LONDON — As we feared, historically September is a volatile month for equities, and this was further emphasized Thursday. Equities were up for most part of the day only to get hit hard later on and gave back the majority of the rally. The lows now from Tuesday are the levels to watch going into the weekend. There was no clear winner in the fight between USD bears and bulls Thursday. For a while, post-ECB, it looked like the dollar was doomed, but the market seems unclear what to make of the USD reversal. The reversal in stocks reinstated the price correlation with the dollar, but to pin the strength of the dollar on this feels like a lazy explanation. It may be better to assume that markets may just continue to consolidate in a choppy manner for the next two months into the US presidential election. The ECB meeting provided two valuable insights as to the Governing Council's thinking. Firstly, ECB officials remain comfortable with their baseline outlook for a gradual recovery and slowly rising inflation. The 2020 GDP forecast was revised +0.7pp to -8.0%, given a smaller-than-expected Q2 contraction and a "strong rebound" in activity. While projections for 2021 and 2022 were revised lower by 0.2pp to 5.0% and 0.1pp to 3.2% respectively, there remains potential for upside revisions as the EU's Recovery and Resilience Facility may be resolved in the European autumn budget round. The outlook for core inflation was revised higher by 0.2pp for each of 2021 and 2022 to 0.9% and 1.1% respectively, with President Christine Lagarde noting that the GC did not foresee deflationary risks ahead. Secondly, the GC signaled only modest concern over the recent appreciation of the Euro, while Lagarde reiterated that the ECB does not target any level of the currency. Given the noise over the last week, market participants had expected slightly stronger language with respect to currency appreciation and so the committee's decidedly neutral approach provided respite to EURUSD, until the turn in risk took the wind out of the currency pair's sails. GBP remains under pressure overnight as Brussels provides Prime Minister Johnson with an ultimatum — scrap the controversial clauses in the UK's internal market bill or risk a chaotic split. As EU's chief Brexit negotiator warned of "significant differences" between the two sides following the latest round of discussions, the European Commission released a statement on the talks, noting that the draft bill would be a clear breach of the Northern Ireland Protocol and that the EU would not be shy in taking substantive legal action. An internal commission analysis paper seen by the FT details potential options for action, such as hauling the UK before the ECJ or launching an arbitration process — either of which could end in fines. Brussels are not the only unhappy faction — UK officials expect a massive fight to even get the internal market bill through Parliament after ministers conceded it violated international law. The EU has given the UK three weeks to drop legislation changing parts of the withdrawal agreement. Then there is the international outrage, with Nancy Pelosi saying absolutely no chance of a US–UK trade agreement passing Congress if the UK violates that international treaty. Elsewhere in the FX market, AUD and JPY are net unchanged on the week, while the NZDUSD is 60pips or so lower and USDCAD is approximately 110 pips higher. USDCAD also another story of the week, as oil prices tumbled below $40, and USDCAD finally broke above of the trend channel, which seemed to have lasted for an eternity. US CPI the key release today. USDJPY – really not much to comment here other than our view remains the same. It's all very uninspiring as we see wild swings all over the place and this pair just does nothing. Maybe we have to wait for next weeks FOMC to see some action. The range remains 105.70/106.30 and as we have said we still like selling rallies. The 92.80 support held yesterday for the DXY EURUSD – essentially Christine Lagarde gave the green light Thursday to continue buying EUR as she said the ECB policy is still not to target the exchange rate and did not seem too concerned about the current level of EURSD. However, we believe they will be concerned if the pair appreciates much more as core inflation has collapsed and think that 1.23/1.25 will be their line in the sand. The pair liked it as we traded a high of 1.1915 but soon this move was reversed as equities turned and cable was slammed lower. Today we have a slew of ECB speakers in Weidmann/Lane/Villeroy/Schnabel and Mersch to see if there's any divergence from Thursday's policy statement and President Lagarde's comments on both the Euro and the economy. Let's not forget it was Lane's comments last time that stopped the Euro rally so it will be interesting to see what he says Friday as we are 100 points lower from when he made the comment. Today 1.1805 is immediate support followed by 1.1750 a break of the latter would open way for 1.1700/1.1680. On the topside 1.1845/65 are the 2 resistance zones followed by 1.1915/20. For now, our view remains the same and we will continue buying dips however, a lot will depend on what happens in cable Friday. GBPUSD – what a terrible week for GBP, EURGBP from 0.8900 to well above 0.9200 and cable from a near high of 1.3500 to the high 1.27's late last night. All of this move has come about as a result of the government's stance on Brexit and their rewriting of the Brexit deal and this is the exact scenario which we have been saying would come to the forefront as the deadline approached. For now, it seems the UK is really trying to test the EU's resolve however, they are not rolling over and the reality of a hard Brexit are very real and not something which would suit both sides. It seems the onus is now on Johnson to back down as he appears to have put himself in not a great position. 1.2810 now remains a big pivot/support area we did break it last night trading to a low of 1.2780 but we did close above it (barely). A break of this support and we are looking at 1.2720 which is the 61.8% retracement off the recent highs on the daily chart. On the topside 1.2875/80 is resistance with a breakthrough here opening 1.2950/90. We feel though that rallies will be met by sellers as this Brexit issue will not disappear anytime soon. FTSE 100 – a weaker pound continued to provide some support to the FTSE 100 in a lacklustre trading session yesterday, while increasing Brexit woes kept higher prints capped with the EU giving the UK until the end of the month to back-down from its controversial exit plan. In line UK GDP data just released along with better than expected production data should boost market sentiment favoring higher prints as we hover around the 6000 mark. DOW JONES – growing doubts surrounding the US stimulus, weaker than expected labor market recovery, increasing US-Sino tensions and a tumbling tech stocks weighed down on the index as it ended yesterday's session in the red with 27700 key support level to direct today's trading as investors look ahead towards Core CPI data out of the US. DAX 30 – no new stimulus measures and an unchanged ECB policy weighed down on European stocks in yesterday's session, with the Dax retreating though still printing above all moving averages on the daily chart. 13135 is the key support level to hold in today's session for bullish momentum to pick up favoring a retest of 13300 resistance level. GOLD – hit our long entry resistance target at 1960 only to erase gains and end yesterday's session in the red as we print below the 200 period SMA on the hourly chart with technicals favoring further downside with 1920 as key support. Fundamentals on the other hand should keep the yellow metal safe haven bid, with Initial Jobless Claims coming in worse than expected and the GOP stimulus bill getting blocked by democrats in the Senate. USOIL – WTI Crude failed to hold above $38 pbl after EIA inventory data registered a surprise rise in U.S. stockpiles which came in at 2.032Mb vs. a previous drawdown of 9.362 Mb and an expected drawdown of 1.335Mb, weighing down on prices as we look towards 37.20 support level to hold to favor higher prints with 38 as the closest resistance target. — the writer is chief market analyst, Squared Financial
