All but one of the EU and US major stock indices traded higher yesterday, perhaps due to investors' belief that Evergrande (OTC:EGRNY) would make some payments on Thursday. However, risk appetite softened as the day passed with no official announcement.
We also had a Bank of England (BoE) decision yesterday, with the bank appearing more hawkish than expected, raising market participants' expectations of a rate hike.
Sentiment Softens In Asia On Evergrande Woes
The US Dollar traded lower against all but one of the other major currencies on Thursday and during the Asian session Friday. It lost the most ground versus NZD, AUD, and CAD while gaining only against JPY.
The weakening of the US dollar and the Japanese yen, combined with a strengthening of commodity-linked currencies Kiwi, Aussie, and Loonie, suggests that financial markets continued trading in a risk-on fashion yesterday and today in Asia.
Indeed, looking at the performance in the equity world, we see that all but one of the major EU and US indices traded in positive territory, perhaps still due to investors' belief that China's Evergrande could make some bond payments on Thursday.
The only exception was the UK FTSE 100, which finished 0.07% down, perhaps due to the BoE's announcement. Risk appetite softened during the Asian trading session today, as the day passed without any official statement from Evergrande on any potential payments. 
In our view, this revived fears over a potential default, with the developer now having 30 days to settle payments scheduled for yesterday. With more payments due in the days to come, all this confirms what we said yesterday, and the day before, that the default risks loom large.
We continue to believe that the Evergrande saga will keep market participants on the edge of their seats. Even if the company starts negotiating a restructuring agreement with its creditors, anything pointing to such a deal being handled poorly could cause more uncertainty. Therefore, we cannot rule out further setbacks in equity markets in the short run.
DAX Technical Outlook
The German DAX cash index traded higher yesterday, but overnight, it hit the downside resistance line drawn from the high of Sept. 6 and turned down. Although strong, the recovery from Tuesday's low may have been a corrective rebound. However, we would like to see an apparent dip below 15610 before examining the case for further declines.
A clear and decisive break below that barrier, marked by the low of Sept. 15, may encourage the bears to push the action towards the low of Sept. 9, at 15450, the break of which could see scope for extensions towards Wednesday's low, at 15255.
To abandon the bearish case and start examining whether the bulls have gained the upper hand, we would like to see a rebound back above 15710. This could signal the break above the downside resistance line and may initially target the high of Sept. 17, at 15790.
Another break, above 15790, could carry more significant bullish implications, perhaps paving the way towards the high of Sept. 6, at 15960, or the record peak of 16032, hit on Aug. 13.
BoE Signals That Interest Rates Could Rise Sooner
Now, back to the FX sphere, the commodity-linked Aussie, Kiwi, and Loonie were the main winners, as we already noted, but the next gainer in line was the British pound, thanks to a more-hawkish-than-expected Bank of England.
The bank kept all its policies unchanged, but, in the statement accompanying the decision, it appeared more confident regarding interest rate increases. Officials repeated that some modest tightening of monetary policy over the forecast period could be necessary. He went on to add that some developments appear to "have strengthened that case."
What's more, officials agreed that any future initial tightening should come in the form of a rate hike, even if that becomes appropriate before the end of the existing government bond purchases program. Another hawkish tilt was that Ramsden joined Saunders in supporting a halt in the bank's purchases now.
All these signals may have been more hawkish than market participants may have been anticipating and may have encouraged them to bring forth their rate-hike bets. Indeed, according to Reuters, after the BoE's statement, sterling interest rate futures priced in a 90% chance for a hike by February, up from just over 60% before.
The pound jumped higher on the outcome, and it may continue to gain for a while more, as all this suggests that the BoE may become the first major central bank to lift interest rates since the pandemic.
However, with such a likelihood quickly priced in, we will carefully monitor upcoming economic data and developments, as any disappointments could prompt investors to scale back their hike bets and thereby push the British currency down.
GBP/USD – Technical Outlook
GBP/USD traded sharply higher yesterday, breaking above the downside resistance line taken from the high of Sept. 14. Rebounding from the 1.3600 barrier, which is the lower bound of the range, the pair traded in that range since Aug. 6. Therefore, we would expect some more recovery within the range.
The bulls may take charge near 1.3690 levels, marked by the inside swing high of Sept. 22, and the push action above 1.3764, marked by the high of Sept. 16. This may open a path towards the high of Sept. 17. If it manages to break above that level, it could advance towards the peak of Sept. 15, at 1.3853.
On the downside, a dip below 1.3600 could signal the exit out of the range, indicating that the bears have gained complete control. This could pave the way towards the 1.3520 zone, which is defined as a support by the low of Jan. 18. Any move below that level could allow extensions towards the low of Jan. 11, at 1.3450.
As For Today's Events
During the EU session, the German Ifo survey for September is coming out, while later, from the US, we get the new home sales for August. Regarding the Ifo survey, the current assessment index is expected to have inched up to 101.8 from 101.4. Meanwhile, the expectations index could slide to 96.4 from 97.5. This is likely to take the business climate index down to 98.9 from 99.4. New home sales are expected to have increased fractionally.