Overnight Headlines

*USD closed higher last week, rising versus most of its peers on Friday

*US stocks settled lower as inflation fears resurfaced

*Oil is trying to break out higher, approaching recent highs at $73.66

USD rose on Friday logging its best week in three. It has begun a busy data week on the front foot, benefitting from safety flows and a Fed that continues to signal tapering is coming. Tuesday’s US CPI figures are the next major focus framing the economy’s progress into the FOMC meeting on September 21-22. EUR has lost ground above 1.18 and is trading on the 50-day SMA. GBP is trading around its 200-day SMA even on renewed hawkishness from the BoE. AUD slipped after a report the US administration may open an investigation against China.

US equities closed lower on Friday recording the worst week since mid-June. Concerns on the persistent Covid-19 spread are undermining the recovery amid elevated inflation. The tech-laden Nasdaq posted its worst week since July. The S&P500 recorded its worst performance since mid-June. Elevated cost structures showed up in more new data, this time Friday’s US factory gate prices. The Vix is now north of 20. Asian are mostly lower with European futures in the red and US futures holding small gains.

Market Thoughts – Stocks lower, dollar higher

There is currently a high correlation between EUR/USD and stock markets. Strength in the latter is seeing a soft dollar while equity weakness is giving a bid to the greenback. A rare week of losses in US stocks has pushed USD higher marking at least a pause in the recent weakening trend.

Market themes remain the same and centre chiefly on Fed tapering and a cyclical slowdown amid constant Covid concerns. Chinese regulatory risks and China-US relations linger in the background. US inflation data will be watched tomorrow though jobs is now more of focus than well-known inflationary pressures.

Chart of the Day – EUR/GBP breaking down out of range

Even though the ECB meeting was a small win for the hawks, the BoE is still ahead in terms of policy normalisation. The Old Lady’s bond buying will soon be complete and debate about a rate hike next year is live. By contrast, even if the ECB’s emergency PEPP programme is retired in March, its normal QE plan (APP) is likely to be increased.

After threatening to move higher out of its recent range last week, EUR/GBP instead broke down below 0.8550 and its 50-day SMA. Prices are touching the recent lows this morning with bearish momentum picking up. The big figure will be the first target, ahead of 0.8472.