The Week Ahead – ECB Under Pressure To Follow Suit With Tightening

EURUSD consolidates over high inflation expectations

The euro treads water near an 18-month low as inflationary pressures build up. The ECB has pledged to maintain its monetary policy support, arguing that inflation will drop below its 2% target in late 2022.

However, several policymakers have warned that price pressures could settle for a longer time. After the US Fed and the BOE started to normalize their policies, the market could be betting on an all-familiar situation.

What if the ECB realized that it is futile to sit on its hands and switched to a more hawkish stance? The pair is hovering above 1.1190 and its breach could trigger another sell-off. 1.1550 is a major resistance ahead.

GBPUSD recovers as BOE turns hawkish

The sterling bounces swiftly over high-interest expectations. The market is still euphoric after the Bank of England lifted its interest rates to 0.25%.

By firing the first shot among major central banks, the BOE has moved to the forefront of monetary tightening. Traders’ aggressive buying suggests they are pricing in more hikes to come in 2022.

Additionally, the UK government’s new fiscal support for hospitality businesses provides a floor for economic recovery at a time when the pandemic situation remains unclear. The pair has found support at 1.3170. A break above 1.3500 could send the pound to 1.3800.

UK OIL rallies on positive Covid news

Brent crude regained some lost ground after positive development on the Omicron front, as recent headlines have battered the commodity.

Contracts exchanging hands between traders taking profit and those buying the dip led to a lack of direction. Nonetheless, overall sentiment remains resilient.

Encouraging vaccine data suggest a milder impact on fuel demand than initially feared. And compounded by the fact that OPEC+ has retained firm control over their output, oil prices may enjoy an effective floor.

65.00 is a critical support to keep the uptrend viable. A break above 82.50 may further extend the rally.

US 500 climbs as Omicron fear subsides

The S&P 500 rallies as sentiment improves across risk assets.

The new variant could turn out to be another reason to take profit on high-flying stocks without fundamentally sapping investors’ confidence. Also, big pharmas’ reassuring messages have raised hopes that governments may not resort to drastic restrictions again.

While the recent sell-off has taken a toll on tech names on Nasdaq, the S&P’s smaller drawdown indicates resilience in blue-chip companies. Investors’ rotation into value stocks may continue to fuel the bullish trend. A break above 4750 may pave the way to 4900. 4550 is a fresh support.