Overnight Headlines

*USD retreats from three-month highs, higher versus commod-$s

*US equities suffered a broad-based sell-off, futures mixed

*Vix spikes above 20 before retracing back below 19

*UK GDP disappointed, 0.8% m/m v 1.5% expected

USD suffered losses versus the euro after the ECB announced its 18-month review and higher inflation goal. EUR climbed to an intraday high of 1.1868 before settling lower. Safe haven currencies such as JPY and CHF soared with impressive gains especially against high-beta, commodity currencies like AUD, CAD and NZD.

US equities fell on Covid Delta and inflation concerns with volatility exploding and the Vix at one point jumping 25%. The broad-based sell-off hurt banks the most while consumer discretionary and utilities held up the best. Asian markets are broadly lower with Japan hit hard by the double whammy of new restrictions and growth rotation. European futures are indicating only small declines at present.

Market Thoughts – Volatility jumps

A volatile day started with US 10-year bond yields falling down to 1.25%, a huge 20 basis point move across the last few sessions. The bounce above 1.30% has helped the risk off mood ease somewhat, but markets remain jittery with the bond market on course for one of its biggest weekly slides since June last year.

Oil prices steadied after dropping over 7% at one point yesterday since Tuesday. The feud within OPEC+ and the impact from the Delta variant are hitting the bulls, even with solid demand for oil as well as a decline in US stockpiles. OPEC+ has still not made a deal on how to raise output and there is no indication of when a deal will be reached.

Chart of the Day – EUR/AUD hits major resistance

The higher inflation goal and willingness to tolerate a limited overshoot of the target were the main takeaways from the ECB’s strategic review. However, the bank does not have the power to raise inflation to target on its own so warnings of an overshoot and forceful action may ring hollow. This raises the bar for the ECB meeting on 22 July, especially as reports suggest the bank rejected a proposal to update its forward guidance to reflect the new inflation target.

Risk-off sentiment gave a decent bid to EUR which tends to outperform in periods of market stress. EUR/AUD jumped over 1.2% and out of its recent range, making a new high of 1.5978 at the peak of yesterday’s market volatility. The key level in this pair is 1.5965 which acted as huge support for the second half of 2019 and into 2020, before breaking in the early part of this year. Prices surged through the 200-day SMA yesterday so the weekly close will be key to see if this bullish explosion can hold above here. The top of the recent range will offer some support and the first target for bears at 1.5878 while those hoping to see more gains will target June 2020 lows around 1.6033 if we can consolidate the break higher.