Markets mixed, central banks and energy shock in focus

Market sentiment lacked conviction on Tuesday morning despite the Chinese government pledging more efforts to support economic growth. Asian shares were mixed as investors braced for the return of traders from across the pond. US markets were closed yesterday due to the Labor Day holiday, but the Dow and S&P 500 futures are signaling a positive open this afternoon. In Europe, shares tumbled in the previous session thanks to the region’s worsening energy crisis with stock futures pointing to a negative open this morning.

In the currency space, the mighty dollar hit a fresh 20-year high yesterday while the euro sank to levels not seen in two decades. Sterling made fresh cycle lows a few hours before Liz Truss was formally announced as the new Prime Minister of the UK. Looking at commodities, oil bulls were injected with fresh confidence after OPEC+ decided to cut production by 100,000 barrels per day in October to boost prices. With so much already going and more high-risk events in the pipeline, this promises to be an eventful week for markets.

Most importantly, the fierce war against inflation is set to continue with central banks ready for battle. Earlier this morning, the Reserve Bank of Australia hiked interest rates by another 50-basis points to 2.35%, its highest since early 2015. The aussie weakened following the move with prices trading around 0.6780 as of writing. The Bank of Canada rate decision will be on Wednesday and all eyes then turn to the European Central Bank meeting the following day.

Will ECB hawks deliver?

Much attention will be directed towards the ECB meeting later this week. The central bank is expected to fire a monetary bazooka in the form of a 75-basis point rate increase. Indeed, with inflation hitting a record high in August at 9.1%, the central bank needs to employ all tools to tame rampant prices.

It is worth keeping in mind that the Eurozone economy faces the growing risk of recession due to the unsavoury combination of conflict on its borders, rising price pressures, and an energy shock. The latest development concerning Russia’s Gazprom has worsened matters, exposing the economy to downside risks and fueling inflationary pressures as gas prices soar.

According to Bloomberg, traders are predicting a 73% probability of a 75-basis point rate hike in September. If the ECB joins the “jumbo rate hike club” and strikes a hawkish tone, this could open the doors to more supersized hikes in the future. While this could inspire euro bulls, the upside may be capped by the gloomy outlook for the Eurozone. If the ECB catches markets off guard with a 50-basis point hike and strikes a dovish tone, this may send the euro tumbling back towards 0.9900 and below.

What next for the pound?

Sterling tumbled to fresh lows on Monday, as investor confidence continued to deteriorate over the UK economic outlook. Since then, the pound has enjoyed a relief rally, but it is certainly not out of the woods yet. With Liz Truss formally announced as the new Prime Minister after a protracted leadership contest, investors will be keeping a close eye on the government’s next steps in dealing with the current challenges, primarily the soaring rise in energy bills.

Looking at the technical picture, cable is under pressure on the daily charts, but a technical rebound could be in the making. A strong move above 1.1600 could encourage a push towards 1.1760 before bears re-enter the scene.

Commodity spotlight – Oil

Oil prices have received a boost after OPEC+ agreed on Monday to cut supply in an effort to boost prices. This decision was made despite calls from western governments fighting to tame inflation in the face of a growing energy crisis across the world. The cartel will cut production by 100,000 barrels a day from October. Although this was seen as a small cut, it was more symbolic and sent a message to the west that OPEC+ will defend oil prices if needed.

Talking technicals, Brent crude could challenge the 200-day simple moving average at $98.82 if $96 gives way. A move back above the August high at $103.23 may be required to change the longer-term trend.