Markets drift ahead of US data and the ECB meeting

Overnight Headlines

*US stocks sold off late on, backing away from record highs

*USD slid modestly lower closing below 94

*The BoJ left policies unchanged, cutting growth and inflation forecasts

*Huge moves in bonds, yields drop sharply across the globe

US equities slipped off their all-time highs. The S&P500 eased 0.5% for its first down day in three. The index has gained 5.6% in October, its best month since November 2020. The Dow dipped for the first time in four days. Major averages have been marching higher on earnings momentum this month. Fears on margin pressure look to have been overdone. Asian sentiment is mixed, and futures are moderately in the green.

USD moved sideways as the focus turned to the ECB and US GDP this afternoon. The euro continued to trade around 1.16. GBP remains stuck below trendline resistance from the June highs. USD/JPY followed US Treasury yields lower, support is at 113.38/41. Big moves in bond markets indicate worry on future rates, declining growth and central banks acting on high inflation. CAD was strong after a hawkish surprise from the BoC.

Market Thoughts – Bank of Canada shifts gears

Yesterday’s news but nonetheless a very significant meeting from the Bank of Canada. In a move that was very much a shock, the bank not only ended its QE purchases immediately but also moved forward its indicated timing for the first rate hike from the second half 2022 to potentially as early as April.

The economy is growing strongly with the job market back to pre-pandemic levels. More sustained inflation is being seen which means there is the real prospect of 100bp of rate hikes next year. There is now around an 80% chance of a January 25bp rate hike. This should give broad support to the popular long loonie trade. The energy story will further boost buyers. Importantly, this is yet another example of a central bank admitting that growth prospects are weaker than expected. Yet policymakers still want to accelerate the timing for tightening monetary policy forward in time.

Chart of the Day – EUR/USD consolidation around 1.16

The ECB meeting will grab the headlines today. This is an interim meeting as we get new staff forecasts released in December. Key this afternoon will be President Lagarde’s reaction to soaring inflation expectations which are at their highest levels since 2014. The ECB is expected to push back against this and money markets which are betting on a rate hike already next year.

The euro is not expected to benefit in this scenario. The 1.16 zone has held up prices in recent sessions. But the recent range trading looks to be bearish consolidation. That means downside risks remain, in line with the dominant long-term trend. Eyes on 1.1524 in that case and then potentially 1.1495/93 support. Bulls need to get above 1.1665.

Jamie DuttaAnalyst / Trader

"With extensive experience as a full time trader and financial market commentator, I have worked as a trader in top tier investment banks and trading houses, including Morgan Stanley and GAIN Capital trading Forex, Index derivatives. and Bonds. I combine technical analysis with a deep fundamental knowledge to identify trade set-ups. My real life experience allows me to break down the complexities of financial jargon and trading. This means everyone can better understand the compelling forces of greed and fear which are realised every day in countless ways across markets."

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