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Stabilizing policy expectations drive volatility lower

Markets are preternaturally calm, with most major pairs trapped in sub-20-pip ranges this morning after policymakers stuck to their “higher for longer” scripts during yesterday’s panel at the European Central Bank’s summit in Sintra, Portugal. 

The Bank of England’s Andrew Bailey delivered a relatively hawkish message, hammering it home by saying “I’ve always been interested that the market thinks the peak will be short-lived in a world where we’re dealing with more persistent inflation”. Christine Lagarde seemed to suggest that her shop could follow a widely-expected July hike with another in September. And Jerome Powell said a “strong majority” of officials on the Open Market Committee expect to deliver at least two more rate hikes in this tightening cycle, warning “Although policy is restrictive, it’s not, it may not be restrictive enough and it has not been restrictive for long enough”.

This messaging aligned closely with market expectations, leaving gilts, bunds, and Treasuries effectively unmoved. 

But it was Governor Ueda who brought down the house: The Japanese policymaker indicated rates didn’t need to climb because underlying inflation remained very low, and triggered a round of laughter when he said “I was a member of the Bank of Japan twenty five years ago. The policy rate back then was 30 basis points. Today it is -10 basis points. So based on that, the lags of monetary policy could be as long as twenty five years”. We worry that his sense of comedic timing might extend to currency intervention efforts. 

In today’s docket: The Bureau of Labor Statistics is expected to report 265,000 initial claims for jobless benefits were submitted in the week ended June 24 – a number that might be effectively unchanged from the prior week, but one that would anchor the 4-week moving average higher ahead of next week’s critical non-farm payrolls report. Statistics Canada will deliver its own (perpetually outdated) non-farm payrolls numbers at the same time, with economists expecting a modest rebound in April from the previous month’s surprising -9,000-position loss. The Atlanta Fed’s Raphael Bostic (non-voting member) will deliver an economic outlook later in the day, and China is slated to publish its latest purchasing manager indices tonight. 

Tomorrow will bring: Euro area inflation, UK gross domestic product, US personal consumption expenditures, and Canadian growth numbers. This could prove a potent cocktail for currency markets ahead of what will be, for all intents and purposes, an extended long weekend in North America. Surprises could also trigger outsized reactions amid typically-erratic quarter-end flows. 

Market Retreat Continues as Yields Climb
Hawkish Kashkari Comments Pour Cold Water on Markets
Market Momentum Fades After US Long Weekend
No news is good news
Dollar Cruises Toward Weekly Gain on Fading Easing Expectations
Twists & turns

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