Yesterday saw risk-off hit cryptocurrencies the hardest, while gold and indices retreated as well. The dollar rallied as yields rose. Today, bond yields have fallen back a tad, and this has helped the European indices and US futures to bounce off their earlier lows. Gold was also finding some mild support, but the likes of EUR/USD and AUD/USD had moved further lower. The dollar index was up for the third consecutive day, and it had more than made up its NFP-related losses. It was trading near levels last seen since the Jackson Hole summit when Jerome Powell watered down the Fed’s hawkish commentary by refusing to provide the roadmap for tapering QE (although confirmed it could be announced before the end of the year). So, the dollar was trading at around a pivotal level today, which means it could possibly ease back down given we haven’t had any significant news so far this week to justify the rally.
Delta and expiring government support among factors hurting sentiment
There isn't one specific factor providing a drag on risk sentiment at the moment, so things could improve unexpectedly as we head into the second half of the week - just as the drop happed unexpectedly for many risk assets on Tuesday. Among some of the factors weighing on sentiment, the persistence of the Delta variant of Covid is still a big risk facing the global economy. With various government stimulus measures slowly coming to an end around the world, the fear is that if the virus persists longer then it could hurt the recovery and cause further disruption to supply chains, thereby lead to higher inflation. Indeed, in the US, around 8.9m jobless people lost unemployment benefits on Monday as two government programs expired – one that provided aid to self-employed and gig workers, and another for those who have been unemployed more than six months. The $300 weekly supplemental unemployment benefit also ran out. We could see consumer spending fall as a result in the weeks ahead.
Lagarde likely to delay ECB PEPP taper talks
The market is also looking forward to the European Central Bank meeting on Thursday. Traders are unsure what exactly to expect from the ECB. Will Christine Lagarde dismiss talks of early tapering of PEPP or appear more hawkish in light of the improvement in Eurozone data and pickup in inflation, and try to convince markets that reduced PEPP flows would be appropriate going forward?
Thursday’s policy meeting could provide fresh impetus for European stocks and the single currency. Lagarde’s tone will be scrutinized very closely by the markets, and if she says anything that is slightly different to her previous dovish remarks then the euro could make a more decisive move higher on Thursday, while European stocks will probably show a mild reaction as they will be influenced more by sentiment towards risk in general at the time. For now, the euro and European indices remain lower on the day, but within their prior ranges. The key challenge for Lagarde is to prevent bond yields from rising sharply, so she will need to convince investors that when the time is right to unwind ECB’s massive monetary stimulus, the central bank will do so without impacting the economic recovery. Judging by her previous speeches and conferences, I can’t see why she would change her tone significantly.
BOC likely to stay on hold
Meanwhile, the Bank of Canada is making a policy decision later today at 15:00 London time. The BOC is widely expected to keep its policy unchanged. There is no press conference scheduled and the central bank will provide its next quarterly update on growth and inflation forecasts in October. So, it may be more appropriate to wait until the next meeting on October 28 before reducing QE purchases further from the current C$2 billion per week.
USD/CAD chart to watch
The USD/CAD is the chart to watch today given the BOC’s policy decision and the fact that the Dollar Index is testing potential resistance, with Canadian jobs data due on Friday.
Source: ThinkMarkets and TradingView.com
The current bias is slightly bullish given the breakout above the previous resistance shaded area, shown on the 4-hour chart. If the shaded region fails to offer support, we could see a quick drop back towards 1.25 support and potentially lower. So, watch the 1.2625-1.2650 area closely.
Alternatively, if support holds and price breaks 1.2700 resistance, then this could pave the way towards 1.2800.