Sample Category Title

At today's meeting, ECB decided to slow its PEPP bond purchases to a 'moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the previous two quarters.' This slowdown was widely expected and probably as close to the market consensus as there could be. The entire press conference unfolded in a quite predictable fashion.

The ECB gave further guidance of the next re-calibration to take place at the December meeting, which was widely as expected. The 'calibrate, not taper' narrative gave us deja-vu of the December 2016 press conference. Further TLTRO operations will be discussed alongside the general stance at the December meeting, but will be data dependent.

EUR/USD was largely unchanged on the day, with Bund yields slightly lower and intra-euro area spreads tighter.

Full release here.

US stocks pared losses after weekly jobless claims hit a fresh pandemic low and as the ECB turns optimistic enough to moderate their PEPP buying. The S&P 500 index won't make a major move unless inflation heats up or if delta variant concerns ease further and the economy can resume reopening. The global economic recovery will be led by Europe in the third quarter and that should be very positive for European equities.

ECB

The heavily anticipated ECB rate decision did not disappoint. The ECB tweaked their pandemic bond buying program in what was somewhat a hawkish surprise. The ECB slows the pandemic bond program from significantly faster to moderately lower level from now. The ECB is turning upbeat on the economy as they are signaling the economy can handle less support. The euro rose slightly following the announcement of lower PEPP buying. The ECB did not specify exactly what will be the new pace in the statement, so the amending of the pace is really a minimal difference.

The ECB raised the 2021 growth forecasts from 4.6% to 5.0%, and trimmed 2022 GDP from 4.7% to 4.6%. Inflation forecasts all were bumped higher, but Lagarde still stuck to the script in saying it will be transitory. 2021 inflation now seen at 2.2%(prior 1.9%, 2022 inflation at 1.7% (prior 1.5%) and 2023 inflation at 1.5% (1.4% prior).

The key takeaway from the ECB is that the economy is strong enough to start pulling back support and that they still view the decade high with inflation as transitory.

Jobless claims

Jobless claims continue to head in the right direction, making a fresh pandemic low, despite some concerns over the impact Hurricane Ida. Louisiana’s initial claims rose from 2,060 to 9,319. Initial filings for unemployment insurance fell last week to 310,000, much lower than the consensus estimate of 335,000 and upwardly revised 345,000 prior reading. The job market outlook remains optimistic.

Chinese gaming stocks

Tencent and Netease shares plunged after regulators reminded companies of the crackdown over video game time for children. Foreign investors were delivered another reminder that President Xi’s crackdown is not over just yet. Chinese regulators urged the tech companies “to break from the solitary focus of pursuing profit or attracting players and fans.”

In addition to the latest regulatory squeeze from Beijing, Cathie Wood’s Ark cut their positions dramatically with Chinese companies and is focusing on Beijing-friendly firms. Pockets of Wall Street are running away from investing with any related to China and that can’t be good for risk appetite.

Oil

Crude prices sharply rose after reports that a ship was stuck in the Suez Canal, potentially disrupting movement across the vital artificial seal-level waterway. Sky News tweeted that the ship was floating, but the oil price jump mostly remained intact.

The news from the airlines was not very encouraging for the crude demand outlook. Southwest Airlines cut its third quarter outlook again, citing elevated trip cancellations, especially close-in. Leisure travel is easing and that will make it difficult to turn a profit this quarter. American Airlines also cut their guidance for the third quarter over softness in bookings and close-in cancellations. Delta’s update was also downbeat, noting the pace of the recovery paused due to sharp rise of COVID cases. Delta trimmed their revenue outlook and maintained their total capacity guidance. The airlines did not give any reasons to be optimistic for a pickup in jet fuel demand as business travel remains depressed as companies delay or scale-down re-openings and as leisure travel declines.

Crude prices plunged after China’s state reserves administration noted a historic decision to release national crude reserves to the market for the first time. China tapping their crude oil reserves is huge news and should provide much relief for domestic refiners and chemical companies.

WTI crude’s fundamentals were very bullish until the China news of releasing their reserves. Momentum selling could accelerate and WTI could target the $65 level. The oil market is in deficit but this China story could disrupt it staying in deficit for the rest of the year.

Gold

Gold prices rebounded as investors grew cautious over the COVID impact on the economy after NIAID director Fauci reiterated we’re still in pandemic mode. He told Axios that Americans are now getting infected with COVID-19 at 10 times the rate needed to end the pandemic. The Fed’s Beige Book showed economic growth is getting rattled by the delta variant and that will continue to weigh on the outlook.

The stimulus trade is not dead yet and that is good news for bullion. Gold will see underlying support as central banks slow down stimulus reductions: The Bank of Canada is turning cautious over growth concerns and both the ECB and Fed will have gradual taper plans that won’t really get going until next year.

The ECB statement was somewhat hawkish, as many traders were surprised over the lower PEPP buying. Good news for the euro is also very positive for gold prices. Gold is hovering around the $1800 level but that could quickly fade. If dollar resilience becomes the theme for the rest of the week, gold could see sellers take price down to the $1750 level.

Bitcoin

Bitcoin is stabilizing on dollar weakness. Social media platforms are filled with retail traders remaining extremely bullish long-term but cautious over what prices will do next. Bitcoin seems poised to consolidate following the rollercoaster ride that happened earlier in the week. The $44,000 to $45,000 zone is key for Bitcoin right now, but if prices steadily rise beyond $47,000 the bulls might give the all-clear signal.

Markets

The ECB decided to moderately lower the pace of net asset purchases under the pandemic emergency purchase programme (PEPP) compared with the previous two quarters based on an assessment of financing conditions and the inflation outlook. We expect weekly PEPP purchases to decrease to $15bn (Q1 pace) from $20bn in Q2/Q3. We add that effective purchases in August were already lower because of low liquidity. This PEPP recalibration counts for the next three months with a new update in December. That’s the meeting where the ECB will also spell out how the transition period post PEPP will look like. We assume a temporary increase in APP bond purchases. Key ECB policy rates and forward guidance remained unchanged today. In her press conference, ECB President Lagarde emphasized that the rebound phase in recovery increasingly advanced. The same goes for the situation on the labour market. Lagarde maintained the mandatory disclaimer about the Delta covid-variant, though she adds that high vaccination rates so far prevented fresh economic restrictions. Q3 growth momentum will remain strong with supply problems even preventing better (manufacturing) growth. The ECB upgraded this year’s GDP forecast from 4.6% to 5% while keeping them broadly unchanged for 2022 and 2023 at respectively 4.6% (from 4.7%) and 2.1%. Risks to the economic outlook are broadly balanced. The central bank’s inflationary assessment remains an extremely soft one. Lagarde and co continue to side with the temporary higher inflation line. They have to acknowledge that the spike has been higher and that it might take slightly longer to return to normal than earlier envisioned, but stick with the view that inflation won’t return at all towards target over the policy horizon. New inflation forecasts capture this feeling: upgrades for 2021 (2.2% from 1.9%) and 2022 (1.7 from 1.5%), but broadly unchanged in 2023 (1.5% from 1.4%). We believe that this inflation view eventually determined an initially hesitant market reaction. EUR rates and the single currency drifted south after the inflation forecasts/view, ignoring a (rising) number of scenario’s which could nevertheless derail this soft inflation assessment. The main risk in this respect is a translation into wages at the traditional autumn wage negotiations. Another one is that supply bottlenecks remain longer part of the economic life than currently assumed. The German yield curve bull flattens at the time of writing with yields sliding by 0.6 bps (2-yr) to 1.5 bps (10-yr). Peripheral yield spreads vs Germany narrow by up to 4 bps for Italy. EUR/USD currently trades at 1.1820 compared to 1.1840 ahead of the press conference. European stock markets generally recovered opening losses to currently trade with marginal gains.

News Headlines

The central bank of Ukraine as expected raised its policy rate from 8.0% to 8.5%, the fourth time this year. The step was needed as inflation rose to 10.2% in July, compared to a policy target of 5.0%. The central bank indicated that inflation might remain in the 10-11% area short-term. In this respect, the Bank indicated that it stands ready to take additional action if needed. The august inflation data published later today might bring some comfort. Inflation in August printed at 0.2% M/M to remain unchanged at 10.2% Y/Y.

However, not all central banks in the region face similar inflationary headwinds. The central bank of Serbia today kept its repurchase rate unchanged at a record low 1.0%. In its statement, the national bank said that it sees no significant inflationary pressures despite strong growth of the economy (it expects 6.5% growth this year with upside risk). Inflation printed at 0.2% M/M and 3.3% Y/Y in July. The National Bank of Serbia set the headline inflation target from January 2021 to December 2023 at the level of 3%, with a tolerance band of ±1.5 percentage points.

US weekly jobless claims fell to a new post-pandemic low of 310k vs 335k expected. Continuing claims also fell, yet less than expected and from an upwardly revised previous figure. The data add more flair to last week’s disappointing payrolls report: the Deltavariant has stalled/postponed hiring but did not prompt mass layoffs. In coming releases we might also see the impact of the augmented unemployment benefits having expired this week.

Daily Pivots: (S1) 1.1796; (P) 1.1824; (R1) 1.1845; More...

Outlook in EUR/USD is unchanged and intraday bias stays neutral. On the downside, break of 1.1792 support will confirm rejection by 1.1907 resistance. Intraday bias will be turned back to the downside for retesting 1.1663 low first. On the upside, sustained break of 1.1907 should indicate that fall from 1.2265, as well as the consolidation pattern from 1.2348, have completed. Near term outlook will be turned bullish for 1.2265/2348 resistance zone.

In the bigger picture, rise from 1.0635 is seen as the third leg of the pattern from 1.0339 (2017 low). Further rally remains in favors long as 1.1602 support holds, to cluster resistance at 1.2555 next, (38.2% retracement of 1.6039 to 1.0339 at 1.2516). However sustained break of 1.1602 will argue that the rise from 1.0635 is over, and turn medium term outlook bearish again. Deeper fall would be seen to 61.8% retracement of 1.0635 to 1.2348 at 1.1289 and below.

Daily Pivots: (S1) 1.3750; (P) 1.3803; (R1) 1.3839; More...

GBP/USD rebounds strongly today but stays in range below 1.3890 resistance. Intraday bias remains neutral first. On the downside, firm break of 1.3730 support will suggest that rise from 1.3601 has completed. Intraday bias will be turned back to the downside for 1.3570/3601 support zone. On the upside, break of 1.3890 will target 1.3982 resistance first. Decisive break there will indicate that fall from 1.4248 has completed. Near term outlook will be turned bullish for retesting 1.4248.

In the bigger picture, as long as 1.3482 resistance turned support holds, we'd still treat price actions from 1.4248 as a corrective move. That is, up trend from 1.1409 (2020 low) is in favor to resume. Decisive break of 1.4376 key resistance (2018 high) would indeed carry long term bullish implications. However, sustained break of 1.3482 will at least bring deeper fall to 38.2% retracement of 1.1409 to 1.4248 at 1.3164, or even further to 61.8% retracement at 1.2493.

Daily Pivots: (S1) 0.9191; (P) 0.9213; (R1) 0.9242; More....

Intraday bias in USD/CHF remains neutral as sideway trading continues. On the upside, break of 0.9241 resistance should resume the rise from 0.8925 through 0.9273. On the downside, break of 0.9098 will target 0.9017 support first. Further break there will likely resume the decline from 0.9471 through 0.8925 low.

In the bigger picture, USD/CHF is still struggling around 55 week EMA (now at 0.9176) and outlook is mixed for now. Confirmed rejection by the 55 week EMA will retain medium term bearishness. That is, larger fall from 1.0342 would resume through 0.8756 low at a later stage. However, sustained trading above 55 week EMA will tilt favor to the case of bullish reversal. Focus would then be turned to 0.9471 resistance for confirmation.

Daily Pivots: (S1) 110.12; (P) 110.29; (R1) 110.43; More...

Range trading is still in progress in USD/JPY and intraday bias remains neutral at this point. On the upside, break of 110.79 will resume the rebound from 108.71 to retest 111.65 high. On the downside, break of 109.10 will target 108.71 support first. Firm break there will resume the decline from 111.65 and target 38.2% retracement of 102.58 to 111.65 at 108.18 next.

In the bigger picture, medium term outlook is staying neutral with 111.71 resistance intact. The pattern from 101.18 could still extend with another falling leg. Sustained trading below 55 day EMA will bring deeper fall to 107.47 support and below. Nevertheless, strong break of 111.71 resistance will confirm completion of the corrective decline from 118.65 (2016 high). Further rise should then be seen to 114.54 and then 118.65 resistance.

The euro has posted small gains in the Thursday session. Currently, EUR/USD is trading at 1.1827, up 0.10%.

The sole data event out of the eurozone was Germany’s trade balance for July. The reading of EUR 17.9 billion (MoM) was much stronger than the consensus of EUR 13.0 billion. A gain of 0.5% in exports and a decline of 3.8% in imports compared to June helped propel the July trade balance to its highest level since February.

ECB will scale back PEPP, but stays cautious

The ECB was widely expected to remain cautious at today’s policy meeting, and the central bank did not disappoint in that regard. The ECB did not make any changes to interest rates, but took a small step, saying that it would reduce its purchases under the Pandemic Emergency Purchase Programme (PEPP) slightly in Q4, compared to the previous two quarters. The Bank did not provide any hard numbers, but given that recent purchases have stood at 80 billion euros/month, expectations are that this will drop to 60-70 billion euros in Q4.

ECB President Christine Lagarde stressed that the reduction in purchases was not a tapering, which means that the reduction is a token step. Nonetheless, the move reflects an improvement in the eurozone economy, as growth and inflation are moving higher, even though the Delta variant of Covid has not been contained. Inflation has pushed above the ECB’s target of 2% and has hit a 10-year high. In response, the ECB has taken a page out of the Fed’s playbook, stating that the jump in inflation is transitory and inflation is expected to ease. If the eurozone economy continues to improve and inflation remains high, there will be pressure on the Bank to make further moves to reflect improving economic conditions.

EUR/USD Technical

• On the upside, EUR/USD faces resistance at 1.1930 and 1.1983
• There is weak support at 1.1804, followed by support at 1.1731

Daily Pivots: (S1) 0.8571; (P) 0.8587; (R1) 0.8596; More...

EUR/GBP's sharp decline and break of 0.8561 support argues that rebound from 0.8448 has completed already. Intraday bias is back on the downside for retesting 0.8448 low. Also, with 0.8668 resistance defended, larger down trend is probably still in progress, starting another leg through 0.8448 low. On the upside, above 0.8612 will resume the rise form 0.8448 to 0.8668 resistance instead.

In the bigger picture, price actions from 0.9499 (2020 high) are still seen as developing into a corrective pattern. Deeper fall could be seen as long as 0.8668 resistance holds, towards long term support at 0.8276. However, firm break of 0.8668 resistance would argue that a medium term bottom was already formed. Stronger rise would be seen to 0.8861 support turned resistance to confirm completion of the corrective pattern.

Euro tumbles notably against European majors and Yen today, and ECB's re-calibration of PEPP purchases provide no support. But Dollar is seen as equally weak. Sterling is currently the star performer for today, followed by Swiss Franc and Yen. Commodity currencies are mixed. Focuses will now turn back to development in stocks and bonds markets, as both look relatively soft.

Technically, EUR/GBP's sharp fall and strong break of 0.8561 support argues that rebound from 0.8448 might have completed at 0.8612 already. Well ahead of 0.8668 resistance. Deeper fall would now be seen back to retest 0.8448 low. Eyes will be on 1.0843 support in EUR/CHF. Break there will also suggest completion of rebound from 1.0694. Also, firm break of 1.1792 support in EUR/USD would bring retest of 1.1663 low.

In Europe, at the time of writing, FTSE is down -1.06%. DAX is up 0.11%. CAC is up 0.12%. Germany 10-year yield is down -0.0129 at -0.336. Earlier in Asia, Nikkei dropped -0.57%. Hong Kong HSI dropped -2.30%. China Shanghai SSE rose 0.49%. Singapore Strait Times rose 0.09%. Japan 10-year JGB yield dropped -0.0058 to 0.040.

ECB: Favorable financing conditions can be maintained with moderate lower pace of PEPP

ECB kept the envelope of the Pandemic Emergency Purchase Programme (PEPP) unchanged at EUR 1850B, and will continue purchases until at least the end of March 2022. Nevertheless, the Governing Council now "judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters." ECB will now "purchase flexibly" according to market conditions, over time, across assets classes and among jurisdictions.

Also, ECB kept main refinancing rate, marginal lending rate and deposit rate unchanged at 0.00%, 0.25%, and -0.50% respectively. Forward guidance is maintained, which imply a transitory period of overshoot. The regular asset purchase program will also continue at a monthly pace of EUR 20B.

In the post meeting press conference President Christine Lagarde said the rebound phase in the recovery of Eurozone economy is "increasingly advanced". Output is expected to exceed its prepandemic level by the end of the year. Current rise in inflation is expected to be "largely temporary". Medium term inflation is "foreseen to remain well below our two percent target". Risks to economic outlook is "broadly balanced".

In the new economic projections ECB raised 2021 growth forecasts from 4.6% to 5.0%. For 2022, GDP growth is downgraded slightly form 4.7% to 4.6%. 2021 GDP growth was forecast was kept unchanged at 2.1%.

Inflation forecast was revised slightly up, from 1.9% to 2.2% in 2021, from 1.5% to 1.7% in 2022, and from 1.4% to 1.5% in 2023.

US initial jobless claims dropped to 310k, pandemic low

US initial jobless claims dropped -35k to 310k in the week ending September 4, better than expectation of 343k. Four-week moving average of initial claims dropped 16.75k to 339.5k. Both were the lowest level since March 14, 2020.

Continuing claims dropped -22k to 2783k in the week ending August 28, lowest since March 14, 2020. Four-week moving average of continuing claims dropped -29k to 2840k, lowest since March 21, 2020.

Fed Bostic: Recent weaker data suggests a chance for some play on tapering

Atlanta President Raphael Bostic "as strong as the data was coming in the early part of the summer, I was really very much leaning into advocating for an earlier start than what many may have expected".

However, "the weaker data that we've seen more recently suggests to me that maybe there's a chance for some play on this, but I still think that sometime this year is going to be appropriate" to taper.

EUR/GBP Mid-Day Outlook

Daily Pivots: (S1) 0.8571; (P) 0.8587; (R1) 0.8596; More...

EUR/GBP's sharp decline and break of 0.8561 support argues that rebound from 0.8448 has completed already. Intraday bias is back on the downside for retesting 0.8448 low. Also, with 0.8668 resistance defended, larger down trend is probably still in progress, starting another leg through 0.8448 low. On the upside, above 0.8612 will resume the rise form 0.8448 to 0.8668 resistance instead.

In the bigger picture, price actions from 0.9499 (2020 high) are still seen as developing into a corrective pattern. Deeper fall could be seen as long as 0.8668 resistance holds, towards long term support at 0.8276. However, firm break of 0.8668 resistance would argue that a medium term bottom was already formed. Stronger rise would be seen to 0.8861 support turned resistance to confirm completion of the corrective pattern.

Economic Indicators Update