On Wednesday evening, yields plummeted without any clear reason. In particular, 10-year UST went below 1.5% for the first time in a month, which led to a decline in global yields, and Japanese GKOs sharply updated their 6-month low. Considering the fact that the yields of Japanese government bonds are tightly controlled by the Bank of Japan, it can be assumed that the movement is based on some kind of global repositioning, the reasons for which will become known soon.
Last night's meeting of the Bank of Canada ended without surprises. As expected, the BoC has kept all of its policy parameters unchanged, with the volume of bond purchases remaining at $ 3 billion per week, although the market expects that a further reduction will be announced at the meeting next month. The outlook for the cash rate is also left unchanged until the economic downturn is fully overcome, which the Bank predicts will happen in the second half of 2022. However, the market believes that this may happen earlier, which is in about a year, but the fact remains that the BoC has softened expectations for the Canadian dollar, depriving it of a driver for strengthening, and now, the targets for the USD/CAD pair need to be revised upwards.
Apart from the ECB meeting, today's attention is focused on the US consumer inflation report. This is the last major report before the FOMC meeting on June 16, and attention will be focused on it, since inflation is one of the key indicators, along with profitability and the state of the labor market, which are at the heart of the Fed's decisions. It can be recalled that the Fed publicly insists on the temporary nature of inflation, which gives it a reason to disown the need to revise the forecasts for the rate. As of Wednesday evening, the yield on the inflation-protected 5-year TIPS bond has declined, so we are unlikely to see a strong growth today.
If consumer prices do not show steady growth in May, then this will strengthen the positions of bearish traders and will most likely lead to a downward correction of the US dollar. Conversely, strong data can backfire.
At the moment, players are cautious and do not want to leave the ranges, since they have not received new pivot points.
Today, the focus is on the ECB meeting. It is expected to raise its growth forecasts by 0.3% this year. PEPP's purchases are also expected to announce a decline to 70 billion euros per month from the current 80 billion starting in Q3. Markets do not expect more, so there will only be minimal changes for the euro's demand.
Meanwhile, the ZEW indicator of economic sentiment for Germany declined in the current survey for June 2021, falling by 4.6 points, to a new value of 79.8 points. Despite the decline, positivity still clearly dominates, as the current ZEW levels are at their highest since 2001, and the assessment of the economic situation has significantly risen to -9.1 p, which is 31p higher than in May.
In general, the economy in the Euro area is recovering rapidly and needs lesser stimulation. The media write a lot about the unprecedented volume of QE4 implemented by the Fed, and that strong growth in the money supply undermines the stability of the US dollar, but it is often forgotten that the ECB balance is twice the Fed's balance with a comparable volume of economies.
The EUR/USD pair is consolidating near the local high of 1.2265. If the results of the ECB meeting disappoints, a decline to the level of 1.2050 is possible. However, the euro remains the favorite in the long term, so we can expect a return to the resistance level of 1.2240/70 and a continuation of growth by the end of the week.
The macroeconomic calendar for the pound is empty. There will only be an extensive release of important data on Friday that will clarify the prospects for the recovery of the UK economy. The political drivers associated with disagreements over the implementation of Brexit have not yet led to any movements. The pound is consolidating near the local high, and an upward breakthrough is more likely than the development of a correction. However, if the Fed surprises with a hawkish result, the pound may adjust to the support zone of 1.4005/35, with the next support at 1.3950. In the medium term, the resistance level of 1.4245 is expected to be broken, followed by a movement to the 1.4380 mark.