To the market’s surprise, the European Central Bank announced plans to purchase bonds at a “significantly higher pace” over the next quarter. The decision was motivated by the recent rise in yields and concerns that “headline inflation is likely to increase in the coming months,” according to central bank President Christine Lagarde. Today’s move widens the distance between the ECB and the Federal Reserve, which does not see the increase in bond yields and inflation as a problem. This comes as the European Union’s vaccine rollout faces more setbacks, with delivery delays and new concerns about AstraZeneca’s vaccine. The vaccine’s use was halted temporarily in a few countries on concerns about increased risk of blood clots.
The euro traded lower after the ECB decision, but the decline did not erase all of its earlier gains against the U.S. dollar. The pair ended the day unchanged, in part, because of the central bank’s economic projections. The ECB raised its GDP and inflation forecasts for 2020 and 2021. This year, it expects the economy to expand by 4% and inflation to rise 1.5%. While the ECB expects the annualized CPI rate to hover around 1.5%, it said it could rise to 2% on a technical and temporary basis. Until the Eurozone recovery gains momentum, we continue to expect EUR/USD to underperform, especially if U.S. yields continue to rise. The Federal Reserve meets next week and it will update its economic projections. Stronger numbers will underscore the divide between the U.S. and Eurozone recoveries this year. EUR/USD support is still near the 200-day SMA at 1.1826.
The U.S. dollar traded lower against most of the major currencies despite improvements in jobless claims and, according to the Biden administration, stimulus cheques will start going out by the end of the month. The continued rise in Treasury yields reflects the market’s optimism. Producer prices and the University of Michigan’s consumer sentiment index are scheduled for release tomorrow. Stronger numbers are expected all around.
After a week of quiet, sterling comes into focus on Friday, with the release of monthly GDP, industrial production and trade data. Most of these reports are expected to be better as the UK economy continues its recovery.
USD/CAD sold off for the third day in a row ahead of what should be a very strong jobs report. After two months of extensive job losses, job growth is expected to return. Economists are looking for the economy to add more than 75,000 jobs, all of which should be full time. The Bank of Canada is worried about localized outbreaks and more transmissible variants of the virus, but it found reasons for optimism. This optimism should be reinforced by the data, which is expected to show an economy finally on its way to recovery.