Investors didn’t buy the rumour of a European Central Bank (ECB) rate hike but heavily sold the ECB’s intention to stop hiking the rates in the close future. The ECB raised the rates by 25bp yesterday and said that it ‘now considers that the key ECB rates reached levels that, maintained for sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target’. And that was it for the euro bears. ECB Chief Christine Lagarde tried to convince investors that the ECB rates are not necessarily at their peak and that the future decisions will depend on the incoming data. But in vain. The EURUSD sank below 1.07 after the decision and the EZ yields melted as many were rubbing their eyes to understand why a 25bp hike didn’t even spark a minor rebound given that the decision was not warranted, on the contrary, the expectations were mixed into the meeting!
In fact, many euro bears also jumped on a trade yesterday as Lagarde announced that the ECB significantly pulled its economic projections to the downside. BUT, in the meantime, the ECB revised its inflation expectations higher as well. Therefore, it’s naïve to think that the ECB can’t continue hiking rates with such a sour economic outlook. They can. They can, because they have a single mandate – price stability. As such, the market certainly remains too enthusiastically, and unrealistically dovish about the ECB. When I hear ‘data dependency’, I immediately look at energy prices and you know what I see there: further inflation pressures and a real possibility for further rate hikes.
Oil extends gains
The barrel of US crude traded past $91 yesterday, and Brent is getting ready to test the $95pb level. The better-than-expected industrial production, retail sales data from China this morning and news that the People’s Bank of China (PBoC) cut the required reserves for banks for the second time this year to boost market liquidity are giving a further support to the oil bulls looking for reasons to ignore the overbought market conditions.
But the rising oil prices are not benign, and the hawkish ECB is not necessarily positive for the euro, and here is why: the data released in the US yesterday showed that both retail sales and PPI got a decent boost because of higher gasoline prices in August. But it also showed that spending more on gasoline didn’t get Americans to spend less elsewhere. And that’s inflationary. Consequently, the latest developments will, at some point, awaken the Federal Reserve (Fed) hawks, and increase the risk of a further selloff for the EURUSD. There is no chance that Jerome Powell will announce the end of the rate hikes next week. He will only say that the trajectory of core inflation is soothing, but rising energy prices is a risk that they must manage. The dollar index could soon take out a major Fibonacci resistance, the 38.2% retracement on last year’s meltdown (near 105.40), and step into the medium-term bullish consolidation zone. Hence the EURUSD could well be forced below a critical Fibonacci retracement, its own 38.2% level, near 1.0615.
PS: US government drama and shutdown risk could eventually soften US outlook and temporarily prevent the Fed hawks from forcefully coming back.
ARM gains 25%
In the equity markets, ARM went public yesterday, and nailed its first day on Nasdaq. The share price rose 25% and closed above $63. It wasn’t as impressive as Rivian, for example which had jumped more than 50% during its first hours of trading, But hopefully, ARM will have a more stable cruise. Arm currently estimates that ‘70% of the world’s population uses Arm-based products’, in their PCs, cars, smartphones and so. And growth is the only possible direction for the chip designer with AI’s sudden arrival to our lives.