Image © Adobe Images

With the new earnings seasons slowly getting underway this week, investors seem to be once again adopting a glass half-full outlook on the economy in spite of the bond market continuing to flash red about recession risks.

Valuations still look too expensive for many of the Wall Street favourites, so it remains to be seen how much scope there is for an earnings-led rally even if expectations are set very low.

Moreover, markets will first have to digest tomorrow’s CPI numbers out of the United States, as any element of the report that comes in hotter-than-expected could push up Fed rate hike expectations even higher.

The odds of a 25-bps rate rise in May have now risen to above 70% while expectations for rate cuts have been scaled back slightly.

A number of regional Fed presidents are due to speak later today and the danger is that they will play down the impact of the banking episode as they emphasize that the job of fighting inflation is not done yet.

However, it's doubtful how much any fresh hawkish language can boost the US dollar as even in the most hawkish scenario the Fed could end up pausing before some other central banks like the ECB and Bank of England.

Unsurprisingly, the euro and pound, along with the Swiss franc are the best performing major currencies this year.

The greenback, though, does stand a better chance against other currencies like the yen and Australian dollar whose central banks have been a lot more cautious during this global tightening cycle.

The RBA has signalled it is willing to tolerate a slower path towards getting inflation back to target, while the Bank of Japan’s new chief dampened expectations of any radical policy shift in his inaugural speech yesterday.

Although Governor Ueda has opened the door to some further normalization in policy, he’s indicated he’s not in a rush to do so.

More strikingly, even if yield curve control is eventually phased out, he’s clearly messaging that Japan is not in a situation where interest rates can rise much.

The yen is broadly lower for a second day today, while the dollar index is paring its gains after sharply reversing earlier weakness on Monday to climb to a one-week high.

Softer-than-expected CPI data out of China earlier today further underlined the view that central banks in Asia are either entering a pause or have no intention of beginning a tightening cycle.

This is helping to lift spirits at a time when some question marks are emerging about the strength of China’s economic recovery from the pandemic.

It could also be partly fuelling the rally in cryptocurrencies this week, with hopes that the Fed will also soon go on pause.

Major cryptos have staged an impressive rebound since mid-March and Bitcoin just smashed the $30,000 ceiling for the first time since June 2022.

Raffi Boyadjian is Lead Investment Analyst at XM.com. An original version of this article can be read here.