The Bank of Canada is expected to hike interest rate by 50 basis points at the meeting today, but it cannot be ruled out that the BoC will go for a more aggressive step – a 75 bp increase. Elsewhere, incoming data pointing to resilience of the US economy and signs of upward pressure in US bond yields pave the way for greenback recovery, while the specter of stagflation in the Eurozone, which is becoming clearer with incoming inflation data, undermines support of EURUSD.The dollar trades moderately positive on Wednesday thanks to sell-off in fixed income market, signals of a new round of escalation in relations between the EU and the Russian Federation (the sixth package of sanctions which includes embargo of Russian oil), as well as positive data on the US economy, which runs counter to pessimistic expectations. The latest data on the EU economy (inflation data for May) and the US economy (consumer spending, Conference Board consumer confidence index) seem to convince investors that the Fed’s tightening cycle is based on stronger growth in the US economy than the EU, so policy divergence between the Fed and the ECB are likely to widen further. This plays into the hands of the dollar. In addition, speculation about the Fed’s September pause in hiking interest rates seems to have abated somewhat, as incoming data does not support the hypothesis that the US economy is starting to lose ground due to high inflation.The Conference Board report on consumer optimism beat expectations, the headline reading came at 106.4 points against the forecast of 103.9:Today, the market continues to focus on incoming data, in particular, the ISM index in US manufacturing sector and labor market data from JOLTS will be the key to assess momentum in the US expansion. As for the Fed’s policy, John Williams and James Bullard, known for their hawkish views, will make comments today. In addition, the market’s attention may be drawn to regional trends in the US economy, which will be assessed in today’s Beige Book report.Investors will likely continue to increase their long positions on the US dollar in the run up to NFP release on Friday which will likely surprise on the upside again in terms of wage pressure. Weak demand in fixed income market due to increasing inflation fears and solid US consumption data suggest that the Fed will likely stick to the previously indicated course, at the same time, the ECB will have to take a couple of steps back, as due to high inflation, the risk that interest rate hikes will send economy into recession, are increasing. Closer to the Fed meeting in June, the dollar index may regain lost ground and rise to the level of 103.The long-awaited stabilization is observed in equity markets, therefore the currencies whose returns correlate with the returns on risk assets will most likely continue to moderately strengthen. Among them are the Norwegian Krone, the New Zealand dollar and the Canadian dollar.
Source: Tickmill
