Daily Market Outlook, September 8, 2022

Overnight Headlines

Investor risk sentiment improved in Asia following the positive close in equity markets on Wall Street. That has been attributed to further declines in the oil price related to weakening global demand which, in turn, has lowered US Treasury yields. Still, Fed policymakers reiterated that tackling inflation remained the priority. In the UK, BoE Chief Economist Huw Pill yesterday said that freezing energy bills may have a downward effect on inflation in the short term, although the support to incomes may result in ‘slightly stronger inflation’ further out.

The main financial market focus today is the ECB policy announcement at 13:15BST followed by a press conference with President Christine Lagarde at 13:45BST to explain the decision and answer questions. Also today, US Fed Chair Powell will take part in a discussion at a monetary policy conference at 14:10BST as markets continue to speculate on the size of the US central bank’s next hike later this month. In the UK, new PM Truss is expected to set out details in Parliament of a major support package for households and businesses in the face of soaring energy prices.

The ECB is set to raise interest rates again after lift-off at their last meeting in July when they hiked more than expected by 50bp, bringing the deposit rate up to 0% from -0.5%. This time round, the debate on the Governing Council seems likely to shift to whether to raise policy interest rates by 50bp or a record 75bp. Either way, it would bring interest rates on the deposit facility into positive territory for the first time since 2012. Despite survey evidence pointing to Eurozone GDP growth coming to a near standstill, the ECB’s focus remains on worsening inflation trends. Rate-setters, particularly the ‘hawks’ on the council, will be concerned about potential second-round effects and risks that medium-term inflation expectations are becoming unanchored from the 2% target.

Informing rate-setters will be a new set of ECB economic forecasts. Policymakers will be mindful that recent forecasts have consistently underestimated near-term inflation. They will also closely focus on the inflation forecast for the final year of the projection period which, in June, was raised to 2.1% for 2024. But there will also be caution among more ‘dovish’ members about the potential side-effects of a larger rate rise this week, including the impact on peripheral bond yields. Hence a 75bp hike today is not a done deal. Perhaps reflecting this uncertainty, the OIS curve is currently pricing in about two-thirds probability for such an outsized move.

EUR/USD: 0.9800 (1.35B), 0.9850 (965M), 0.9865 (558M), 0.9900 (909M)
EUR/USD: 0.9950 (648M), 1.0000 (2.22B), 1.0050 (756M), 1.0075 (619M)
USD/JPY: 140.00 (1.87B), 142.00 (502M), 143.00 (561M)
GBP/USD: 1.1400 (593M). EUR/GBP: 0.8650 (422M)
USD/CAD: 1.3200 (650M)

EURUSD Bias: Bearish below 1.0250

GBPUSD Bias: Bearish below 1.19

USDJPY Bias: Bullish above 139

AUDUSD Bias: Bearish below .70

Falls to session low after Lowe hints at slower hiking pace
AUD/USD dips below 0.6720 from 0.6745 after comments from RBA Governor Lowe
Lowe said rapid tightening makes the case for slower pace in future hikes
Many analysts polled by Reuters expect the RBA to hike by only 25 BPs in October
AUD buyers tipped around 0.6700 with support at 2022 low at 0.6682
AUD/USD trending lower and break below 0.6680 could see trend accelerate
20 Day VWAP is bearish, 5 Day bearish

BTCUSD Bias: Bearish below 25.3K