Overnight Headlines

*Yen extends slide, euro steady as all eyes on the ECB meeting

*Asian shares subdued following weak handover from the US

*Oil prices hover near 13-week high on robust US demand, China optimism

*The White House expects elevated inflation numbers to be released Friday

US equities closed lower with traders cautious amid higher yields and ahead of risk events. The S&P500 fell 1.1% closing near session lows. Energy was the only sector not in the red. The tech-heavy Nasdaq pared an intraday 0.5% gain to drop 0.7%. Asian markets are mostly softer with Japan moving against the trend on the weakening yen. Futures in Europe and US are indicative of a lower open.

USD eked out marginal gains, but these have been faded this morning. JPY continues to be the main story with USD/JPY posting fresh 20-year highs of 134.47. EUR gained for a second day but remains around 1.07. AUD fell 0.5% and gave back its prior day’s gain. GBP remains quiet trading just above 1.25.

Day Ahead – ECB and Lagarde under the spotlight

The ECB are set to announce the end of its bond buying programme and confirm plans to raise interest rates in the July. This would be the first time in more than a decade. We also get new ECB staff projections which should see higher inflation forecasts and lower growth estimates. We will be watching the 2024 inflation forecasts to see if they are above the bank’s 2% target. This should portend more aggressive policy tightening.

The battle between the hawks and doves on the Governing Council has been in full swing over the last few months. The former wants a full half-point rate rise before the summer as it sends the necessary signal that the ECB is serious about fighting inflation. The dovish side, which include President Lagarde, prefer a more gradual approach in smaller 25bp increments. The energy price shock provides a highly uncertain backdrop and outlook for the region’s economy.

Chart of the Day –EUR/USD waiting to breakout

The euro has been rangebound for a couple of weeks now between 1.0636 and 1.08. Ahead of today’s ECB meeting, markets have been ramping up their bets on rate rises for this year. There is now around a 40% chance of a 50bp hike in July. Implied pricing for the September meeting is currently near 75bps.

With investors preparing for a more hawkish outcome from today, President Lagarde will need to confirm this enthusiasm to underpin support for the euro. Otherwise, the ECB might underwhelm against these hyped expectations. The longer EUR/USD prices track sideways, generally the more range expansion we see on a breakout.  Support is around 1.0627/36 and then the 1.05 region. Resistance is 1.0768 and 1.0805. We haven’t traded decisively above the 50-day SMA at 1.0689 since February.