Central Bank Moods Matter

The top ECB policymaker and #2 at the Fed spoke on Monday and it underscored the reason for the rebound in EUR/USD. On the day, the Australian dollar was the top performer while the US dollar continues its post-Fed fall. The Aussie remains in focus with the China manufacturing PMI coming up.  In our latest Premium Insights, GBPAUD short hits final target for 220 pips, AUDNZD netted more than 280 pips and GBPJPY was stopped out. A new edition of the Premium Insights will be issued on Wednesday.

We first wrote about Draghi talking about green shoots in the Eurozone on Feb 25. The euro continued to decline afterwards but has turned around since ECB QE buying officially began.

What stood out on Monday was how Draghi's optimistic mood contrasted with the wait-and-see tone from Fed vice chair Fischer. Draghi's appearance at European parliament didn't make waves in the market as he continued to say growth was gaining momentum but he also noted that low rates are increasingly being passed through the financial system.

His comments were underscored by a rise in Eurozone consumer confidence to -3.7 compared to -6.0 expected. It was the best reading since 2007.

Fischer, meanwhile, re-emphasized the Fed's data dependence. He also said that a rate hike is likely before year end but the market wants to know just how likely it is. The futures market prices about an 86% chance of a hike but traders are wondering what would have to happen for the remaining 14% to be proven right. One of the factors might be a strong dollar, a risk that Fischer touched on.

Going forward, data will continue to dominate but ECB QE is old news so long as they find the necessary 60 billion euros of bonds to buy each month. What matters next is which economies grow and that will be reflected in central bank comments.

Another key central bank is the PBOC, which suddenly sounds reluctant to keep cutting rates. The market is unsure where the economy stands after skews in February data so today's HSBC manufacturing PMI for March is especially important. It is expected to tick lower to 50.5 from 50.7. A sub-50 reading would stoke fresh fears of a harsher slowdown, something that could quickly reverse AUD gains.