All Eyes on US Inflation Data

All Eyes on US Inflation Data
Volatility in the financial markets remains elevated as yesterday's ECB decision and today's US inflation data are the headlines of this week's trading.
ECB disappoints, as usual

On Thursday, the European Central Bank (ECB) confirmed its intention to hike interest rates in July, albeit only by 25 basis points. Investors had hoped for a 50 basis points rate hike as massive inflationary pressures continue to build in the eurozone. Therefore, the euro was sold-off heavily and declined 150 pips back to the 1.06 handle.

Moreover, the central bank also raised its annual inflation prediction, which now stands at 6.8% for this year, 3.5% in 2023, and 2.1% in 2024. On the other hand, growth has been cut to 2.8% in 2022 and 2.1% over the next two years. As always, the central bank's projections are overly optimistic and usually far from reality. 

Elsewhere, a bank stress test published by the Bank of Canada revealed that big banks would suffer significant financial losses but would remain resilient in the case of a substantial and long-lasting economic disruption. However, according to the paper, monetary policy tightening would put the financial system's endurance to the test and might worsen present financial vulnerabilities. As a result, the USDCAD pair rose 100 pips on Thursday, jumping above the 200-day average again.

In China, Shanghai imposed fresh movement restrictions on Thursday, barely over a week after the country's most populated metropolis completed a lengthy lockdown after a cluster outbreak of COVID-19 was discovered in the city.

Focus on US CPI

Later today, the latest inflation report from the United States is on the agenda. Investors estimate the annual CPI in the United States to remain constant at 8.3% in May, but the Core CPI should fall to 5.9% from 6.2%.

US stock markets declined notably in anticipation of higher than expected inflation numbers. Equities were also undermined by the renewed selling in bonds, driving yields higher. The 2-year yield broke to new cycle highs above 2.5%, while the 10-year yield traded above the critical 3% threshold again.
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