Markets focus on ECB policy meeting

Investors are expected to focus on the ECB meeting on Thursday as the central bank is widely expected to announce an imminent end to large-scale asset purchases, smoothing the way for the first interest rate increase in over a decade next month to combat record inflation. 

Rate hike expectations are close to zero this week. However, the 25bp increases in July and September are fully incorporated into prices, in line with recent ECB communications. 

While ECB rate hikes loom, the yen has also fallen against the euro and was trading at 144.23 per euro on Thursday, just off Wednesday's seven-and-a-half-year low. While the ECB is hawkish, the Bank of Japan is highly dovish, resulting in the high jump in EUR/JPY since the beginning of June.

The BOJ allows Japan's benchmark 10-year bond yield to rise to 0.25 percentage points from its 0% target, which last stood at 0.249%. Meanwhile, Germany's 10-year yield, the benchmark for the eurozone, reached a new eight-year high of 1.368% on Wednesday. The gap between the German and Japanese benchmarks widened to its widest in nine years on Thursday.

In addition to the concern about inflation in Europe, several data points indicated that the eurozone economy grew faster in the first quarter than during the previous three months despite the war in Ukraine.

Events of today

Additionally, as investors speculate about the size and pace of ECB tightening, they will also be awaiting the US consumer price data on Friday, which may become higher than expectations. Based on a Reuters poll, economists expect annual inflation to be 8.3%.

US Treasuries saw yields rise following a weak auction of 10-year notes on Wednesday as investors awaited price data from the United States. The yield on the 10-year note climbed to 3.0548% from a close of 3.029% on Wednesday, while the yield on the two-year note increased to 2.8027% versus 2.774%.