Overnight Headlines

*US stocks ended in positive territory, eventually pushed higher by tech stocks

*USD was mixed to weaker posting a bearish daily candlestick

*Oil sold off on fears over demand with rising Covid infections in Asia

US equities clawed back most of the gains lost over the previous two days as risk appetite made a comeback, closing on their highs of the day. Broad gains were seen across all sectors; growth and value performed as well as cyclicals and defensives and small caps also showed up. European bourses are set to open in the green.

USD struggled yesterday as risky assets found a bid so was generally weaker against its major peers. Prices on USDX broke above the resistance at the mid-March lows intraday but couldn’t make any headway and closed below here on the day.

Market Thoughts – BoC: The only hawkisk bank in town

The Bank of Canada became the first major central bank to taper its QE. In a largely expected move, the bank held interest rates but undertook its second taper, having already cut its bond purchases in October. More of a surprise, and symbolically in many ways, it moved forward its forward guidance, essentially putting a 2022 rate hike firmly on the table. Previously it had suggested this would come during 2023 and is in huge contrast to the Fed next door who still affirm no rate move before 2024.

While the country is still in lockdown in some regions, the economy is enjoying a decent rebound and this hawkish surprise propelled CAD higher. With the market frontloading a rate hike in 2022 and further scaling back of QE expected this year, we should see more strength in the loonie with USD/CAD heading towards 1.24 and the recent cycle lows, at a minimum.

Trade of the Day – EUR awaiting ECB

The main event of the day will be the ECB meeting, though no new signals are expected. Forward guidance will remain unchanged with a broadly balanced growth risk assessment. The June meeting may see a change and reversal to its bond buying (PEPP) and President Lagarde will be asked about why this has initially been slow to kick off. If she hints that a major scaling back is to occur sooner, then EUR/USD will move higher.

For the euro, there has been an improvement in sentiment and positioning recently, primarily driven by the expectation of the dollar weakening. Any positivity by Lagarde may also push the single currency higher as she sees the vaccine rollout picking up speed. Business sentiment surveys across the region have been rising and the ECB looks at these when gauging future activity.

Technically, EUR/USD is holding above 1.20 and while USDX remains below 91.31, we presume the bullish bias in EUR/USD remains after Monday’s break higher. 1.2080 is this week’s high with the 100-day SMA just below here and a minor Fibonacci level (of the January-march drop) at 1.21, while trendline support of the April rally can offer the first line of support along with the 50-day SMA.