July 22 Market Update: Risk-on Sentiment Returns Ahead of ECB

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July 22 Market Update: Risk-on Sentiment Returns Ahead of ECB

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Despite Wednesday’s quiet economic calendar, the market was not short of sharp moves as risk instruments fought back to reclaim some of the ground lost since the last week. Led by the Canadian dollar, risk FX stayed upbeat throughout as safe-havens shed gains.

FX

The dollar index, after reclaiming the 93 key area, plummeted sharply to 92.75. It stayed around it throughout the Asian session. The Japanese yen was even weaker thus pushing USDJPY to its highest price in a week. 

As for the European currencies, safe-haven Swissy and EUR were downbeat. However, the more overwhelming dollar weakness fueled a EURUSD rebound off 1.175 (lowest since April 5) to the 1.18 psychological level where it remained throughout the Asian session. ECB will be eyed later in today’s London session. In contrast, USDCHF fell over 50 pips from 0.922. 

CAD was the biggest mover yesterday, largely influenced by a quick recovery in the oil market. Aussie and NZD also had a good share of the brighter market mood. As a result, USDCAD suffered over 2% setback (-260 Pips) while AUDUSD and NZDUSD jumped over 1% each. 

Commodities

The higher US bond yield weighed on Gold. The yield was up over 14% thus pressuring Gold to break below the 1800 key support. But the yellow metal quickly climbed above. However, the downside risk remains high as 1800 looks fragile. 

Meanwhile, after plummeting to $65 (-15% from the recent high), WTI is now off to $70.5 following an over 8% recovery in the last 36 hours. 

Bitcoin

Elon Musk intensified BTC recovery on Wednesday after some optimistic comments. The flagship crypto hit $30,000 on Tuesday but has found support in the same area. BTC gained 9% on Wednesday to hit $33,000 which relieved investors’ concern. A potential rally to $36,000-38,000 could follow as the price stays within the near 3-month range. 

Major Risk Drivers to watch out for

The ECB Day: The ECB monetary policy statement will be the most-watched event on Thursday. With the recent breakout of the Covid 19 new variants, the export-dependent bloc might come out all dovish. In the last meeting and recent statements from President Lagarde, inflation is allowed to hover above 2% while the bank didn’t see any reason to tighten monetary policies or taper asset purchases until 2022. Euro will most likely not be saved today as a dovish ECB with the current Covid and market situation would most likely force it lower. That’s the market expectation. However, a sway from that especially an unlikely hawkish ECB asset taper clues would shoot the Euro to the moon. 

Covid-19 Delta Variant – Still rampant. Still deadly. It shattered the market last week and Monday. The recovery from Tuesday is a result of optimistic claims by vaccines producers and the market’s trust in the policymakers. Still a major concern for traders and investors.

Brexit – Are you surprised the market still worries about Brexit after last December’s final resolution? The EU has rejected UK’s appeal to alter the Northern Ireland protocol. The NI protocol was the biggest barrier during negotiations and even after a deal was struck, the UK wants renegotiation. Together with rising Covid deaths in the UK, the NI issue pressured the GBP on Monday. The Sterling has been fighting back pretty well since Wednesday. However, traders and investors will continue to monitor Brexit NI protocol development.  

Today’s Forecast

Wednesday’s trends will most likely continue across different asset classes. A prolonged risk-on sentiment is expected to force risk assets like the equities, oil, AUD, NZD and CAD to the upside while pressuring JPY and USD further downside. GBP should mount higher but the EUR will be at the mercy of the ECB decision today. Merging weak currencies with strong currencies should give traders the best pairs to trade and the most likely short-term direction.

ECB Trades: If the ECB comes out dovish as expected, we should see shorts triggered on EURGBP, EURAUD, EURCAD and EURNZD. The best trades on a hawkish or less-dovish-than-expected ECB will be Longs on EURUSD and EURJPY. 

Disclaimer: This communication is for informational purposes only and should not be viewed as any form of recommendation as to a particular course of action or as investment advice. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This communication has been prepared based upon information, including market prices, data, and other information, believed to be reliable; however, TigerWit does not warrant its completeness or accuracy. Trading CFDs involve risk and can result in loss of capital.

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