The USD Correction Deepens as Focus Shifts to ECB

The US Dollar has come under heavy selling pressure over the European open on Friday, extending losses from mid-week, with the Dollar Index now almost 2% lower the weekly highs. The sell-off comes despite generally hawkish comments from Fed chairman Powell yesterday. The Fed chief reiterated the bank’s message of focusing on the need to tame rampant inflation.

Perhaps USD bulls were left somewhat empty handed given that there was no new information. However, market pricing for a larger 75bps hike has now jumped to around 86% from around 70% prior to the comments. For the US Dollar this week, it seems to be more the case that attention was elsewhere given the other central bank action we’ve seen. Today, traders will be monitoring comments from Fed’s George and Waller.

Key Factors for Today

- USD falls further as Powell offers no fireworks and focus turns to the ECB
- Risk markets rally amidst USD soft-patch
- ECB hikes by 75bps and signals more hikes to come as it fights inflation
- AUD rallying amidst risk-on flows, safe-havens suffering
- Metals and oil both bid on Friday

Coming Up

- EUR ECB’s Lagarde speaks
- CAD Canadian unemployment rate
- USD Fed’s Waller and George to speak

Equities Recovery Strengthens Further

Given the fall in USD from mid-week highs, equities markets have roared back to life over recent sessions. Indices across the board have seen better demand amidst the current USD rout, though the Dax was seen struggling yesterday as the ECB hiked rates. The broader backdrop for equities traders remains tricky given hawkish central bank expectations and growing recessionary fears. However, for now, traders are content to buy equities as the Dollar continues to soften.

ECB Hikes By 75bps, Signals More to Come

In FX, the main story was the September meeting yesterday which has seen EUR turning sharply higher. The ECB hiked rates by 75bps, along with signalling further hikes as likely coming over the remainder of the year as the bank continues to battle inflation. The hike, which was the largest in over 50 years, brings eurozone rates back into positive territory for the first time since before the 2008 GFC. Today, traders will turn their attention ECB chief Lagarde who speaks again as the Eurogroup meetings and EU economic summit get underway.

AUD Leads the Way on Risk Flows

In terms of market strength, AUD is currently leading the pack in FX, however. The currency has benefitted firmly from the pickup in risk sentiment amidst the drop in USD. With equities and commodities rallying across the board, safe havens have been the weaker performers so far today with JPY and CHF both suffering.

Metals & Oil Higher, Helped By Weaker USD

In the metals and commodities space, the drop in USD has been a big help for gold and silver which have both turned higher, moving back into positive territory on the week. Oil prices have found some support over the last 24 hours also, although the tone remains heavy given the strong declines earlier in the week as recession fears lean on the demand outlook for crude.