By Lukman Otunuga Research Analyst, ForexTime
Grab the popcorn everyone and fingers on the mouse! Everyone in the market has been eagerly anticipating today’s risk events with the start of the ECB meeting and the US inflation numbers being released at 12.30GMT. Narrow ranges and quiet markets have been the order of the week so let’s hope there is some excitement later today.
Transitory versus sustained?
Headline and core prices are expected to jump to 4.7% and 3.5% respectively in the US CPI numbers with base effects being the primary reason for the surge higher. This should be the peak for US prices with the trend starting to come down in June, although some economists still believe they will remain elevated and above target through the rest of the year. But the Fed is in no rush to respond as it is happy to look through the spike in rising prices, especially as the latest US job figures provide a further excuse for its patient stance.
We’ve seen bond markets move already with yields falling steadily all week with the widely-watched US 10-year Treasury now trading below 1.5%, the first time since March. A bumper headline number to the topside of estimates is surely needed to arrest this fall, but bond markets are known to generally lead markets so it will be fascinating to see who is right later today.
USD/JPY has been tracking sideways this week in a narrow range around 109.50. A bumper CPI print would push the pair higher and challenge last week’s highs at 110.32/33 while support rests at the 50-day SMA at 109.10 near this week’s lows.
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ECB meeting and taper talk
ECB officials have recently been talking down any mention of tapering bond buys in the emergency ECB programme but there are some expectations that there may be a small change in guidance. This would come in the statement with a shift from “significantly” to “moderately” higher than at the start of the year and see buying cut to €70bn/month versus the current rate of €80bn/month. If President Lagarde does not repeat this “taper on hold” message or there is a communication error, then the risks are skewed to a higher euro as market expectations are generally currently cautious.
EUR/USD has been treading water this week either side of 1.22. Any bullish talk from Lagarde will see the pair push higher towards end of May highs at 1.2266 with the January peak at 1.2349. Last Friday’s low at 1.2103 is support if the ECB gets out its very patient and vigilant card.
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