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Weekly Market Outlook: ECB, BoC and US CPI in the Spotlight

Key economic data releases and central bank meetings in both the eurozone and Canada are anticipated during this week. While the European Central Bank probably will not send any signals about tapering, the Bank of Canada may take a pause to reassess its QE exit process. In the US, inflation numbers are on top of the agenda, as the FOMC meeting will be held next week and expectations are getting higher for possible discussions about policy tightening. 

ECB: No Tapering ahead

The ECB policy meeting and press conference will be held June 10 with a review of financing conditions and the inflation outlook in focus. This will hold implications for the asset purchases program over the coming months. The latest eurozone manufacturing PMI rose to a record high for the third straight month bringing along growing price pressures. May flash eurozone inflation data likewise surprised slightly to the upside. However, none of this data will be enough to push the ECB towards QE tapering, at least for now. ECB will likely to balance the risks in the upcoming meeting and conclude with no policy changes. 

Eurozone

On the other hand, the ECB will upgrade its economic projections. Back in March, the staff predicted GDP growth to climb 4% this year and at 4.1% in 2022. Inflation was expected to come in at 1.5% this year and 1.2% next year. While confidence indicators point to better activity, no data is yet available to confirm economic performance in the second quarter.

However, with an expected rise in inflation levels due to supply chain disruptions, elevated commodity prices and the reopening, which may push inflation to settle above targeted 2%, ECB may revise its inflation projections higher. This may also make the bank to consider not extending PEPP program beyond march 2022, while continue APP between 40bn to 50bn euro monthly after march 2022. 

BoC: Policy Tightening still on the table 

Bank of Canada will hold its policymaking meeting on Wednesday. The bank was unexpectedly hawkish in its previous meeting back in April, announcing reducing asset purchases and expecting the economic slack to be absorbed in 2022, which may open the door to a rate move. The bank reduced its weekly asset purchases from 4 to 3 billion Canadian dollar. An adjustment that reflects the progress made in the economic recovery as stated in the bank’s policy statement. It is the second tapering move since October, when BoC announced its first tapering from 5 billion. 

Since the last meeting, the Canadian dollar has been leading major currencies with a gain of 3.4%. However, the jobs report disappointed for the second month in a row, shedding about 68k jobs in May, which was more than twice the median market forecast. It lost 207k positions in April. Canada has lost nearly 145k full-time jobs in April-May. So far this year, Canada has grown less than 75k jobs. The Bank of Canada emphasized that the uncertainty and variability of the re-opening of the economy and that patience is needed. 

US CPI: key driver for USD this week

US CPI has been accelerating, but the good news is the base effect peaked last month. The 12-month CPI rate is forecasted to rise to 4.6% and the core rate to tick up to 3.4%.

CPI figure to be released a week ahead of the FOMC meeting. Fed officials have acknowledged that temporary factors are behind the price pressures and will look beyond the near-term rise. 

Last week, NFP numbers disappointed by adding 559,000 jobs. But when looking at the big picture, the unemployment rate fell unexpectedly from 6.1% to 5.8% with average earnings rising by 0.5% on a monthly basis. 


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