Asian markets were under pressure on Thursday, following the mostly negative cues from Wall Street overnight as investors adopted a cautious approach towards risk. 

Concerns seem to be mounting over rising inflation prompting central banks to tighten monetary policy at a time when the global economy is still recovering from Covid-19. This unease may be reflected in risk sentiment with European and US stock futures mixed ahead of another busy day for financial markets. There is certainly a lot on the plate, ranging from the European Central Bank meeting and updated earnings from tech titans to the third quarter US GDP report among other key economic data.

Earlier this morning, the Bank of Japan left interest rates unchanged as widely expected. However, it cut this year’s economic growth forecast to 3.4% compared to the 3.8% previously expected. The bank’s inflation estimate for the year ending March 2022 was also cut to 0% from the 0.6% seen in July.

Euro on standby ahead of ECB 

The European Central Bank is widely expected to leave monetary policy unchanged today. However, it may be unwise to label the meeting as a non-event given that rising inflationary pressures in Europe pushed euro-area CPI to the highest level since September 2008. It will be interesting to hear what President Christine Lagarde has to say, especially after she recently stated that inflation is largely transitory and unlikely to last.

Another topic of interest will be interest rate hikes. Markets have been pricing in a strong chance of a rise by the end of 2022, but the ECB is expected to pour cold water on these expectations. The market will also listen out for any hints the bank might offer about the future of the Pandemic Emergency Purchase Programme (PEPP) which expires in March 2022. The ECB is set to wait until December before making any formal decisions on the PEPP. 

Should the overall tone of the meeting sound dovish, this may weaken the euro against its major counterparts. EURUSD continues to wobble around the 1.16 level, but a solid breakdown below this point could open a path towards the cycle low at 1.1523.

All eyes on Q3 USD GDP 

Today’s main risk event for the dollar will be the growth figures for the July-September quarter in the United States. According to Bloomberg estimates, economic growth will dip sharply to 2.6%, compared to the 6.3% witnessed in the first quarter and 6.7% seen in the second quarter. The sharp decline in growth may be attributed to labour constraints, supply chain disruptions, and rising delta variant cases.

What complicates issues is the fact that US inflation remains at a 13-year high, with the horrible combination of slowing growth and rising inflation potentially fuelling fears around stagflation. The widely watched Dollar Index is trading around 93.85 as of writing. The pending GDP report may influence where the DXY closes this week, with tomorrow’s core PCE inflation data also a focus for traders.

Commodity spotlight – Gold 

Gold continues to be pulled and tugged by conflicting forces and this is reflected in recent price action. The precious metal remains supported by subdued Treasury yields and the cautious market mood. However, the journey north may be blocked by robust corporate earnings and a stabilising dollar. Given how the end of the week is jampacked with key economic reports, the ECB meeting, and earnings, volatility could be on the cards for gold.

In regard to technical levels, prices remain trapped in a sticky range with support at $1777 and resistance around $1800. A strong breakout above here may open the doors towards $1813 and $1832. Should $1800 prove to be reliable resistance, a decline back towards $1777 could be on its way.

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