Headlines

*Fed’s Powell does little to dispel expectations of third big rate rise

*ECB officials leave open chance of another jumbo rate hike

*Dollar relaxes after steep climb, euro gains on ECB hike

*China consumer inflation, producer price growth both ease further

USD strengthened early in the session before coming off its highs after the ECB meeting. The DXY has dropped below support at 109.29 this morning. The positive risk tone has seen more dollar selling today despite Fed Chair Powell sticking to the hawkish script. EUR extended above parity and closes in on resistance at 1.0090 this morning. GBP reclaimed 1.15 and trades just above near-term trendline resistance. USD/JPY has retreated overnight after further jawboning by officials including BOJ Governor Kuroda. Wednesday’s high was 144.99.

US equities rallied, posting their second straight positive session. All three major averages are on track to snap a three-week losing streak. The Vix moved lower again, below 24. Asian markets are mostly higher, driven by a strong up leg in Hong Kong. Supportive policy-related headlines are helping. European futures are showing a firmer open. US futures continue their gradual advance.

Event Takeaway – Hawks rule the ECB

The ECB took the hawkish option and raised rates by 75bps as it looks to restore its inflation-fighting credibility. President Lagarde said the bank still intends to hike rates at “several meetings” (that means less than five). But she didn’t say where she sees the neutral rate. Most economists think that lies at the top end of the 1-2% range. The latest growth forecasts look very optimistic. Inflation falls to 2.3% in 2024, up from 2.1% on its previous projection.

Overall, it was a hawkish tone, that doesn’t especially match those estimates. Whether growth expectations are too positive remains to be seen further out. For now, the ECB is data dependent with bank sources suggesting another 75bp is on the cards at its October meeting. Risks are certainly skewed towards more tightening, which is helping underpin support for the euro, for now. The single currency could get another boost from the EU energy summit today, which may feature a region-wide price cap solution.

Chart of the Day – Gold steadies above $1700

The latest leg higher in the dollar was driven by a sharp move up in US Treasury yields. This impacted gold with prices dropping to a fresh low and the month’s low at $1688. The key downside level is the August 2021 spike low at $1677. This area is reinforced by the pandemic bottom at $1676 and the July low at $1680.

The precious metal has managed to find buyers below $1700 on several occasions over the past week or so. Short covering by recently established shorts may help the rebound. Near-term resistance is $1721. The 50-day SMA sits above at $1743. It’s all about yields and the US dollar as the main drivers at present. Gold remains in a bear channel.