European events and news dominate as the ECB's main policy settings look set to remain unchanged while drawing every FX trader on the planet's attention to its exchange rate views.
Market-based inflation expectations mean the ECB lacks inflation-boosting credibility relative to the Fed, which might generate a dovish surprise today—at least in terms of verbal intervention if not policy action itself.
Growing concerns around the outcome of Brexit negotiations provides a gnarly background and could undermine GBP/USD towards 1.25 over the next month. Brinksmanship or not, the next few weeks will more clearly reveal whether a no-deal outcome is increasingly set.
Main views
Stocks
- Since investors have not yet mustered up the courage to fill the Tuesday NASDAQ gap, it suggests the tech sector aftershocks are still reverberating and keeping the Wall of Money sidelined in one of the most interconnected market momentum shifts in some time.
- But the rebound rally might suggest that investors remain confident about the economic prospects where a virus vaccine still provides a pillar of support, albeit with some dents in the armor. But ultimately, they remain codified around the Federal Reserve Boards' redoubtable policy support.
FX
- Traders have hit the pause button, given the ECB meeting's enormity that lies in wait later today.
- I am not sure much has changed in terms of the bigger picture, and EUR/USD is still heading much higher. The market has been busy reducing positioning ever since the failure of 1.20 and had been hoping to buy a dip at 1.17-1.15. Looking at EBS volumes, traders did not jump on the 1.1760 yesterday. So there remains a heightened risk of traders tripping over one another for topside exposure once the ECB risk is out of the way.
- The yuan might continue to rally as traders position long CNH into a potential Chinese CGB's inclusion in WGBI and still-widening yield differentials CGBs vs. USTs
Gold
- I like gold because the FOMC's new policy roadmap unveiled in August solidified expectations that rates will stay low for a long time. But gold traders remain very unsure how much of the new framework will find its way into the FOMC's 15-16 economic projections, suggesting range trade mentality with $1910 providing the ultimate in sticky support.
Oil
- I think the trading houses will start to buy and store oil in floating storage. But for today, it makes sense to trade oil from a risk-on risk-off perspective as oil remains tethered to the hip of broader markets. Still, stock market investors may need to fill Tuesday's NASDAQ gap to get oil prices kicking into a larger gear.