FX markets stalemate.

ECB council member Knot stated that the outlook for interest rates beyond July is unclear with policy more dependent after rate hikes in June and July. He added that the bank should not hesitate to keep raising rates if inflation stays high. He did, however, add that prolonged higher rates might lead to financial stresses.

According to council member Schnabel, a peak in underlying inflation would not be sufficient to declare victory and the bank needs to see convincing evidence that inflation is returning to the 2% target on a sustained and timely manner.

The Bank of Canada increased interest rates by 25 basis points to 4.75% due to concerns over excess demand and sticky core inflation.

Consensus forecasts were for rates to remain on hold, but the decision was rated as a close call.

The Bank of Canada decision to raise interest rates, coupled with the move by the Reserve Bank of Australia on Tuesday, triggered fresh speculation that the Federal Reserve could also hike rates again.

The chances of a June Fed rate increased to just above 30% from below 20% earlier in the day.  US yields also moved significantly higher during the day.

Higher bond yields and concerns that global central banks would have to be more aggressive in raising interest rates put equities on the defensive.

Moves overall, however, were relatively contained with Asian bourses regaining some ground late in the session.

The Euro posted gains on hawkish ECB rhetoric, but the dollar fought back after the shift in Fed expectations with little net change in the dollar index and overall ranges were relatively limited.

US jobless claims Thursday

The latest US jobless claims data will be released on Thursday and will be important given that it is a relatively high-frequency release.

The Euro drifted lower into Wednesday’s New York open. Hawkish rhetoric provided net support for the single currency. EUR/USD strengthened to highs at 1.0740 on direct dollar selling after the Bank of Canada decision. The dollar gained fresh support from higher US yields. EUR/USD retreated to the 1.0700 level.

Higher US yields undermined the yen. USD/JPY jumped from 139.00 lows to test 140.00 on Wednesday. From highs just above 140.20, USD/JPY retreated to 139.70 with a very large option expiry at 140.00 on Thursday.

The Swiss franc overall was marginally lower. EUR/CHF settled around 0.9720 with USD/CHF settling just below 0.9100.

Sterling posted significant gains around the New York open. GBP/USD jumped to highs at 1.2500 before a retreat to below 1.2450.

A slightly stronger RICS housing survey had little net impact with GBP/USD around 1.2450 on Thursday.

Commodity currencies were unable to hold intra-day highs. AUD/USD retreated to 0.6655 from 0.6715 highs before settling around 0.6665. The Canadian dollar jumped after the Bank of Canada rate hike. USD/CAD dipped to 4-week lows at 1.3320 before a rebound to 1.3365.

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