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Forex: Competing euro forces

The last trading day for April and there is plenty for FX markets to be watching. Early on, eyes are on Eurozone inflation data, which could well come in softer than initially expected after the weaker German numbers yesterday. Some see the number as making or breaking whether the ECB acts at next month’s policy meeting. The initial expectation was for a move higher to 0.8% (from previous reading of 0.5%), but there is decent chance that reading will not jump this far after the softer than expected German numbers yesterday.  The other dynamic in the background has been rising short-term money market rates, which should start to reverse after yesterday’s addition of liquidity via the ECB’s weekly liquidity operations.  So short-term the underlying dynamics should be for a softer euro, but this may not follow through vs some of the cross rates given that the structural issues that have underlined euro strength, principally the strong current account position.

Looking beyond the single currency, the release of Q1 GDP in the US will catch the attention ahead of the Fed meeting this evening. Of course, a weaker reading is widely expected given the weather related distortions seen in Q1. Unless there are major surprises on this, the Fed is likely to continue its steady taper path this evening with a further USD 10 bln shaving of the pace of asset purchases. No news conference this time around, so that reduces the risk of verbal bombs from the new Fed Chair, but as always watch out for the statement, where subtle steers could well be given. Overall, this being month end, the risks are for some choppy trading, with seasonal suggesting stronger dollar through May.

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