US CPI Inflation and ECB decision to take centre stage in FX markets

GBP

Yesterday's session saw sterling tumble across the G10 currency board at a time when US dollar strength was less pronounced than seen earlier in the week. The pound's weakness came after the European Union warned it may impose tariffs and quotas on the UK as the Northern Ireland dispute continues without a breakthrough. At the same time, the pound was being weighed down by comments from Prime Minister Boris Johnson who issued a warning about rising coronavirus infections after the daily case count increased by over 7,000. The UK government is due to decide whether to further ease lockdown rules on June 21st, but it remains unclear whether this is achievable given the risks of the Delta variant. An announcement on the further reopening will be made on June 14. Today's economic calendar contains little top tier data, with the RICS house price balance which printed at 83% being the main data release of note.

EUR

Today's FX session will be all about the European Central Bank for the euro after the currency's wait-and-see approach in the days building up to the event. The central bank will announce its monetary policy decision at 12:45 BST today ahead of the usual press conference at 13:30 BST, which starts at the same time as the release of the US CPI figures. The coincidence of the two events may make FX moves blurry in the sense that it will be more difficult to assess which of the two events are causing short-term price action, although the consensus is for the ECB to maintain its current policy. Bond-buying via the Pandemic Emergency Purchase Programme has been elevated since the ECB's March meeting when they added to their press statement that purchases will be conducted at a 'significantly higher' pace. Since then, the asset purchase pace remained around 20bn euros a month higher compared to the months prior to March. While we don't expect the ECB to change its current communication, this does not rule out the fact the ECB may still reduce the bond-buying pace slightly to reflect the improvement in economic conditions without having to change its language. For the euro, this means that most of the price action should in that case come from the press conference as the statement is expected to remain widely unchanged.

USD

The dollar remains in the spotlight in today's session after yields on the US 10-year moderated below 1.5% late in yesterday's session. The bull flattening of the Treasuries curve has seen some market participants scratch their head as the reduction in back-end yields comes at a time when inflation data in the US is expected to remain hot. Today's May CPI data, released at 13:30 BST, is expected to rise from 4.2% to 4.7%, while the core measure is expected to rise above 3% for the first time since the mid-1990s with a print of 3.5%. How fixed income markets read today's data will be key for overall market positioning ahead of next week's Fed meeting and will likely determine how the dollar trades for the remainder of the week. For the time being, it seems as if markets are coming round to the idea that the inflationary overshoot will be transitory, with inflation breakevens across the treasuries curve moderating from May's highs. Initial jobless claims figures are released alongside the inflation data at 13:30 BST, which are expected to show continued progress in the labour market recovery at the beginning of June. Meanwhile, President Biden takes a break from bipartisan stimulus talks to travel to Cornwall, England for the G7 meeting, where he is expected to press Boris Johnson over the diplomatic spat with the EU and discuss reopening travel channels between the US and UK.

CAD

Yesterday's session saw the Canadian dollar outperform among most G10 currencies ahead of the Bank of Canada decision on Wednesday and today's US CPI inflation data. The BoC decision fell broadly in line with the consensus expectations which foresaw a hold in policy as the Bank balanced a slip in the near-term economic data with the improving external backdrop and growth outlook. While the loonie strengthened in the build-up to the event, the actual meeting was less exciting for the currency as markets were not presented with any news in yesterday's meeting. The emphasis is now on the development of the economic data until the July 14th meeting, where we expect more action from the central bank to reflect the improvement in economic conditions. Today at 18:00 BST/ 13:00 ET, Deputy Governor Timothy Lane is expected to present an economic progress report, giving markets more insight as to how the central bank is viewing the recent influx of data. For USDCAD traders, US CPI at 13:30 BST will likely garner all of the attention, however.

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