Volatility is expected to gradually rise as the Bank of Canada delivers its monetary policy today. All eyes are on the price of oil and the equity markets, waiting for crude oil inventories and inflation data in the US.

The first two trading days of the week turned out to be eventless. Because of that, the levels on most financial assets are more or less the same as they were at the previous week’s close.

The best example is offered by the EUR/USD exchange rate. At the time of writing, the pair trades at the 1.2180 area, or about where it closed last Friday. Similar price action is seen on most other FX pairs, so one can say that the FX market’s volatility disappeared in the first two trading days of the week.

But things are about to change. Today’s Bank of Canada and tomorrow’s European Central Bank decisions are the preface of the all-important Fed meeting one week from now. As such, the tight ranges are just preparing market participants for the rising volatility levels to come.

The stock market indices are trading close to their all-time highs, as seen in the case of the Dow Jones or the Xetra Dax. Commodities are well bid as well, with gold pressuring at $1,900 and the price of oil flirting with the $70 level.

Daily Analysis

Today is all about the Bank of Canada Rate Statement and the crude oil inventories. Both events have a direct influence on the Canadian dollar pairs, so that is where the price action matters.

The Bank of Canada is seen as deciding to remain on hold today and to announce a further tapering of its asset purchases at the next meeting in July. However, it would not be for the first time that the central bank takes market participants by surprise, especially considering that inflationary pressures in Canada are surging.

Markets to Watch

Dow Jones, EUR/GBP, AUD/USD – markets in focus today.

Dow Jones

Dow Jones formed a huge wedge on the daily chart during the last twelve months or so, and it may act as both a continuation and a reversal pattern. Key levels to watch ahead of the inflation data in the US on Thursday and the Fed next week – the 32,000 level to the downside and the 36,000 level to the upside.

EUR/GBP

The ECB interest rate decision and press conference will likely bring more volatility on euro crosses. The EUR/GBP seen above on the daily timeframe reveals the tight range recently. A move above 0.8700 should attract more buying interest, while a break and close below 0.85 signals the resumption of the previous bearish trend.

AUD/USD

A massive head and shoulders pattern has formed on the AUD/USD pair since the start of the trading year. The head of the pattern stretched all the way up to 0.80, but the price action quickly retraced to 0.76, which acted as a support level. A move below should spark interest for the measured move toward the 0.72 area and beyond.

Winners and Losers

Strong equities, strong commodities, weak dollar – the themes of the trading week so far.