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Last week, hardline members of the European Central Bank's governing Governing Council came out one after the other to warn that the Eurozone's monetary policy will need to be tightened in the coming months.
However, they are very likely to be outvoted by the doves in this week's Council meeting, and the current strategy will be maintained, with no pre-announcement of a decrease in asset purchases anticipated before the end of the year.
n Despite recent proposals from hardline Council members, it is very likely that the European Central Bank's Governing Council will vote against pre-announced tightening of Eurozone financial conditions in the next week. Given the likelihood that many EUR/USD traders have initiated long positions in the pair as a consequence of the hawks' rhetoric, the main risk is that the pair will retrace its losses once the Council announces its policy decision on Thursday. ECB Vice-President Luis de Guindos, Bundesbank President Jens Weidmann, and fellow ECB Council members Robert Holzmann and Klaas Knot were among the numerous hawks who appeared on the newswires. It is a cause of worry for them all that the Eurozone economy is rebounding but inflation has increased sharply to 3%, considerably more than the European Central Bank's goal.
Despite this, the doves, headed by President Christine Lagarde, are virtually likely to retain their majority in the Council, arguing that the inflation overshoot would be transitory and that there should be no signal of future policy tightening for the time being. She might also note in passing that statistics published last week showed an unexpectedly significant fall in the final August reading of the Eurozone services PMI, as well as an unexpected drop in German retail sales year on year in July. This would obviously be negative for the EUR/USD, particularly considering that the pair has been on a rampage since reaching a low of 1.1664 on August 20. Following the ECB's decision on Thursday, Lagarde will hold a news conference to clarify her views, but there is something else that traders should look out for: the ECB's economic forecasts. A news conference will immediately follow Lagarde's. El Confidencial, a Spanish newspaper, ran a story on De Guindos. The European Commission said this week that the “economy is doing better than we expected in 2021, and this will be reflected in the forecasts that will be published in the coming days.” If the growth and inflation forecasts are correct, this may offer some support to EUR/USD bulls while also reducing the negative possibilities.
Looking forward, the ECB may propose asset purchase cutbacks by the end of this year, which may involve a transfer from its Pandemic Emergency Purchase Program to its Asset Purchase Program, as well as a general slowing in asset purchases. The European Central Bank's quantitative easing program is anticipated to be phased down gradually, with the first interest rate hike happening as early as 2024.
However, they are very likely to be outvoted by the doves in this week's Council meeting, and the current strategy will be maintained, with no pre-announcement of a decrease in asset purchases anticipated before the end of the year.
n Despite recent proposals from hardline Council members, it is very likely that the European Central Bank's Governing Council will vote against pre-announced tightening of Eurozone financial conditions in the next week. Given the likelihood that many EUR/USD traders have initiated long positions in the pair as a consequence of the hawks' rhetoric, the main risk is that the pair will retrace its losses once the Council announces its policy decision on Thursday. ECB Vice-President Luis de Guindos, Bundesbank President Jens Weidmann, and fellow ECB Council members Robert Holzmann and Klaas Knot were among the numerous hawks who appeared on the newswires. It is a cause of worry for them all that the Eurozone economy is rebounding but inflation has increased sharply to 3%, considerably more than the European Central Bank's goal.
Despite this, the doves, headed by President Christine Lagarde, are virtually likely to retain their majority in the Council, arguing that the inflation overshoot would be transitory and that there should be no signal of future policy tightening for the time being. She might also note in passing that statistics published last week showed an unexpectedly significant fall in the final August reading of the Eurozone services PMI, as well as an unexpected drop in German retail sales year on year in July. This would obviously be negative for the EUR/USD, particularly considering that the pair has been on a rampage since reaching a low of 1.1664 on August 20. Following the ECB's decision on Thursday, Lagarde will hold a news conference to clarify her views, but there is something else that traders should look out for: the ECB's economic forecasts. A news conference will immediately follow Lagarde's. El Confidencial, a Spanish newspaper, ran a story on De Guindos. The European Commission said this week that the “economy is doing better than we expected in 2021, and this will be reflected in the forecasts that will be published in the coming days.” If the growth and inflation forecasts are correct, this may offer some support to EUR/USD bulls while also reducing the negative possibilities.
Looking forward, the ECB may propose asset purchase cutbacks by the end of this year, which may involve a transfer from its Pandemic Emergency Purchase Program to its Asset Purchase Program, as well as a general slowing in asset purchases. The European Central Bank's quantitative easing program is anticipated to be phased down gradually, with the first interest rate hike happening as early as 2024.
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As a result of the government's non-farm payrolls data falling short of experts' forecasts, the US dollar dropped on Friday. In the chart below, this pushed my majors-based USD index to its lowest levels since July, closing off two weeks of dismal market performance. According to the Bureau of Labor Statistics, 235k jobs were created in November, compared to 733k anticipated, and the unemployment rate dropped to 5.2 percent, down from 5.4 percent as predicted, in November. However, the average hourly wage rose by 4.3 percent year on year, which came as a nice surprise to the public and the economy. This in mind, it is probable that the release of this data has reduced hopes that the Federal Reserve would begin to tighten monetary policy this month. Those comments follow dovish remarks on the job market from Federal Reserve Chair Jerome Powell earlier in the week. On top of that, further deterioration of the labor market may result in future rate increases being postponed in the long term. This may explain why the yield on the longer-term 10-year Treasury note rose in the aftermath of the publication of the employment data.Note
Note
Each of the world's major central banks, including the Reserve Bank of Australia, the European Central Bank (ECB), and the Bank of Canada (BoC), will deliver their most recent monetary policy statements this week. As their individual economies continue to grow, recent economic events in Australia, the Eurozone, and Canada may progressively establish different pathways for their respective central banks' post-Covid QE unwinding methods. Australia is the first nation where there is increasing fear that its gross domestic product (GDP) may shrink in the third quarter as a consequence of the country's extensive economic limitations. The chance that the Reserve Bank of Australia may rethink its plan to cease weekly asset purchases later this year has sparked a flurry of betting activity. Having said that, the central bank shocked some investors by sticking to its original strategy and without making any changes last month. The situation continues to be volatile, and the possibility of AUD/USD volatility remains high. Meanwhile, a high Euro-area inflation data published last week is likely to have increased expectations for the European Central Bank to tighten policy sooner rather than later. In response to this news, the yield on the 10-year German government bond surged to levels not seen since the middle of July. Since the end of July, the EUR/USD exchange rate has likewise hit record levels. In addition to what ECB President Christine Lagarde has to say, investors will be paying careful attention to the comments of her colleagues. Unexpected GDP contraction in the second quarter of this year in Canada has delayed policy tapering bets that were made sooner than anticipated. The central bank has already reduced the amount of money it is spending on asset purchases to a certain degree. In the event that the Canadian Dollar weakens due to a more dovish monetary policy, the US Dollar will gain as a consequence of this. With this in mind, the Greenback is expected to put a higher premium on external spillover risks, creating an uncertain picture for the next week.Note
Although non-farm payrolls in the United States had a miss, with 235,000 jobs added in August, as opposed to the estimated 733,000, most Wall Street stocks rose over the week. Compared to the S&P 500 and the more cyclical Dow Jones, the Nasdaq 100, which is particularly heavy on technology, rose. Growth stocks rose in response to increased expectations that the Federal Reserve will defer tapering this month. The Nikkei 225 jumped after Prime Minister Shinzo Abe declared his intent to resign, which is helping to prepare the way for new leadership as pressure to take extra measures is on the rise.The US dollar endured another week of underperformance versus every G10 currency as a result.
The Australian and New Zealand Dollars gained in value as market mood improved. The Euro increased after a surprise spike in Euro-area inflation statistics was reported at the beginning of the week.
Other commodities responded well in the face of a weakening US dollar, as evidenced by their performance in the market for precious metals like gold and silver. XAU/USD tried to end the day at its best price since the middle of June. XAG/USD rose to its highest point in a month. Low iron ore prices are likely to continue due to the reduction in Chinese demand. Natural gas prices have gone through the roof, staying close to their record highs. The Australian, Canadian, and Euro currencies are waiting to see what happens when the central banks announce interest rate decisions next week. The RBA, the ECB, and the BoC are all available to provide assistance. A variety of economic situations may influence the AUD/USD, EUR/USD, and USD/CAD currencies' volatility.
The US financial markets will be closed on Monday due to the Labor Day vacation. This could lead to a shortfall in liquidity early in the week. In the near future, two big topics will be the Eurozone and UK GDP. China will release its latest inflation report, while Canada is expected to publish its latest data on the labor market. Is there anything else to expect in the market in the coming months?
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