As expected, the Bank of Canada announced a reduction in asset purchases to $ 3 billion a week, which reflects progress in economic recovery. The decline in issuance volumes also corresponds to a reduction in bond issuance. In the budget published earlier, it was announced that the issue of bonds will amount to 286 billion Canadian dollars from 374 billion Canadian dollars. The Bank of Canada currently owns 40% of the bond issue.
In addition, the forecast for rates has been shifted by at least six months, meaning the Bank of Canada expects conditions to increase rates in the second half of 2022, compared to the previous forecast "until 2023". As a result, the Bank of Canada was the first to see the formation of conditions for normalizing rates from the major banks, and now, the main question is whether it will be supported by other major banks. Today, the ECB will hold its meeting, while the Fed will hold it next week.
So far, market expectations for the Fed are as follows. The actual reduction in QE will begin in January 2022, and the first rate increase will take place in the 1st half of 2023. Large banks' analysts adhere to approximately these terms, and the spread of opinions is more or less a few months.
Here, the main target is to reach a yield of 2% for 10-year UST. If this barrier is reached, it will be possible to say that the conditions for a Fed rate hike are almost there. On Thursday morning, the yield was just above 1.5%. BoC's decision led to an increase in the yield spread in favor of the Canadian dollar, which is now highly likely to be reflected in the strengthening of the currency.
EUR/USD
Today's ECB meeting is expected to be calm. The Central Bank will refrain both from changing the monetary policy and most likely, from revising economic forecasts. According to the results of the polls, Bloomberg predicts that the first significant changes are planned for June, so today's meeting will just be ignored.
The ECB's Governing Council does not have a single strategy. The southern countries want QE to never end, as they have a huge accumulated debt. Meanwhile, the northern countries, led by the Bundesbank, have an opposite opinion and are calling for the curtailment of procurement programs as soon as possible.
The main focus will clearly be on Christine Lagarde's press conference, as questions about changes in GDP, labor market forecasts, as well as policy parameters in the future, will be inevitable. In this case, the euro may go either decline or remain in the range depending on the answers. The latter is more likely. The upper limit of the range is approximately at the level of 1.21, while the lower one is at 1.1920/40. The exit from the range is possible only in case that the ECB makes a surprise.
GBP/USD
The Bank of England will hold its meeting exactly two weeks later, by which all major banks will react in one way or another to the global growth in yields. Internal factors are favorable for at least announcing a shift in the timing to normalize policy, similar to the Bank of Canada.
The report on the labor market for March came out positive. The unemployment rate declined to 4.9%, which is better than forecasts, but what's most impressive is the growth rate of average wages, which have already exceeded the pre-crisis level. It can be noted that high wages mean high inflation, and the rise in inflation also brings the time of rate hikes closer.
The core consumer price index in March remained at the same level of 1.1% yoy, but the growth of producer prices noticeably surged. Therefore, we can expect the effect of the transition to the consumer sector in the future, namely 1-2 months. At the same time, vaccination rates remain high, despite the problems with AstraZeneca. B. Johnson's roadmap will be implemented, with the EC agreeing on an additional 1-month deadline to address the Northern Ireland issue as part of the Brexit process.
Technically, the pound sterling has a chance to continue its growth. The nearest resistance level of 1.40 withstood the first attempt, so the second attempt is being prepared. The target is the high of 1.4220.
The material has been provided by InstaForex Company - www.instaforex.com