The euro tested the lower of its range near $1.05 in Asia before short covering in Europe lifted back toward yesterday’s highs near $1.0575. However, buoyed by the upside surprise in the ADP estimate of private sector jobs growth, the dollar is firmer against most other currencies today. The US 10-year yield is up 20 bp this week. Including today’s move, the US 10-year yield is up for the ninth consecutive session, and new 2.57% it had convincingly broken the downtrend in place since the middle of last December when the yield peaked near 2.64%.  

Sandwiched in between the ADP estimate and the US government’s report,the ECB meets today. With the euro near the lower end of its range, falling for four of the past five weeks, the pain trade is the ECB to be somewhat less dovish. The signal could be a change in the forward guidance about rates remain at current levels or lower. The or lower could be dropped, some believe, in recognition of the solid growth (above trend) and rising price pressures. 

However, this does not appear to us to be the more likely scenario. The fact that core inflation is stable in the trough (now 0.9%, after bottoming at 0.6%),the ECB cannot be confident that energy prices, and to a lesser extent some weather-related increase in some fresh vegetable prices, will fade in the coming months, leaving a return to disinflation in its wake. This idea may deter the ECB’s staff from lifting their inflation forecasts very much.  

Also, the ECB will be loath to take measures in the presently charged environment that could be destabilizing. Comments from officials show no strong urgency. The market is doing some of that work already in the sense that outside of a few exceptions, like Germany and the Netherlands, have seen short-term interest rates over the past month.  

Moreover, it seems that the pressures spurred by higher commodity prices may be peaking. It is true that China’s PPI jumped to 7.8% year-over-year, which is the fastest pace since 2008 and is seen reflecting commodity prices. However, this is partly a base effect as in the month of February producer prices actually fell (by 0.6%). Oil prices have fallen, and today, the US WTI is below $50 a barrel for the first time this year. Copper prices are lower for the sixth session and iron ore prices, off over 1% today, also appear to have rolled over.Gold is falling as its down draft enters its fourth session (it has fallen in seven of the past nine sessions).