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June 7th - As the conflict with Iran triggers global inflationary pressures, the European Central Bank (ECB) is expected to raise interest rates by 25 basis points next week, becoming the first major central bank among the G7 to tighten monetary policy. Markets anticipate at least one more rate hike this year. In contrast, the Bank of Canada is likely to keep its rates unchanged, while the Federal Reserve and the Bank of England are expected to remain on hold this month, observing the impact of the Iranian conflict. ECB officials aim to ensure that inflation in the Eurozone does not become deeply entrenched, but a rate hike would come at the cost of further dragging down an already weak economy. ECB President Christine Lagarde is likely to provide a clearer signal on the next steps at the press conference following the decision. Meanwhile, the ECB will also release its quarterly economic forecasts, assessing different scenarios of the energy shocks impact on the regional economy.On June 7th, Willie Walsh, Director General of the International Air Transport Association (IATA), stated that rising jet fuel prices are expected to lead to more airline bankruptcies and industry consolidation. He pointed out that a merger between United Airlines and American Airlines is unlikely due to regulatory hurdles. Walsh also stated that once the Middle East conflict subsides, airlines and hubs in the Gulf region will regain market share. Furthermore, despite disappointing progress in clean fuels, IATA remains committed to its 2050 net-zero emissions target.The Russian Ministry of Defense stated that its air defense forces intercepted 339 Ukrainian drones in multiple regions, including Moscow, within 13 hours.On June 7th, local time, the Russian Ministry of Defense stated on the 6th that Russian forces had seized control of the Shevchenko settlement in Kharkiv Oblast and struck 153 areas in Ukraine. These included production, storage, and launch sites for long-range drones; fuel, transportation, and port infrastructure; and temporary deployment points for Ukrainian armed forces and foreign mercenaries. The General Staff of the Ukrainian Armed Forces stated on the 6th that Ukrainian forces attacked targets including Russian personnel assembly areas, drone control points, and artillery systems.Ukrainian Foreign Minister Kuleba: Russian forces attacked two civilian search and rescue vessels in Ukrainian waters, causing casualties.

USD/CAD Remains in Resistance Territory in the Absence of a Catalyst

Daniel Rogers

Apr 29, 2022 09:49

At the time of writing, the USD/CAD currency pair was trading at 1.2805 and consolidating in resistance territory. The US dollar strengthened against the majority of the G10 currencies before easing somewhat near the close of the day, providing some comfort to the commodity complex. Nonetheless, DXY, a measure of the dollar's value relative to a basket of currencies, hit a two-decade high as investors priced in a succession of relatively low interest rates from the Federal Reserve.

 

A rebound in risk appetite occurred throughout the Wall Street session, as investors noticed evidence of robust consumer demand hidden by the unexpected decline in Gross Domestic Product growth for the last quarter, the first decline in GDP growth since 2020. Nonetheless, the risk-off tone is firmly established, as evidenced by the S&P 500's more than 5% decline in April, which is on track to be the worst month since 1987's bear market.

 

Concerns over China's war against COVID, combined with the Ukraine crisis and hawkish central banks intent on tightening monetary policy, are fueling recession fears. Treasury Secretary Janet Yellen came out overnight, stating that the global pandemic and Russia's invasion of Ukraine demonstrate the possibility of future large economic shocks, adding that downturns are "expected to continue to stress the economy."

 

Meanwhile, the price of crude oil has increased to USD107/bbl, bolstering the CAD, despite the growing likelihood of a European ban on Russian oil. "Germany is considering a gradual suspension of Russian oil imports, which would result in a broader sanction by the area. Germany's minister has already stated that the country can survive without Russian oil," according to analysts at ANZ Bank.

 

"Investors are anxious about compensating for the barrels lost as a result of the impending European sanctions. Oil product prices are also increasing, which helps refiners' profitability. However, demand for oil products remains sluggish in China as the number of COVID cases continues to rise."

All Eyes on the Federal Reserve

All eyes will now be on the Federal Reserve meeting next week. Expectations of the Fed tightening are high. Markets anticipate at least a 50 basis point increase at the May 3-4 meeting and another at the June 14-15 meeting. This is fully priced in, with over 25% odds of a June 75 basis point shift. The shock will come if anything falls short of or exceeds this consensus at next week's summit.

 

"Looking ahead, the swaps market is pricing in 275 basis points of tightening over the next 12 months, implying a policy rate at 3.25 percent. While this comes close to meeting our own target of a 3.5 percent terminal rate, we continue to see risks that the predicted terminal rate will move even higher if inflation proves to be even more resistant than expected," Brown Brothers Harriman analysts wrote.

USD/CAD Technical Evaluation

According to the following analysis, USD/CAD is consolidating in resistance zone and may be on the verge of a big correction towards 1.2720/50:

 

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