Eyes on ECB meeting, 25 or 50bps rise?
The market continues to struggle to find direction, we had some US dollar weakness yesterday but then we saw a sharp turn as GBPUSD dropped from 1.2030 to 1.1960 and EURUSD from 1.0270 to 1.0160. That 1.2030/40 area in GBPUSD has been tested several times over the past couple of days, so far failing to break through, as I have warned before there does seem to be large demand for US dollars when it weakens. Some of the dollar gains were given up overnight, GBPUSD got back to 1.2000 but as I type GBPUSD has fallen quickly back to 1.1960, on what looks like GBP selling against EUR. EURGBP moves up to 0.8540 (GBPEUR 1.1710), we tested this crucial level a few time in the past couple of days, a break could well open up a return to 1.1550.
For the record, Liz Truss has emerged as the new favourite to replace Boris Johnson despite Sunak having more votes in the final ballot, with Mordaunt being eliminated. Party members now vote for their next leader, results on that not due until 5th Sept.
EURUSD has regained 1.0200 ahead of the all-important ECB rate meeting today. We’ll be on the edge of our seats as we wait to see whether they see fit to raise just 25pbs or take the leap and raise to 50bps. Part of me thinks this shouldn’t be a big issue either way. If we imagine they are looking to raise 75bps in total in the coming months, this could be three 25bps moves or one 50bps and one 25bps move. In theory, ECB could choose either and have little market impact if Lagarde can talk it through sensibly.
We also await details of the much talked about anti-fragmentation tool. This may become useful sooner rather than later given Draghi looks set to resign today and the Italian government would be thrown into disarray once again. Watch the spread between Italian and german bonds to see whether it widens further. This had been down at around 90 in late 2021 but has climbed steadily to around 235 now. This sounds like a big move but we are still well below levels seen in 2018 and 2020 in the low to mid-300s, and considerably lower than the 520+ we saw back in 2011/2012. Plenty of room for that to widen and I’d imagine the wider it goes, EURUSD surely has to move lower.
A one month 1.0100 EUR put costs 100 usd pips. Add a 0.9600 knock out and the price becomes 25 usd pips. It is cheaper although not necessarily better value, for some though it might just be a little bit of interest.
Elsewhere, BoJ left policy unchanged at its meeting overnight but did raise their 2022 and 2023 inflation forecasts, while lowering 2022 GDP forecasts. They did however raise 2023 and 2024 forecasts. USDJPY at 138.50, EURJPY 141.50 and GBPJPY 165.75.
Gold has slipped below 1700 and just below my trendline of the lows that go back to April 2020, and March and August 2021. So much depends on USD strength but I am tempted to look at downside options, they are just so expensive. A one month 1690 put is $35/oz. Add a knock out at 1630 and the costs is just $5/oz. Historically vanilla options have worked better in gold but for me the premiums of vanillas make them too expensive to consider for a speculative punt.
Russia tells the West that it will expand its attacks into other regions of Ukraine if the West continue to arm Ukraine. Clever, on one hand, it is then the West’s fault that Russia move further into Ukraine, or we don’t help Ukraine and Russia can waltz through. Either way I’m thinking they are not going to be stopping where they are. A ceasefire may be being discussed but I do not hold out much hope for one unfortunately.
Finally, my eldest arrived back from his calm and peaceful trip to Kavos with eight friends. I believe a good time was had by all but a couple of them were ill while they were away with symptoms which sounds very much like Covid. Given they all travelled together, including minibus transfers both in Greece and here from Stansted, I’m going to keep him at arms length for a while. Might even make him do a couple of covid tests. Might sound a bit over the top but given it is only just over one year since my wife was in hpsital, I think there is no harm in being alittle cauitious.
- 13.15 ECB rate announcement
- 13.30 US initial jobless claims, philly fed manufacturing survey
- 13.30 CAD new house prices
- 13.45 ECB press conference
- 23.00 AUS S&P manufacturing, services PMI
- 00.01 UK GfK consumer confidence
- 00.30 Japan CPI
- 07.00 UK retail sales