- ECB calls emergency meeting
- FX markets on edge ahead of FOMC meeting
- US dollar drops on profit-taking ahead of Fed
USDCAD Snapshot: open 1.2934-38, overnight range 1.2918-1.2971, close 1.2956, WTI open $117.50, Gold open $1,825.50
The Canadian dollar is grinding out modest gains in early NY trading. It is caught up in a wave of profit-taking across the G-10 spectrum as traders take profits on long-dollar positions ahead of today’s FOMC meeting.
The FOMC is widely expected to announce a 0.75% rate hike today, bowing to pressure from bond traders who are convinced that the FOMC needs to be more aggressive to combat inflation.
The steep rise in US 10-year Treasury yields from 2.75 three weeks ago to 3.47% yesterday appears to have convinced policymakers to act. Market participants believe the Fed is behind the curve in managing rising inflation and need to raise interest rates higher and faster than previously expected.
European Central Bank officials are facing a similar dilemma. President Christine Lagarde and colleagues detailed their plan to combat inflation and normalize policy on June 9. The monetary policy statement acknowledged that high inflation was a challenge and expected at 6.8% y/y in 2022. They also expressed concern that the Russian invasion of Ukraine was disrupting the economy.
However, the ECB stuck to its previously announced agenda instead of taking immediate action. They planned to end the Asset Purchase Program (APP) July 1, then begin raising ECB interest rates.
Bond traders thought the process was far too slow. They drove EU bond yields rapidly higher, led by the Italian 10-year bond yield topping 4.0% for the first time since 2014.
Policymakers took note and the ECB Governing council called an emergency meeting which is ongoing.
EURUSD climbed from 1.0415 to 1.0507, with broad US dollar weakness providing support. Germany’s IFO institute downgraded GDP growth while raising its inflation forecast to 6.8% y/y.
GBPUSD traded in a 1.1991-1.2124 band on profit-taking ahead of the FOMC meeting and the Bank of England meeting Thursday.
USDJPY dropped to the bottom of its 134.31-135.58 range just before NY opened underpinned by widening US and Japanese interest rate yield differentials
AUDUSD rallied in a 0.6874-0.651 garnering some support from interest rate forecasts. Goldman Sachs analysts predict the RBA will bump rates by 0.50% at the August and September meetings.
Today’s US data which includes May Retail Sales, and NAHB Housing Market Index should be non-events due to the FOMC meeting.
