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Sterling Down as Risk Sentiment Turns Weaker, Dollar Trying to Rebound

Risk sentiment turns a bit weaker today in the stock markets. But benchmark European and US yields are staging a strong rally. In the currency markets, Aussie is sold off is in delayed reaction to RBA’s dovish tapering, but Canadian is follow closely with selloff in oil price. Sterling is also falling in European crosses, probably in reaction to the government’s plan to raise taxes. On the other hand, Dollar is trying to rebound, other with Euro and Swiss Franc.

Technically, EUR/GBP’s break of 0.8601 resistance suggest resumption of rise from 0.8448 for 0.8668 resistance. We’ll keep an eye on 1.3730 support in GBP/USD and 151.32 support in GBP/JPY. Break of these levels would indicate more Sterling weakness to come. Meanwhile, we’d continue to pay attention 1804.70 support in Gold. Break there could sign a more sustainable rebound in the greenback.

In Europe, at the time of writing, FTSE is down -0.20%. DAX is down -0.11%. CAC is up 0.01%. Germany 10-yaer yield is up 0.0425 at -0.322. Earlier in Asia, Nikkei rose 0.86%. Hong Kong HSI rose 0.73%. China Shanghai SSE rose 1.51%. Singapore Strait Times rose 0.24%. Japan 10-year JGB yield dropped -0.0041 to 0.041.

Germany ZEW dropped sharply to 26.5, global chip shortage caused significant reduction in profit expectations

Germany ZEW Economic Sentiment dropped sharply from 40.4 to 26.5 in September, well below expectation of 30.2. It’s also the fourth consecutive decline. Germany Current Situation index improved form 29.3 to 31.9, below expectation of 33.1. Eurozone ZEW Economic Sentiment also tumbled from 42.7 to 31.3, below expectation of 35.3. Eurozone Current Situation index rose 7.9 pts to 22.5.

“Expectations fell markedly once more in September 2021. Although financial market experts expect further improvements of the economic situation over the next six months, the expected magnitude and the dynamics of the improvements have decreased considerably. Global chip shortage in the automobile sector and shortage of building material in the construction sector have caused a significant reduction in profit expectations for these sectors. This may have had a negative effect on economic expectations,” comments ZEW President Professor Achim Wambach.

Also from Germany, industrial production rose 1.0% mom in July, versus expectation of 0.7% mom.

Eurozone GDP grew 2.2% qoq in Q2, -2.5% below pre-pandemic level

Eurozone GDP grew 2.2% qoq in Q2, revised up from prior estimate of 2.0% qoq. Comparing with same quarter of previous year, GDP grew 14.3% yoy. GDP was -2.5% below the pre-pandemic level of Q4, 2019. Household final consumption expenditure rose 3.7% qoq. Government final consumption expenditure rose 1.2% qoq. Gross fixed capital formation rose 1.1% qoq. Exports rose 2.2% qoq. Imports rose 2.3% qoq.

EU GDP grew 2.1% qoq, 13.8% yoy. Ireland (+6.3%) recorded the sharpest increase of GDP compared to the previous quarter, followed by Portugal (+4.9%), Latvia (+4.4%) and Estonia (+4.3%). Declines were observed in Malta (-0.5%) and Croatia (-0.2%).

From Swiss, foreign currency reserves rose to CHF 929B in Aug. Unemployment rate dropped to 2.9%, matched expectations.

BoE Saunders concerned with continuing with asset purchases

BoE hawk Michael Saunders said he believed that the economy was now close to the pre-pandemic level. He’s worried that continuing with the asset purchase program would cause rise in medium-term expectation.

“I also worry that continuing with asset purchases, when CPI inflation is 4% and the output gap is closed – that is the likely situation later this year – might well cause medium-term inflation expectations to drift higher,” he said.

“Such an outcome could well require a more substantial tightening of monetary policy later, and might limit the committee’s scope to respond promptly the next time the economy needs more stimulus,” he added.

RBA tapers but extends QE, Delta to delay but not derail recovery

RBA kept with its tapering plan and announced to lower purchase of government securities at AUD 7B a week. But the program is extended until at least mid-February 2022, from mid November. At the same time, cash target rate is held at 0.10%. Target for April 2024 Australian government bond yield was also kept at 0.10%.