The Week Ahead – Collective pause
The euro bounces back as the ECB vows to keep interest rates restrictive for a while. The central bank has signalled a conclusion to its tightening cycle after lifting its key rates for a 10th consecutive time. As the market digests the record high of 4% which seems to be the much-awaited terminal rate, most participants expect the rates to stay high probably into the middle of next year, unless inflation drops faster towards the 2% target. In the meantime, more readings indicating a steady downtrend in inflation may prompt the ECB to lean further to the dovish side. The pair is sliding towards 1.0520 and 1.0770 is the first hurdle to clear.
The Australian dollar continued to drift lower after the RBA decided to stay on the sidelines. Policymakers have to weigh a tight labour market and high services prices against the risk of a sharp downturn, especially when its largest trading partner China is currently riddled with economic woes. The RBA is likely to sit on its hands and hope that inflation would become less persistent than expected. Against the backdrop of timid risk appetite across markets, worse-than-expected CPI and retail numbers this week would add pressure on the Aussie as it sinks towards 0.6280. 0.6600 is the closest resistance in case of a bounce.
Brent crude settles around a 10-month high as traders turn their attention to supply restrictions. Oil prices have been trading higher after a shift in sentiment from concerns about weak demand to tight supply. A collective pause in quantitative tightening by major central banks eases fears that their economies would tip into a deep recession. While traders expect the OPEC+ production cuts to be extended, Russia’s decision to temporarily ban fuel exports in an attempt to address shortages and stabilise its domestic market could pull the commodity higher. The price may probe support above 87.50 with 99.00 as a potential target.
The S&P 500 headed lower after the Fed warned that the policy tightening was far from over. For the bulls, even though the central bank held interest rates unchanged, the problem was that by acknowledging the strength of the economy and revising economic projections higher, it also allowed itself to stick with a still hawkish stance. With probably an additional 25 basis point down the road, the market has also tempered its projections of rate cuts for next year, leaving rate-sensitive stocks hanging. This could be the breathing room the index needs after it took off in March. 4260 is the next support and 4530 is the resistance ahead.