Abundant USD liquidity - and the promise of more - is dominating the market
USD: Marketing the view that US inflation would hit 5% YoY in May, but that 10-year US Treasury yields would be declining to the low 1.40s% would have been a tough one earlier this year. Yet, it seems that abundant USD liquidity - and the promise of more - is dominating market thinking right now. This glut of liquidity is driving volatility levels lower across asset classes. Next week's Fed meeting looks to be one of the big, final event risks before the market shuts up shop for the summer. The consensus clearly seems to be that though the Fed may hint that a tapering discussion may be closer than before, it will not be rushed into anything. For today, look out for the Michigan Consumer Sentiment for June, with a key focus on whether sentiment has bounced back from last month's decline and the latest take on inflation expectations.
CAD: The CAD is unchanged after trading in a very tight range overnight. Following the BoC’s announcement fundamentals-based model suggests USDCAD should trade just under 1.19, mainly on the back of strong crude prices. Expect the USD/CAD to trade in very tight range today.
EUR: One of the biggest talking points in FX markets right now will be whether one-year EUR/USD implied volatility crashes below 6.00% to hit a post-pandemic low. The ECB avoided any missteps yesterday in its communication, and another quarter of above-average PEPP purchases adds to the story of a liquidity glut. What does this mean for EUR/USD spot? With both the Fed and the ECB continuing to print money aggressively, a case is made that spot goes nowhere. That said, in the medium term, most expect EUR/USD advance to the 1.25 area by late summer.
GBP: The pound is holding up quite well. This morning's April GDP and industrial production figures were slightly disappointing, and the hangover from Brexit could still pressure the GBP. Most doubt today's G7 meeting in Cornwall has much impact on financial markets and would probably still think that GBP exits very tight ranges to the upside given the weak dollar.
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