Headlines

*ECB poised for another big rate hike as inflation soars

*UK to announce borrowing-funded energy bailout today

*Fed officials reluctant to call inflation peak as policy meeting looms

*Oil edges up after plunging nearly 6% on China demand and dollar

USD traded to highs of 110.78 yesterday before closing below 110. Softer yields and a rebound in risk appetite saw the dollar pull back. EUR moved above the July low at 0.9952 near to parity. GBP dropped just below the pandemic spike low at 1.1409 before rebounding back to 1.15. USD/JPY hit a multi-decade high at 144.99 but stalled. Prices are trading below 144 this morning on potential intervention. Anitpodeans are subdued today with AUD hovering above the cycle low at 0.6681.

US equities turned positive posting the best session since early August for all three major indices. The relief rally saw the Nasdaq fare best, gaining 2.07% and breaking a seven-day losing streak. Cyclical, growth stocks were the top performers as the Vix dropped below 25. Positive sentiment has carried over into Asia with broad based gains led by Japanese stocks. US and European futures are indicative of a firmer open.

Market Thoughts – King dollar and much else

There’s a lot going on in markets right now. Yesterday was mainly characterised by a sharp drop in oil as well as a move lower in bond yields. This finally eased some pressure on USD/JPY, the major which has been grabbing many of the headlines. It hit levels not seen since 1998 with many expecting a test of the spike high from then around 147.67. Prices have pulled back this morning on reports of a meeting between the BoJ, the Ministry of Finance and the UK’s FSA.

The fall in Brent crude has taken it below $90 for the first time since February. New lockdowns in China are hurting oil, but front-loading rate hikes from major central banks pose clear downside risks. If this continues, with the drop in long bond yields as well, then headline inflation could fall rapidly next month. In the near-term, Fed officials expect to keep tightening until the economy is weakening and the jobs market is softening.

Chart of the Day – The bar is set at 75bps for EUR/USD

The central question for today’s ECB meeting is will they hike rates by 75bps or 50bps? In fact, perhaps we should frame it as do policymakers hike by 50bps with a hawkish press conference? Or a 75bp move with a data dependent bias? Recent comments by the hawks have seen markets price in a 68% chance of a bigger 75bp move. City analysts remain less convinced which means we should expect volatility.

If policymakers hike aggressively, they may worsen the economic outlook as the eurozone economy is hit by a winter recession. And if they don’t, they may prolong stagflation or lose credibility as inflation fighters. New staff projections will potentially tell us what the ECB plan to do going forward. Higher inflation forecasts may mean more front-loading and support for the euro. Parity is key in EUR/USD with yesterday’s low at 0.9863 and then next support around 0.9750.