Stagflation risks seem to take their toll and after a short pause European currencies and the Japanese yen continued to depreciate against greenback. The dollar index rose by almost half a percent advancing past 99.00 handle. USD also rises on the assumption that the US March labor market report will surprise on the upside cementing market view that the Fed will raise interest rate by 50 bp two meetings in a row.

Among currency pair majors, a particularly strong reassessment of expectations occurs in USDJPY and GBPUSD. The yen slipped more than 1% against the dollar and technically any significant resistance can be expected near 125 handle. Cable tumbled by half percentage point against the dollar as markets gradually come to realize that the Bank of England may have promised too much in terms of tightening policy and will likely be more dovish at the next meeting. The ECB has been less hawkish in its recent policy guidance, being more cautious in dropping hints about unwinding of monetary stimulus, hence there may be less pressure on EURUSD from dovish reassessment of future ECB policy.

The US yield curve inversion reached a new extreme, with the spread between 30-year and 5-year US Treasury yields reaching zero for the first time since 2006:

This means that markets expect a short period of relatively high rates followed by a long period of low interest rates. High and low rates, respectively, accompany periods of ups and downs in the business cycle. Periods of yield curve inversion are often accompanied by strong dollar.

There may be also some focus on EU inflation report slated to release this week. Price growth is expected to accelerate, over 6% in Germany and 6.7% in the Eurozone. Core inflation is expected to exceed 3% YoY. However, given clear signals of cost inflation due to the strong rise in energy prices, the effect of the data on foreign exchange market may be insignificant, as investors are likely be prepared for an upside surprise.

Several of the ECB's talking heads will also speak this week, including Lagarde. Despite expectations that the ECB will raise rates this year and more than once, policy gap with the Fed is growing, and ECB officials are unlikely to be able to do anything about it.

Important economic reports on Britain are not expected this week, Rishi Sunak and the head of the Central Bank Bailey will make comments in Parliament. The dynamics of the pound will depend on the behavior of the dollar this week.

The Bank of Japan intervened in the bond market, however, it did not succeed in holding back capital outflows. The yen looks vulnerable to further declines due to a combination of high fuel prices (together with Japan's high reliance on energy imports) and Fed policy expectations. The movement of USDJPY towards 125 seems to be a matter of time.