Markets shaky ahead of ECB meeting

A sense of caution has taken hold of financial markets as investors adopt a guarded stance ahead of another week packed with key economic reports and risk events. Asian shares got no love this morning, following overnight declines on Wall Street after Apple announced plans to slow hiring and spending growth next year. Renewed fears around Covid-19 outbreaks in China added to the negative vibe, fanning concerns about slowing economic growth.

With downbeat sentiment likely to send investors rushing towards safety, risk assets could be in store for a rough and rocky week ahead. European futures are trading lower ahead of the highly anticipated ECB meeting on Thursday. Regarding commodities, oil bulls seem to have shifted into a lower gear this morning after yesterday’s rally, while gold wobbles above $1700.

In the currency space, the dollar hovered above a one-week low against a basket of major currencies while the euro extended its recovery from parity. The Aussie has appreciated against every other G10 currency this morning, gaining roughly 0.6% versus the dollar after the RBA minutes for July struck a hawkish tone. The central bank hiked rates by 50bps at this meeting and agreed that further steps would need to be taken to tighten monetary conditions down the road. Taking a quick look at the technical picture, AUDUSD is pressing against the 0.6850 level. A strong breakout above this resistance could encourage a move back towards 0.7000.

Euro above parity ahead of ECB meeting

After hitting parity for the first time in 20 years last week, the euro remains a hot talking point across markets. All eyes will be on the European Central Bank rate decision and President Christine Lagarde’s press conference on Thursday. The bank is expected to raise interest rates for the first time since 2011 with markets fully pricing in a 25bp move. However, this would still keep rates in the Eurozone in negative territory despite inflation soaring to a record high of 8.6%.

Given how the quarter point move has already been priced in, the euro’s fortunes could be influenced by Christine Lagarde’s comments and the ECB’s anti-fragmentation policy tool. Certainly, the euro could be in trouble if the ECB’s plans disappoint, Lagarde’s conference underwhelms or uncertainty in Italy intensifies. Alternatively, a surprise 50bp rate hike, firmly hawkish Lagarde and a positive reaction to the ECB’s new tool could support euro bulls. Whatever happens on Thursday, the meeting is set to be an historic one and potentially have a lasting impact on the single currency.

Currency spotlight – GBPUSD

The British pound may be volatile this week as we have a stack of UK domestic data on tap. First up was the labour market data this morning which showed it remains tight, even if it is no longer tightening. According to the office for National Statistics, the unemployment rate stayed steady at 3.8% in May, but earnings missed expectations with growth of 6.2%, less than the expected 6.7% and down from 6.8% witnessed in April. With real wages in the United Kingdom falling, this is likely to fuel concerns over slowing economic growth as consumption falls.

UK inflation is at its highest level in 40 years and British households are facing severe pressure from rising living costs. The Bank of England is expected to raise interest rates by 50bps in August to tame the inflation beast. With buying sentiment towards the pound haunted by recession fears and political uncertainty, the currency could remain on a slippery decline. GBPUSD remains under pressure with sustained weakness below 1.2000 promising a decline back towards 1.1760 and lower.