ECB rate decision & Truss' energy support package in focus
The euro is pushing higher ahead of the ECB rate decision later today. The big question is whether the central bank will raise interest rates by 50 or 75 basis points.
Recent ECB policymakers have ramped up the hawkish rhetoric, leading the market to believe that a supersized hike could be on the table. However, with staff projections expected to show a downward revision to growth and after PMI data points to contraction, an overly aggressive hike could accelerate the road to recession.
A more conservative hike could disappoint the euro, and with the euro already trading below parity against the USD, further weakness adds to inflationary pressures.
Meanwhile, the pound remains depressed amid a bleak economic outlook for the UK, highlighted by BoE governor Andrew Bailey yesterday in his testimony before the Treasury Select Committee.
Today Liz Truss is expected to unveil her energy relief package, which could see household energy bills capped at £2500. The move could see inflation slow in the near term. However, given the huge government borrowing expected to fund the package, appetite for gilts could wane further.
Where next for EUR/GBP?
EUR/GBP continues its steady rise higher. The rising above resistance at 0.8680 combined with the bullish RSI and the 20 sma crossing over the 50 sma keep buyers hopeful of further upside. Buyers will look to target 0.8720 the 2022, high ahead of the 0.88 round number.
Sellers will be looking for a move below 0.8680 to open the door to the 0.86 – 0.8590 zone, which offered support and resistance on several occasions over the past year. Below here is yesterday’s low of 0.8620.
Gold awaits Powell
Gold is extending the bounce from the previous session after the Fed’s Beige book pointed to weakening US economic growth and cooling inflation. As a result, US treasury yields fell back, and the USD pulled back from a 2-decade high of 110.79.
Today all eyes are on Fed Chair Powell, who is due to speak later today. Should Powell use the occasion to hammer home the Fed’s commitment to taming inflation, he could reignite the USD rally, pulling Gold prices lower.
Powell could also look to use this event to tee up a 75 basis point hike at the September FOMC. The CME Fed watch tool shows that the market is currently pricing in a 75 basis point rate hike probability of 76%. Should this rise, non-yielding gold is likely to come under pressure.
Where next for Gold prices?
Gold trades within a falling channel dating back to March. The price rebounded lower off the upper band of the channel in early August, falling back below the 50 sma, which, combined with the RSI below 50, keeps sellers hopeful of further losses.
Support can be seen at 1689, the weekly low, ahead of 1680, the 2022 low. A move below here opens the door to 1677.
Buyers will look for a move over 1726, the weekly high to expose the 50 sma at 1745.