The Week Ahead: Market Expects Hawkish Shift From ECB

EURUSD recovers as ECB taper pressure grows

The euro bounces back as markets expect a more aggressive stance from the ECB.

Now that growth within the bloc has almost recovered to the pre-pandemic level, the ECB is one of the last major central banks to signal monetary tightening.

While the supply shock could be a one-off factor, the true headache lies in labor shortages which are driving wages higher. Unlike consumer prices, higher labor costs may not be cut back, making what was once thought to be a temporary price rise permanent.

Traders have started to price in tapering expectations as the single currency rises towards 1.1740. 1.1520 is now fresh support.

USDCAD tumbles ahead of BOC decision

The Canadian dollar stays supported by the prospect of a hawkish tone from the Bank of Canada.

Canada’s Finance Minister has announced that there will be no extension of the COVID-19 support programs for companies and individuals. This is a sign that the economic recovery has gained traction.

The inflation rate climbed to an 18-year-high in September. This placed the central bank under the spotlight in the upcoming interest rate decision.

The loonie’s surge across the board suggests that the BOC could front-run the Fed in the tightening cycle. A drop below 1.2260 may push the US dollar towards 1.2000. 1.2500 is the closest resistance.

USDJPY surges on policy divergence

The Japanese yen sank to a four-year low as the BOJ’s ultra-loose monetary policy lingers on.

Despite the fact that Japan’s economic recovery has become more pronounced, the core consumer price index is still below policymakers’ target of 2%. As a result, the Bank of Japan remains reluctant to reduce monetary easing, unlike its US counterpart which has set a clear timeline for tapering.

This divergence may continue to play out to the yen’s detriment. As analysts expect the BOJ to sit on its hands, the pair is hovering under March 2017’s high of 115.40. A pullback is likely to meet strong buying interest around 112.00.

UKOIL supported by rising demand

Brent crude rallies as OPEC keeps a tight lid on supply. The recent power crunch has opened up demand as surging natural gas and coal prices forced generators to switch to oil.

The combination of economic recovery and winter weather could drastically increase consumption. Meanwhile, OPEC+ is carefully controlling the tap flow with gradual output increases.

An unexpected reduction in US stockpiles in the past week also contributes to the bullish case. Overall sentiment remains positive as long as this supply-demand imbalance goes on. Price action is testing October 2018’s high at 86.70 with 79.00 as the first support.