The USD traded lower against most of the major currencies on Wednesday. According to the latest report, inflationary pressures are on the rise but not as quickly as investors feared. In US consumer prices grew 0.4% in February, which was in line with expectations. USD traders were positioned for a strong number, but when they saw the muted report, they took the greenback lower against most of the major currencies.
Although, prices are expected to rise further in March, inflationary concerns eased somewhat. This allowed yields to decline and the Dow Jones Industrial Average to power to new highs.
Investors were pleased to see the House pass the US$1.9 trillion stimulus package. President Biden is expected to sign the bill on Friday and the Treasury could start sending out US$1,400 stimulus checks within days. Stocks could extend their gains as investors look forward to the positive implications of the latest economic relief bill.
Meanwhile the Bank of Canada’s decision to leave monetary policy unchanged was widely anticipated. Consumers and businesses are adapting to containment measures, and housing market activity has been much stronger than expected according to the short monetary policy statement.
The focus turns to the European Central Bank’s monetary policy announcement. In many ways, the ECB rate decision is this week’s biggest event risk. Not only will we hear from ECB President Lagarde, but economic projections will also be updated.
Here are a few things we must know – vaccine rollout in the Eurozone is slower than the US, more restrictions remain in place, the currency is strong and the ECB is more concerned about the rise in yields than the Federal Reserve.
Economic data has been mixed and the Eurozone would be lucky to escape contraction in the first quarter. With that said, the global economy is recovering, more people are getting vaccinated with each passing day and the outlook is bright.
The big question for the ECB is, whether they will look past near term uncertainties? If they put more emphasis on market volatility and increases bond purchases, EUR/USD will fall to fresh lows. If they maintain an air of optimism and suggest that any move taken will not be followed by further action, EUR/USD could return to 1.20.