Yesterday saw another choppy session for markets in Europe, with the FTSE100 finishing sharply lower due to weakness in crude oil prices, which fell to their lowest levels since early February, as concerns over a global recession increased.
US markets, on the other hand saw a positive finish after the latest Fed Beige Book showed that while growth was slowing, price pressures were also easing in a number of districts. This easing prompted a pullback in the US dollar, as well as a slide in yields.
Last night’s rebound in US markets, and the weaker US dollar looks set to translate into a positive European open.
As we look ahead to today’s key events the main one will be the European Central Bank rate decision, along with the latest US weekly jobless claims.
Up until a couple of weeks ago it had seemed certain that we would see the European Central Bank raise rates by 50bps this week, pushing the headline rate into positive territory for the first time since 2014.
The last few days has seen this narrative shift after several governing council hawks got a lot louder in their pronouncements for much more aggressive rate moves, arguing the case for a 75bps rate move, after headline inflation pushed up to 9.1% at the beginning of the month.
It is clear that there are a wide range of views on the governing council about whether to hike by 50bps or 75bps today, with some talk that President Lagarde is leaning towards the smaller of the two options of 50bps.
An overly aggressive move today does present huge risks for the ECB, given that the latest staff projections are likely to see growth downgrades, and upgrades to inflation targets. It also runs the risk of pushing yields sharply higher, particularly those of Italy which saw the 10-year yield briefly push above 4% earlier this week.
On the other hand, if the ECB were to go down the more cautious 50bps route the euro could drop back down towards its recent lows, unless the ECB signalled that it was prepared to go in 50bps increments in subsequent months if inflation remained high.
That however would go counter to its recent guidance that all future rate decisions would be decided on a meeting-by-meeting basis, thus signalling the end of forward guidance.
Whether we get 75bps today or 50bps, today’s move will follow in the footsteps of the 50bps we saw in July, a move which was higher than expected and saw the ECB unveil its new Transmission Protection Instrument (TPI) or anti-fragmentation tool. The tool would deal with “unwarranted, disorderly market dynamics”.
Whatever decision is made today, ECB President Christine Lagarde will need to ensure that her messaging is clear. There will also be the opportunity to establish further details on how the Transmission Protection Instrument is expected to work, given that details in July were somewhat sketchy.
US weekly jobless claims are expected to remain steady at 234k, slightly up from last week’s 232k.
EUR/USD – squeezed sharply higher after this week’s low at 0.9864 but needs to push above 1.0120 to minimise the risk of a move towards 0.9620. In the absence of a move through the recent peaks at the 1.0120 area, the risk remains for lower levels as we head towards the 0.9000 area.
GBP/USD – slipped to its lowest level since 1985, at 1.1405 before rebounding strongly yesterday. While above 1.1400 we need to see a move above 1.1600 to stabilise and signal a short squeeze towards 1.1800. Below 1.1400 targets 1.1000.
EUR/GBP – looking to retest the June highs at 0.8720, after failing to move below 0.8560 earlier this week. We need to see a sustained break below 0.8560 to retarget the 0.8480 area.
USD/JPY – came to within touching distance of 145.00 before retreating. This is the next resistance for a move towards the 1998 highs at 147.70. Major support comes in at the 140.30 area, as well as the highs of yesterday at 143.10.
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