USD is gaining for a fourth straight day today, after moving modestly higher yesterday. EUR found support at the mid-August high and 50-day SMA around 1.18 ahead of the ECB meeting. USD/JPY was little changed above 110. The higher-beta currencies (AUD.NZD and CAD) were off for a fourth day with the kiwi holding up best.

US equities retreated as some investors brace for volatility in September, one of the seasonally weakest months of the year. All the major indices fell, with the Nasdaq down nearly 0.6%, dropping for the first session in five. Asian markets are mostly lower as well, especially in Hong Kong with tech stocks getting hit on new regulation fears. US futures point to a weaker open.

Market Thoughts – Will ECB hawks get their way?

Today’s highlight is the ECB meeting where the inflation outlook and emergency QE programme (PEPP) will be the main focus. Hawkish members of the Governing Council have been out in force recently, concerned about pro-inflationary risks. They want to see an exit plan for the PEPP and EUR rates markets have brought forward the timing of ECB hikes in recent weeks.

The bank’s new asymmetric 2% inflation target implies a more dovish stance as the ECB is able to tolerate temporary overshoots, especially when policy is at the effective lower bound. CPI recently hit decade highs and we may see potential upgrades to staff projections today. Will Lagarde respond to the neutral/hawkish wing with at least a cut in emergency bond buying, from €80bn to €60bn/per month? Otherwise, the doves will continue to guide soft policy with more policy debate into the autumn around a slower pace of PEPP purchases and eventual wind up.

Chart of the Day – EUR/USD finds support

This week has seen three straight daily declines after a failed test of 1.19 last Friday. Prices are now resting on the 1.18 support zone where the 50-day SMA, mid-August high and the Fib retracement (23.6%) of the May-August fall all sit. Further ECB disappointment brings into view 1.1750 and below.

On the flip side, an ECB taper (probably not called that, but rather a “re-calibration”) with an optimistic tone will see buyers come back in. EUR/GBP is an alternative pair to trade, depending on the general risk mood and dollar volatility. Hawkish noises by Lagarde could see the July high at 0.8670 challenged.