ECB Signals End of Hike Cycle, US Dollar Gains Strength

In a surprising turn of events, the European Central Bank (ECB) has sent shockwaves through the financial markets by raising interest rates, potentially marking the end of its hiking cycle. This unexpected move has had a significant impact on global equities and the strength of the US dollar.

Key Factors for Today

• ECB's unexpected rate hike raises questions about the future of monetary policy.
• Strong US inflation data pushes the dollar to a six-month high.
• European nations, including France, the UK, and Germany, oppose easing sanctions on Iran.
• Robust Chinese economic data supports the Australian dollar.

Market Movers

• The ECB's surprise rate hike led to a surge in the dollar, while the euro weakened.
• US retail sales exceeded expectations, further boosting the dollar's strength.
• WTI crude oil prices reached a 10-month high as European nations stood firm on Iran sanctions.
• Positive Chinese economic indicators propelled the Australian dollar higher.

Economic Calendar

• EA Trade Balance
• ECB President Lagarde Speech
• US Import, Export Prices
• NY Empire State Manufacturing
• Industrial Production
• Michigan Consumer Sentiment
• Eurogroup Meeting

The Big News

ECB Shocks Markets with Rate Hike Amid Growth Concerns

In a move that caught many by surprise, the ECB raised interest rates by a quarter of a point, causing ripples throughout the financial markets. While there was a near-even split among analysts regarding whether the ECB would hold or hike rates, the accompanying statement indicated that the bank believes it has reached a level that could contribute to achieving its inflation target. Although the ECB did not explicitly rule out future hikes, market interpretation leaned toward a signal that the tightening cycle may be coming to an end. Additionally, the ECB revised down its GDP growth outlook for the current and next year, adding a bearish tone to the announcement. Consequently, the Eurodollar rate dipped to a May low of $1.0633, potentially setting the stage for further decline if it remains below $1.0687.

US Retail Sales Surge Amid Inflation Fears

Meanwhile, in the United States, evidence of robust consumer demand emerged as Advance Retail Sales for August surpassed consensus expectations, coming in at 0.6% compared to the anticipated 0.1%. This marked the fifth consecutive month of growth, signalling strong economic activity. August's Producer Price Index (PPI) also exceeded expectations, rising by 0.7% versus the forecasted 0.4%, reinforcing concerns about inflationary pressures. As a result, US yields climbed higher, propelling the dollar index to a six-month peak. Cable, on the other hand, fell by 0.67% to reach a low of $1.24 in June, with potential downside targets at $1.232.

European Nations Unite Against Iran, WTI Hits New Heights

In another significant development, European nations, including France, the UK, and Germany, united in opposing the easing of sanctions on Iran. This stance was communicated by the EU's foreign policy chief, Josep Borrell, and further confirmed by White House official Amos Hochstein, who hinted that the $70 per barrel price threshold remained a concern. Coupled with robust consumer demand data in the US, WTI crude oil prices surged past $90 per barrel, reaching a fresh 10-month high. If the bulls can maintain prices above $89.60 per barrel, the upward momentum may extend toward the $92 per barrel level.

Chinese Economic Surprises Boost Aussie Dollar

In the Asia-Pacific region, China's economic data delivered positive surprises. Industrial production in August exceeded expectations, growing by 4.5% compared to the forecasted 3.9%. Retail sales also posted strong gains, rising by 4.6% against the anticipated 3.0%. Moreover, China's surveyed jobless rate declined to 5.2% from the previous 5.3%. These encouraging indicators provided a boost to the Australian dollar, which climbed by 0.45% to 0.6468. A crucial support level for further bullish price action stands at 0.6450, potentially opening the path to levels around 0.65 or 0.6420.