ECB will announce its latest policy decision on Thursday.
Fed Governor Waller stated that this is a good time to do aggressive actions as the economy can handle it. He added that he wants to get above a neutral rate by the latter half of the year and could support three 50 basis-point rate hikes by July.
US Treasuries continued to regain ground on Wednesday with the 10-year yield edging lower to around 2.67%. Markets attempted to focus on the prospect for peak inflation which helped pull yields lower despite hawkish Fed rhetoric and expectations of a rapid move in short-term rates towards neutral.
The dollar index retreated from 23-month highs as yields edged lower.
The ECB will announce its latest policy decision on Thursday. No policy changes are expected, but forward guidance will be important with the bank facing a surge in inflation, but major uncertainties over the outlook. Bank President Lagarde will have to manage hawkish rhetoric within the governing council with markets looking for some clear guidance on the potential for rate hikes.
Markets have priced in around 70 basis points of tightening by the end of 2022.
The Bank of Canada increased interest rates by 0.50% to 1.00% which was in line with consensus forecasts. The bank also announced that it would start the process of reducing the balance sheet through quantitative tightening with no re-investment of maturing bonds.
Bank Governor Macklem stated that the higher interest rates were needed and that the economy can handle it. He added that the bank was prepared to act as forcefully as possible to get inflation on target.
There will be significant position adjustment on Thursday ahead of market holidays across much of Europe on Friday. Short covering could provide some further respite for the yen and Sterling given substantial short positioning.
There has been a jump in speculation that the Chinese central bank will cut interest rates within the next few days and potentially on Friday.
Expectations of a cut helped underpin risk appetite in Asia on Thursday.
Confidence in the Euro-zone outlook remained fragile, especially given Ukraine fears. There was, however, an element of Euro short covering ahead of Thursday’s ECB policy meeting EUR/USD found support just above 1.0800 and rallied further to around 1.0915 on Thursday. The dollar overall was hampered by a decline in US bond yields.
There were mixed messages from Japan over yen policy. USD/JPY overall dipped to near 125.00 before stabilising and recovering to 125.35. The Swiss franc lost ground against the Euro with EUR/CHF recovering to 1.0180.
Sterling was resilient with failure to sustain a GBP/USD break below 1.3000 also triggering short covering. GBP/USD strengthened further to 1.3140 on Thursday. GBP/EUR rallied to test the important 1.1250 level.
The Canadian dollar strengthened after the hawkish Bank of Canada policy decision. USD/CAD retreated to just below 1.2550 on Thursday. The Australian dollar rallied as the US currency lost ground, but labour-market data was weaker than expected with the jobs increase held to near 18,000. AUD/USD settled just above 0.7450 on Thursday.
Economic Calendar
| Expected | Previous | ||
|---|---|---|---|
| 07:30 | CHF PPI (Y/Y)(MAR) | 5.80% | |
| 07:30 | CHF PPI (M/M)(MAR) | 0.40% | |
| 12:45 | Deposit Facility Rate(MAR 01) | -0.50% | -0.50% |
| 12:45 | ECB Rate Decision(APR) | ||
| 13:30 | USD Core Retail Sales (M/M)(MAR) | 0.90% | 0.20% |
| 13:30 | USD Export Price Index (M/M)(MAR) | 1.6 | 3 |
| 13:30 | USD Import Price Index (M/M)(MAR) | 1.50% | 1.40% |
| 13:30 | USD Advance Retail Sales (M/M)(MAR) | 0.40% | 0.30% |
| 13:30 | CAD Manufacturing Shipments (M/M)(MAR) | 1.30% | 0.60% |
| 13:30 | CAD Wholesale Sales (M/M)(FEB) | 3.90% | 4.20% |
| 15:00 | USD Business Inventories(MAR) | 1.10% |