21 October, 2016
Stock markets were erratic on Thursday with most major arenas violently swinging between losses and gains as the messy combination of depressed oil prices, a resurgent Dollar and rising ECB stimulus hopes kept investors on edge. Asian stocks drifted lower during early trading on Friday pressured by falling oil prices which soured investor risk sentiment. Although European stocks displayed some resilience after European Central Bank President Draghi signalled that December could be the meeting to take action, Asia’s bearish domino could enforce downside pressures in Europe. U.S stocks were punished by weak earnings reports on Thursday with further losses expected as a strengthening Dollar and rising rate hike speculations repel investors from riskier assets.
Draghi dishes out the volatility
Euro/Dollar was chaotic on Thursday with prices crashing to four-month lows at 1.0915 after the ECB swiftly extinguished the persistent taper talk rumours. Although interest rates and the current 80 billion bond buying were left unchanged, markets were injected with volatility after Draghi stated that there were no discussions of extending the current Quantitative easing program beyond March 2017. With Draghi signalling that December will be key to take action, this almost mirrors the views of the Fed and reinforces the theme of central bank caution. Euro sensitivity may intensify in the coming weeks as investors re-evaluate the steps taken by the ECB in pending December meeting.
The EURUSD is under extreme pressure on the daily timeframe and could be poised for steeper declines once bears conquer 1.0900.
Dollar bulls return
The Greenback regained its dominance on Thursday with the Dollar Index lurching above 98.50 after Europe’s central bank rekindled expectations over further monetary stimulus in the future. Dollars upsurge was complimented by hawkish comments from Fed President William Dudley saying that the “Fed would move this year if the economy remains on track” which heightened optimism over a US interest rate increase in December. Sentiment is firmly bullish towards the Dollar with further inclines expected as speculators boost bets over the Fed breaking the trend of central bank caution this year.
The Dollar index is heavily bullish on the daily timeframe as there have been consistently higher highs and higher lows. A weekly close above 98.50 could encourage a further incline towards 99.50.
Currency spotlight – Sterling
Sterling was left vulnerable on Thursday after comments from Donald Tusk on how EU leaders will not engage in talks on Britain’s divorce from the single trading bloc at Theresa May’s first summit in Brussels simply revived hard Brexit fears. Additional remarks from French President Francois Hollande on how the UK should expect tough negotiations after the article 50 is triggered sparked further weakness in the currency. It is becoming clear that Sterling has been enveloped by political uncertainty with hard Brexit jitters ensuring prices remain depressed. Although UK data continues to point to some economic stability, Sterling may be destined for further declines as uncertainty entices bears to install repeated rounds of selling.
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