Caution reigns ahead of the ECB rate announcement & US CPI

European stocks eased back from record highs on Thursday as investors look cautiously ahead to two key risk events – the ECB rate announcement and US CPI inflation data.

Stocks in Europe have been quietly edging higher to fresh record levels over the past four sessions. All eyes are now on the ECB. The central bank is not expected to move on interest rates, and the PEPP is expected to remain at EUR 1.85 trillion.

The latest data from the Eurozone has been mixed. PMIs were encouraging, but retail sales and German ZEW sentiment missed the mark. Inflation reached the ECB’s target of 2% but is expected to be only temporarily at this level.

Just a fortnight ago, ECB President Christine Lagarde said it was too early to talk tapering support. The markets will be keen to see signs that the ECB is willing to keep the monetary taps turned on.

The PEPP programme allows for the monthly purchase amount to be adjusted. The ECB frontloaded purchases, increasing to a pace of bond purchases in its March meeting. Given the accelerating vaccine rollout, the easing of lockdown restrictions and the improving outlook, the ECB could adjust the statement’s wording to take bond purchases back to pre-March levels. This could be viewed as a step towards tapering.

As ECB President Christine Lagarde starts her press conference, US CPI data will be released. Expectations are for inflation to rise to 4.7% YoY after the 4.2% April print spooked the markets last month. Despite prices rising at the fastest pace in almost 12 years, the Fed came out in their droves to reassure that the spike in inflation is transitory and calm market expectations of a sooner move to taper support. The Fed was united and unwavering in its message, and the market bought it. Yields on the 10-year treasury hit a monthly low.

A stronger-than-forecast print today could tip the taper talk dial to sooner rather than later, which could bring stocks lower. US futures are pointing to a mixed start on the US open, with the tech-heavy Nasdaq set to underperform its peers.

FX – USD rises, GBP hit by Brexit jitters, Covid

The US dollar is edging higher in cautious trading ahead of the US inflation print. Activity in the FX markets has been somewhat subdued all week, with investors not wanting to take on large positions ahead of the key release. CPI is expected to rise 0.4% MoM in May. Another strong print would make it more challenging for the Fed to defend its bearish stance. Bets of an earlier move to taper would almost certainly rise, boosting the US dollar.

The pound is underperforming its major peers after the EU threatened tariffs on the UK as the bitter war of words over the Northern Ireland Brexit protocol continues. Talks between both sides ended without a breakthrough yesterday, making it more likely that the UK will bring it up at the G7.

The other grey cloud hanging over the pound is rising Covid cases. Daily Covid infections continue to creep higher with just one week to go until a decision over Freedom Day will be taken. Given the depressed state of the pound, doubts are rising that it will go ahead.

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at Visit to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.

Sophie Griffiths
Sophie Griffiths is a market analyst with OANDA, focusing on the UK and Europe. With almost 15 years of experience, she brings with her a deep-seated understanding of the financial markets, providing timely and relevant fundamental analysis across a broad range of asset classes.
Sophie Griffiths

Latest posts by Sophie Griffiths (see all)