Another hawkish surprise shows inflation remains central bank’s main concern

The Bank of Canada surprised markets with a rate hike on Wednesday, following the Reserve Bank of Australia’s rate increase on Tuesday. These developments come ahead of a crucial week with meetings from the Federal Reserve and the European Central Bank. In terms of data for Thursday’s Asian session, the highlights will be Japan’s Q1 GDP. New Zealand will report Q1 Manufacturing Sales and Australia, trade data. Later in the day, the Eurozone’s GDP and employment figures will be released, along with the weekly US Jobless Claims report.

Here is what you need to know on Thursday, June 8:

The Canadian Dollar outperformed on Wednesday following the Bank of Canada’s surprise rate hike. Against expectations, the central bank raised its key rate by 25 basis points to 4.75%, citing persistent excess demand and increasing concerns that inflation could “get stuck” materially above the target. This decision follows the Reserve Bank of Australia’s hike on Tuesday, which also exceeded economic consensus. In the upcoming week, the Federal Reserve, the European Central Bank, and the Bank of Japan will have their own monetary policy meetings.

The Fed remains in its blackout period, preventing markets from hearing any official comments. Recent data shows a weakening in the manufacturing sector, though there are no imminent signs of a recession. All eyes are now on the upcoming Consumer Price Index (CPI) report next Tuesday, which is expected to be a key determinant for the Fed’s decision. 

Analysts at Wells Fargo commented on the US economic outlook: 

We still expect the delayed effects of monetary tightening and tighter credit availability to dampen economic growth. However, the enduring strength of the labor market prompted upward adjustments to our forecast for employment, real disposable income and consumption, shifting the expected start of the downturn closer to the end of this year. 

During Wednesday’s American session, US Treasury yields surged as market participants pared back their bets for rate cuts by the Fed by the end of the year. However, the most likely scenario for next week’s Fed meeting is that rates will remain unchanged. The 10-year Treasury yield settled at 3.79%, the highest since May 29. Global government bond yields rose in response to another surprise rate hike, while equity prices on Wall Street posted mixed results. The VIX dropped to 13.90, the lowest level since February 2020, despite ongoing caution due to a gloomy global outlook and higher interest rates.

With the debt ceiling drama now resolved, the Wall Street Journal is warning of a potential flood of over $1 trillion in Treasury bills that could trigger volatility across financial markets in the weeks ahead. Investors will be closely watching for any signs of disruption as this massive amount of new issuance hits the market.

China reported weak trade data on Wednesday, with exports dropping 7.5% YoY in May against expectations of a 1.8% decline. This marks the first contraction in three months. Meanwhile, imports dropped 4.5% YoY, less than the 8.0% decline expected by the market consensus. These disappointing numbers add pressure on Chinese officials to provide more policy support, including rate cuts. The USD/CNH climbed to 7.15, the strongest level since November.

EUR/USD continues to trade around 1.0700, moving sideways and stuck ahead of next week’s central bank meetings. On Thursday, the Eurozone will release a new reading on Q1 GDP and Employment.

GBP/USD approached the 1.2500 level before falling back to the 20-day Simple Moving Average (SMA) around the 1.2430 area, as the US dollar gained strength. A consolidation below 1.2400 would indicate potential for further losses in the pair.

Rabobank’s GBP outlook: 

The risk for GBP is that further progressive rate hikes from the Bank significantly undermines the recently improved growth outlook.  The line-up of UK fundamentals has already been poor for some time. The backdrop has been been characterised by high inflation, weak growth in addition to low investment and productivity.  The UK’s current deficit last year likely enhanced the vulnerability of the pound.  This has shrunk recently, which could afford GBP a little protection.  However, on the view that the ‘higher for longer’ interest rate story is set to support the USD into Q3, we see scope for cable to edge lower to GBP/USD1.22 on a 3 mth view.

The Japanese Yen was hit by rising government bond yields. USD/JPY jumped from 139.00, surpassing 140.00. Japan will report Bank Lending, Trade data, and a new estimate of Q1 GDP. Also due is the Eco Watches Survey.

USD/CAD tumbled to 1.3319 after the unexpected rate hike by the BoC. It then rebounded, trimming losses to stabilize at 1.3370/80. The crucial support area above 1.3300 remains firm. 

AUD/USD dropped after a four-day positive streak. The pair failed to hold above 0.6700. A relevant short-term support is located at 0.6640. The momentum that emerged from the hawkish RBA hike and Governor Lowe’s comments faded amid cautious markets and a slide in commodity prices. Australia will report exports and imports on Thursday. 

NZD/USD dropped below 0.6050, posting the lowest daily close in a week. The 0.6000 psychological area is back on the radar.

Despite new government appointments with more market-friendly names, the Turkish Lira remains under pressure. USD/TRY gained more than 7%, reaching fresh record highs above 23.00. Meanwhile, the Mexican peso hit its highest level since 2016, with USD/MXN falling to 17.30. 

Gold tumbled to $1,940 and is looking at May lows, affected by higher Treasury yields. Silver reversed after approaching $24.00, falling below $23.50. Crude oil prices rose more than 1% on the back of inventory data, despite rate hikes and trade data from China. The WTI barrel settled around $72.50.

Cryptocurrencies weakened, with BTC/USD losing 2.25% to $26,360. Volatility still prevails after the Securities and Exchange Commission sued Coinbase on Tuesday and asked for a temporary restraining order to freeze assets tied to Binance on Monday.