US Open Note – ECB delivers new guidance but no surprises; stocks stay on recovery mode

Risk-aversion fades

Concerns over the Covid delta variant and its potential drag on global growth took a back seat on Thursday, letting risk-sensitive currencies such as the Aussie and the kiwi pare some of Monday’s damage and become the best performers of the day.

Even cryptocurrencies managed to gain positive traction within this spectrum, though whether they could set up any turnaround without Elon Musk expressing his overall support for digital currencies, was still a question.

Earnings optimism overshadows pandemic risks

Rising earnings expectations added to the bullish catalysts ahead of a busy week of tech releases, with industrials and financials leading the gains in the pan-European STOXX 600 index. The German Dax 30 index extended its recovery for the third consecutive day on the back of Siemens and the carmaker Daimler, whose shares soared more than 2.0%.

Wall street futures pointed to a muted opening at the time of writing.

ECB to keep policy settings loose for longer; euro stable

Perhaps the European central bank’s policy statement was another relief for European stocks today. Having raised its inflation objective to a symmetric 2.0% over the medium-term from “below but close to 2.0%” previously, the Bank tweaked its forward guidance in a dovish note to be consistent with its new strategic era.

According to the announcement, the bank will leave interest rates stable at current record low levels “until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon”. Moreover, the pandemic emergency purchase program (PEPP) will be conducted as planned until at least the end March 2022 and as long as the pandemic crisis continues to weigh on the bloc, while the net purchases under the Asset purchase program (APP) will continue at a monthly pace of 20 billion euros and stop shortly before the Bank starts to raise its interest rates. Of note, the principal payments from maturing securities purchased under the APP will be reinvested for an extended period of time past the date when the ECB hikes rates.

In other words, the Bank telegraphed that the current accommodative policy will last for longer even if inflation overshoots moderately above 2.0% for some time. That may not make a big difference to the euro in the short term, but in the long term, it may translate to a weaker euro, especially if other key central banks such as the Fed move forward with their tightening plans.

The ECB’s new forward guidance did not surprise analysts, with euro/dollar pulling immediately back to 1.1779 following a soft pickup to 1.1812. Euro/pound stretched lower to an intra-day low of 0.8549, while euro/yen inched down to 129.73.

US jobless claims hit fresh high; UK data next in focus

Meanwhile in the US, initial jobless claims for the week ending July 19, jumped above the forecast of 360k to 419k – the highest since May 20 – suggesting that challenges in the labor market persist. Dollar/yen came under pressure following the release, drifting towards the 110.00 level. Dollar/Swiss franc remained muted around 0.9180.

Pound/dollar is trading higher for the second consecutive day, reaching a one-week high of 1.3779 ahead of Friday’s UK retail sales and flash Markit PMI figures. Australia will also release its PMI figures early in the Asian session.

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