The US dollar continued to gain yesterday, perhaps due to increasing expectations over a quicker removal of monetary policy stimulus by the Fed. Still, equities rebounded, suggesting that stock investors may have already digested the idea of higher rates.
In Europe, though, the picture was different, with appetite staying soft due to the new COVID-related restrictions around the continent. Today, we will get to hear from European Central Bank (ECB) President Lagarde and BoE Governor Bailey, whose remarks could shape market expectations around the future policy path of their Banks.
Most European Indices Continue to Slide, Wall Street Trades in the Green
The US dollar continued to drift north against most other major currencies on Wednesday and during the Asian session Thursday. It underperformed only versus CAD, while it was found virtually unchanged against CHF. The greenback gained the most versus NZD and JPY.
The strengthening of the greenback and the safe-haven franc, combined with the weakening of the risk-linked Kiwi, suggests that financial markets may have traded in a risk-off fashion once again. However, the strengthening of the Loonie and the weakening of the yen point otherwise.
Therefore, to get a clearer picture regarding the overall investor morale, we prefer to turn our gaze to the equity world. There, most of the major EU indices under our radar were lower or unchanged.
The only gainer was Italy's FTSE MIB, due to Telecom Italia (MI:TLIT) taking another shot in the arm, surging 15.6%, following reports that KKR is considering boosting its offer for the company.
Later in the day, sentiment improved in Wall Street, with the S&P 500 and NASDAQ trading in buoyant waters and Dow Jones Industrial Average staying near its opening levels. Today in Asia, the picture was more mixed.
Yesterday, we expected the US indices to rebound and trade higher soon, despite increasing expectations over a quicker removal of monetary stimulus by the Fed. In our view, most investors have already digested that idea, convinced by recent comments from several Fed policymakers, as well as by the reappointment of Jerome Powell as the Fed Chief.
This is also evident by the fact that the S&P 500, and especially NASDAQ, gained, despite the minutes of the latest FOMC meeting, revealing that officials have been considering a faster tapering pace and sooner rate hikes since then.
Thus, we stick to our guns that the US dollar may stay strong when investors are willing to buy stocks, conditional upon economic data confirming the resilience of the US economy.
Now, in Europe, the picture is not so bright. We believe that equities here may stay under pressure for a while more, and this may be due to increasing COVID cases and the imposition of new restrictive measures.
As we noted yesterday, although the flash PMIs for November surprised the upside, suggesting that the Euro-area economy has not been affected by the latest supply shortages as many may have believed, the new pandemic-related measures keep concerns over the future performance of the economy elevated.
Even the German Ifo survey said that business morale deteriorated for the fifth straight month in November, highlighting investors' anxiety even before the imposition of new restrictions.
What's more, expectations over a sooner rate increase and a faster rate path by the Fed raised speculation that the ECB may also raise rates sooner, with participants fully pricing in such a move next year.
However, with the risk of further economic slowdown in the Eurozone, we don't believe that ECB officials will dare to think of something like that. Today, we will get to hear from President Lagarde, and we expect her to reiterate the view that raising interest rates now to rein in inflation could choke off the Eurozone's recovery.
We expect the minutes from the latest ECB meeting, due out an hour ahead of Lagarde's speech, to deliver the same message. This is likely to keep the EUR pressured, especially against the US dollar, as well as against the GBP.
GBP traders have raised bets that the Bank of England (BoE) could hit the hike button next month after Governor Andrew Bailey said that they are still on a path towards raising interest rates, and after the latest CPIs accelerated by more than expected. Governor Bailey will speak today as well, and another round of hawkish remarks could encourage some more pound buying.
EURO STOXX 50 – Technical Outlook
The Euro Stoxx 50 cash index traded lower yesterday but hit support at 4240, and later in the day, it rebounded. Overall the index has been in a sliding mode since Nov. 18, when it hit resistance at 4415, while the next day, it fell below the upside support line drawn from the low of Oct. 6. With that in mind, we will consider the short-term outlook to be negative.
We believe that, even if the latest rebound continues for a while more, the bears may retake charge from near the 4310 zone and push the action back down for another test near yesterday's low of 4240. A break of that barrier will confirm a forthcoming lower low and extend the fall towards the low of Oct. 29, at 4185.
To abandon the bearish case, we would like to see the recovery extending above the high of Nov. 23, at 4327. This may not signal that the prior uptrend is back in force, but it may result in some short-term advances. First, we could see investors targeting the high of Nov. 22, at 4372, the break of which could extend the advance towards the high of Nov. 18, at around 4415.
EUR/GBP – Technical Outlook
EUR/GBP has been trading in a sideways manner since Nov. 17, between the 0.8380 and 0.8430 barriers. However, bearing in mind the fundamentals, as well as that the prevailing longer-term path has been to the downside, we would see more chances for the rate to exit the range to the downside rather than to the upside.
An apparent dip below 0.8380 would confirm a forthcoming lower low and may see scope for declines towards the low of Feb. 25, 2020, at around 0.8335. IF that level cannot stop the fall, then we could experience extensions towards the 0.8294 zone, which prevented the rate from falling lower back on December 12th and 13th, 2019, as well as between Feb 13 and 18, 2020.
On the upside, we would like to see a break above the upper bound of the range, as mentioned earlier, before we start examining whether the bulls have gained the upper hand. This could result in advances towards the inside swing low of Nov. 15, at 0.8462, the break of which could target the high of that day at 0.8483.
As for the Rest of Today's Events
Besides the ECB minutes and the speeches from ECB President Lagarde and BoE Governor Bailey, we will also get to hear from ECB’s Elderson and Schnabel, as well as by BoE MPC member Haskel. Otherwise, the calendar is very light, with Wall Street set to stay closed to celebrate Thanksgiving Day.