European energy ministers will meet today to discuss how best to address the escalating energy crisis. The DAX and EUR are rising, but the meeting could be a bearish catalyst.
· Oil heads for weekly losses for a second straight week
· USD falls across the board on hopes of cooling inflation
· USD/CAD falls towards 1.30 ahead of Canadian jobs data
European stocks saw a broadly positive close yesterday after the ECB hiked interest rates by 75 basis points, a record-sized hike, sending the message that the central bank was serious about tackling inflation. The ECB has arrived late to the rate hiking party and is playing catch up at a time when 75 basis point hikes have become the norm. Earlier in the week, the BoC also hiked interest rates by 75 basis points.
The EUR/USD fell following the hike, which comes as soaring energy prices threaten to send the eurozone economy into recession. The ECB raised its inflation forecasts to 8.1% for this year and 5.5% for next year and slashed growth forecasts to 0.8% next year, down from 2%.
In the US, stocks ended higher and the USD, shrugging off the hawkish stance from Federal Reserve Chair Jerome Powell. Powell reiterated the Fed’s commitment to taming inflation, pledging to keep hiking rates until the job is done.
USD
With oil prices set to fall across the week, the second straight week of declines, hopes are rising that US inflation could continue cooling. Prices at the pumps have fallen considerably, which, combined with the Fed’s aggressive rate hikes, could see CPI, which was 8.5% in July, fall further in August.
The USD, which has risen sharply across this week, hitting a 20-year high, and rattling global markets, fell lower in Asia. EUR/USD is rebounding over parity, GBP/USD is setting its sights on 1.16, and USD/JPY fell 160 pips, helped by comments from the BoJ that they will be watching the exchange rate very carefully. The weaker USD is also helping Gold reverse yesterday’s losses.
European energy crisis meeting
The upbeat close on Wall Street is transferring to a positive start in Europe, even if the inflation picture is quite different. Gains are likely to be modest, and the mood is expected to remain cautious as the European energy ministers meet to discuss the bloc’s response to the escalating energy crisis in the region. The group could also agree on imposing a price cap on gas imported from Russia.
Surging gas prices and tight supply mean that some countries heavily reliant on Russian gas could be forced into rationing as the colder weather comes. The shutting of industries and huge household bills mean a recession could be difficult to avoid.
The meeting could prove to be bearish for European stocks and the euro if agreements on price caps and gas sharing is delayed. Meanwhile, mandatory electricity reduction could fuel fears of recession. Then there is always the risk that Russia will retaliate if caps are approved for Russian oil and gas.
Canadian jobs data
Looking ahead, the economic calendar is relatively quiet. Canadian jobs data will be in focus in the US session. Expectations are for job creation to recover, with 15K new jobs to be added after two months of falling payrolls, owing to a shortage of workers. Unemployment and wages are expected to tick higher. USD/CAD trades at a weekly low as it heads towards 1.30.
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