Big day ahead of euro: What to expect from ECB?

Euro has a big day ahead with a monetary policy announcement and U.S. inflation report on the calendar.  Between these two events, the European Central Bank meeting is generally more market moving but the U.S. dollar shot higher at the equity open, recovering earlier losses ahead of CPI release. There’s little doubt that inflation is on the rise but the Federal Reserve has made it very clear that they see this increase as temporary. With retail sales and non-farm payrolls falling short of expectations, effectively justifying the central bank’s caution, a strong inflation report won’t increase the chance of taper talk in June. USD/JPY may get a boost from a good number but its gains should limited ahead of next week’s Federal Reserve meeting.
 
Euro moved quietly higher ahead of the European Central Bank’s monetary policy announcement which tells us that investors are hoping for optimism. Economic projections are scheduled for release and a lot has changed in the past 3 months. During this time, the regional and global recovery solidified and the outlook for the Eurozone economy firmed. Inflation also increased across the globe with many experts casting doubt on the Fed’s view that the uptick in inflation will be temporary. The question for the ECB tomorrow is whether the growth and inflation outlook are strong enough for the central bank to talk taper. 
 
Fundamentally the Eurozone’s outlook is very bright but the ECB is supposed to act on actual data and not data expectations. The problem are recent data disappointments. The decline in factory orders and industrial production in April follows weakness in retail sales, the ZEW survey and PMI. The decrease in the expectations component of ZEW was particularly surprising given recent re-openings.  The ECB may opt to avoid taper talk until data catches up with expectations. German bond yields and the euro are strong and by initiating the discussion prematurely, they risk setting back the recovery.
 
If the ECB avoids taper talk, EUR/USD will sink towards 1.21 in disappointment but if their confidence in the recovery is so strong that they want to set the stage for asset reductions now, EUR/USD could soar as the Federal Reserve moves further behind the path to policy normalization.
 
While USD/CAD ended the day unchanged after the Bank of Canada’s monetary policy announcement, this steadiness masked a significant intraday bounce. Prior to the rate decision, the Canadian dollar traded strongly with USD/CAD dropping below 1.2060. It shot higher after the announcement, peaking at 1.2117 for the day. The Bank of Canada’s monetary policy statement was fairly optimistic with the central bank looking for a strong summer rebound but investors were hoping for hints of summer tapering. Technically USD/CAD is deeply oversold and with a month long tight consolidation, the pair is prime for a bottom.
 
Other currencies such as sterling, the New Zealand and Australian dollars traded lower on the back of U.S. dollar gains. Rising COVID-19 cases in the U.K. and the fast spreading delta variant raises concerns about the government’s ability to stick to their timeline of full reopening on June 21st. Cases are nearing levels reached in March of this year but the death rates are low. Confidence numbers in New Zealand and Australia are slipping with the ANZ business climate index for New Zealand dropping to -0.4 from 1.8 in June and Australia’s Westpac consumer confidence index falling -5.2%.