Positive risk tone to end the week

Overnight Headlines

*USD eased to its first drop in three days, below the 50-day SMA

*US stocks were broadly lower on Delta variant concerns

*Gold is clinging onto $1800 and trendline support

*UK GDP eases to 0.1% versus 0.5% estimates, 1% previously

USD fell 0.2% as US Treasury bond yields dropped with strong demand in a 30-year bond auction. The EUR was supported after the ECB said it would trim emergency bond purchases over the coming quarter. GBP saw its biggest gain in nearly two weeks after cautiously optimistic words from BoE Governor Bailey. USD/JPY touched a month low on falling bond yields. NZD rose 0.2% and looks to be heading for recent highs above 0.7150.

US equities pulled back, weighed down by the prospects of economic recovery amid the Delta variant spread. The S&P500 and the Dow suffered their fourth day of losses. All three major US indices are looking at losses on the week. The Vix has edged higher. Asian markets are rebounding with the Nikkei again leading the way and rising to six-month highs. Tech shares are bouncing back with US futures pointing to a stronger open.  

Market Thoughts – ECB waiting for December

The ECB decided to slow its bond purchases “to a moderately lower pace” yesterday in a widely expected move. The next “re-calibration” will take place in December. Both the growth and inflation forecasts were revised up with President Lagarde stressing the rebound phase in the economic recovery is increasingly advanced. The current rise in inflation is seen as largely temporary.

Overall, it was a fairly predictable meeting, with the ECB having a cautiously optimistic outlook on the economy. That said, inflation is set to print above the ECB’s target for the rest of the year. No doubt, the hawks will be fairly vocal about this in the coming months. EUR found support above the mid-August high at 1.18 and at the 50-day SMA.

Chart of the Day – NZD/USD looks to push on

The commodity currencies have taken a hit this week, but the NZD has held up relatively well. The national lockdown is over and a hawkish central bank is itching to act on rising inflationary pressures. We saw this in the recent ANZ business outlook survey which showed expectations for inflation surging to their highest level since 2011.

After NZD/USD fell sharply in mid-August neat 0.68, prices have rebounded strongly, rising higher in nine days out of eleven into September. Buyers pushed through the 100-day SMA which now acts as support at 0.7078 and we are now trading around the 200-day SMA. If we can move higher above yesterday’s high at 0.7134, a bull flag is in play with targets at the recent cycle high at 0.7170 and then 0.72.