers and banks leading the losses.

Corporate reporting season kicked off in the US, but the first reports did look very impressive. The US three largest banks' profit forecasts for the first quarter of 2024 did not come true and sent the stock market crashing. Therefore, the S&P 500 began trading on Monday in the intraday corridor of 5,107 to 5,175. But the bearish momentum has fizzled out as the index entered consolidation and turned green on the chart.

However, the escalation of the conflict in the Middle East, including between Iran and Israel, has increased the outflow of assets from stocks to safe haven assets, first of all, in Treasuries and the US dollar.

On the back of all the above factors, the US currency has no other way but to rise in value. This is what we see on the US dollar chart. On late Friday, the greenback had its best week since September 2022.

The US dollar index jumped to about ​​106 points versus its peer currencies. The instrument opened roughly at the same level at the beginning of the new trading week. As long as investors continue to push back the possible start of rate cuts in the US, the US dollar will remain a winner.

The Japanese yen has suffered the worst losses against the greenback. The yen slumped to a 34-year low of 153.85 against the US dollar on Friday. Today the yen weakened even more - to nearly ​​154.4. Moreover, on Monday, the dollar/yen pair seemed to react more to the monetary outlook in the US than to the situation in Israel.

The fact is that the Japanese currency now has the most short positions on the market. So, simmering conflict in the Middle East could work in its favor. In the meantime, the closest possible point of physical intervention by the Bank of Japan on Forex may be the level of 155 yen.

As for the single European currency, after fixing a 5-month low on Friday, it continues to decline. However, the economic reports published today again brought confusion to market sentiment. Industrial production in the euro slowed down its contraction to -6.4% year-on-year in February. But taking into account the previous January figure of -6.6, it is still an increase.

In monthly terms, the data looks more positive. Instead of -3%, industrial production crossed into the plus zone and rose by 0.8% in February. Notably, despite some positive signs, the reports turned out to be much worse than the forecasts.

For example, the year-on-year rate of decline was expected to slow to -4.2%. And even an upward revision of the previous reading to -6.6% does not particularly brighten up the picture of industrial production in the eurozone.