Main European stock indices lost up to 1% yesterday with the German Dax underperforming and falling nearly 1.5%.

US markets managed to limit losses to around 0.5% with the Nasdaq and small cap Russell 2000 suffering the most. Investors may be bracing for a volatile September, which is seasonally one of the weakest months of the year.

Asian markets are also in the red, partly a result of the threat of a new Chinese regulatory crackdown, with Hong Kong particularly affected due to Tencent and Netease. US futures point to another lower open.

Fedspeak mixed

We had more Fed officials on the wires with NY Fed President William saying he does not think the conditions for tapering have been met yet, although the expectation is still that they will be later this year.

The Fed September meeting had been targeted for an announcement about tapering, but this looks increasingly unlikely.

That said, known-hawk Kaplan stuck to his guns yesterday, believing that the Fed should start reining in asset purchases this month. The blackout period starts this Saturday ahead of the FOMC meeting later in the month.

ECB and PEPP on the radar

There is much speculation that the ECB will kick off its own taper (or “recalibration” as it will probably be known on the continent) of the emergency bond buying programme (PEPP) today. This comes after the hawks on the Governing Council have been raising increasing concerns about pro-inflationary risks, with official CPI figures at multi-year highs.

The market will get to see updated ECB staff economic projections with both growth and inflation forecasts set to be raised.

Key will be the bank’s outlook for inflation next year and in 2023.

With GDP growth hitting peak speed and inflation running above target, a reduction of the PEPP, from €80bn/month to €60bn/month could be on the cards. In this case, the dovish side of the ECB would probably demand higher purchases in the non-emergency programme (APP) to avoid a steep drop in overall bond buying. There are many technicalities to be aware of so EUR/USD may prove choppy, but only if there is any policy change of course.

'Markets Extra' podcast: Will the ECB join the tapering club?

EUR/USD sat on 1.18 support zone

This week has seen three straight daily declines in EUR/USD after a failed test of 1.19 last Friday. Prices are now resting on the 1.18 support zone where the 50-day SMA, mid-August high and the Fib retracement (23.6%) of the May-August fall all reside.

Further ECB disappointment brings into view 1.1750 and below.


On the flip side, an ECB “re-calibration” with an optimistic tone will see buyers come back in. EUR/GBP is an alternative pair to trade, depending on the general risk mood and dollar volatility.

Hawkish noises by Lagarde could see the July high at 0.8670 challenged.


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