Euro Flat into ECB, BOC Keeps Status Quo, US CPI Next

Summary: The Dollar finished another lacklustre trading session little-changed into tonight’s US inflation report (10.30 pm Sydney). A measure of currency volatility (Deutsche Bank Currency Volatility Index) hit its lowest level since February 2020 on Tuesday and sank even further yesterday, reported Reuters. Global treasury yields slumped, led by a four-basis point drop in the benchmark US 10-year rate to 1.49%. Germany’s 10-year Bund yield eased to -0.25% from -0.23% yesterday. The Euro inched higher to 1.2175 (1.2172 yesterday) in late New York after peaking at 1.22179. Markets will be watching the European Central Bank’s monetary policy announcement following its meeting (9.45 pm Sydney). While the ECB is widely expected to maintain policy settings, traders will be watching for any clues of tapering to its bond buying program. Earlier, the Bank of Canada left its key interest rate unchanged at 0.25% as expected. The BOC also decided to maintain its current policy of quantitative easing. The USD/CAD pair fell to 1.2057 overnight low before reversing to close at 1.2113, little-changed from yesterday’s 1.2110. Sterling eased 0.27% to a 1.4113 close (1.4140 yesterday). The Australian Dollar was modestly lower to 0.7730 (0.7740) while the Kiwi (NZD/USD) finished 0.10% lower to 0.7177 (0.7194). Against the Japanese Yen, the Greenback edged up to 109.63 from 109.50 despite lower US bond yields. The Dollar Index (USD/DXY), a gauge of the Greenback’s value against a basket of 5 major currencies, closed at 90.15 from 90.12.

Wall Street stocks eased after hitting near record highs following the tumble in treasury yields. The DOW settled at 34,477 (34,607) while the S&P 500 eased to 4,223 (4,227 yesterday).
Data
released yesterday saw China’s May CPI (y/y) climb to 1.3% from April’s 0.9%, but lower than median forecasts at 1.6%. Chinese May PPI (y/y) rose 9.0%, beating estimates of 8.5% and higher than April’s 6.8%. There were no other primary economic data releases yesterday.

  • EUR/USD – the shared currency traded in a lacklustre range of 1.21642 and 1.21941, finishing at 1.2173 in New York. The focus is on the European Central Bank’s meeting and monetary policy announcement. The Euro ended on stable footing which suggests optimism on the outcome of tonight’s ECB event.
  • GBP/USD – Sterling slipped against both the USD and Euro (EUR/GBP higher). The British Pound eased to close at 1.4113 (1.4152). Tonight, also sees the release of the US CPI report, which has underpinned the US Dollar. Which in turn has weighed on GBP/USD.
  • AUD/USD – The Aussie Dollar closed at 0.7730, from 0.7740 yesterday, sidelined ahead of the ECB meeting and US inflation report (10.30 pm Sydney). Australia’s 10-year treasury yield fell 3 basis points in tandem with its US and global counterparts.
  • USD/CAD – The Greenback initially fell (overnight low 1.20573) following the Bank of Canada’s monetary policy meeting and announcement. The BOC left interest rates unchanged and maintained its current policy of QE. USD/CAD rebounded to close at 1.2113 in New York, little-changed from yesterday’s open at 1.2110.

On the Lookout: Traders and investors will focus on tonight’s two key events, the ECB meeting and policy announcement and the US CPI report. The European Central Bank is expected to maintain status quo (and keep its Main Financing Rate at 0.0%) but market participants will be watching for clues to any tapering of the ECB’s bond buying program from its economic forecasts.
Headline US CPI (May) forecasts are for a month-on-month drop to 0.4% from April’s 0.8%. Analysts expect Core CPI to ease to 0.4% from 0.9%. Annual Headline CPI is forecast to rise to 4.7 % from 4.2 % in April. Annual Core CPI is forecast at 3.4% in May from 3.0% April.
Other data scheduled for release start off with Japan’s May PPI (monthly f/c at 0.5% from 0.7% Finlogix). European data starts with French Industrial Production (April) forecast to ease to 0.5% from 0.8%. China releases its New Yuan Loans (May) (f/c CNY 1.410 billion from CNY 1,470 billion April). Italy releases its April Industrial Production report (f/c 0.3% from -0.1% Finlogix). US Weekly Unemployment Claims round up today’s reports (f/c 370,000 from the previous week’s 385,000).

Trading Perspective: It is all about the ECB’s monetary policy announcement and its economic projections and any taper talk. Meantime US inflation numbers would have to exceed expectations to lift the Greenback off its doldrums. The next move on the benchmark US 10-year bond yield is crucial to the Dollar’s fortunes. While the Federal Reserve has said that it sees the rise in inflation as temporary, a higher CPI number (H/L CPI at 0.8% or higher, and Core CPI at 0.9% or higher) cannot be ignored. Expect further consolidation within recent ranges to persist in Asia prior to tonight’s big twin events.

  • EUR/USD – The Euro has quietly traded steady into the ECB’s meeting and monetary policy announcement. The shared currency finished at 1.2176, not far off from the 1.2200 resistance area. EUR/USD has immediate resistance at 1.2200 followed by 1.2220. Overnight high traded for the shared currency was 1.22179. Immediate support can be found at 1.2150 and 1.2120. Look for the EUR/USD pair to trade in a likely 1.2160-1.2220 range first up. The risk lies for a lower Euro if there are any disappointments from the ECB.
  • GBP/USD – Sterling slid both against the Greenback and Euro. The British Pound closed at 1.4110, not far from its overnight low at 1.41086. Earlier in the trading day, Sterling touched an overnight peak at 1.41890. Ahead of this weekend’s G7 meeting in Cornwall in the England, focus has shifted to the meeting between US President Joe Biden and UK Prime Minister Boris Johnson. Biden has taken issue with the UK’s handling of Northern Ireland over Brexit. Which has weighed on the Pound. GBP/USD has immediate support at 1.4100 (overnight low 1.41089) and 1.4070. Immediate resistance can be found at 14130 and 1.4160, 1.4190. Look for Sterling to trade in a likely 1.4080-1.4180 range today. Could be fireworks on this one tonight.
  • AUD/USD – The Aussie continues to trade on the back of the US Dollar. AUD/USD traded in its own lacklustre range between 0.7724 and 0.7762, closing at 0.7730. The Aussie has immediate support at 0.7720 followed by 0.7690. Immediate resistance can be found at 0.7760 followed by 0.7790. Look for the Aussie to trade a likely 0.7710-0.7770 range, taking its cue from the Greenback. And what happens tonight.
  • USD/CAD – Against the Canadian Loonie, the USD ended flat at 1.2113 (1.2110 yesterday). The Dollar slid to 1.20573 overnight lows against the Loonie following the BOC monetary policy statement. The Bank of Canada maintained status quo with its key interest rate and QE program. Which saw USD/CAD rebound to an overnight high at 1.2117 before settling. Immediate resistance lies at 1.2120 followed by 1.2150 and 1.2180. Immediate support can be found at 1.2080 and 1.2055. With USD/CAD still near recent lows and an overstretched long speculative CAD market positioning, the only direction is north. Look to buy dips in a likely 1.2075-1.2175 range today.

Tin helmets on for tonight, it could be a big one. Happy trading and Thursday all.

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