Doves take flight but will the FOMC join the flock?

US equities rose a bit Thursday, S&P up 0.2%. US10Y yields fell 1bp to 1.28%. More significant falls in rates through Europe after the ECB's July meeting saw no change in PEPP commentary.

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There was a surprising jump in US jobless claims last week, up to 51k to 419k, and coinciding worryingly with the payroll survey week. But a significant rise in Michigan points to potential auto sector re-tooling, which can influence seasonal factors this time of year.

The ECB meeting failed to shake the currency trees, with the EURO unable to break out from the current range. Two critical changes from the Strategy Review: (1) The introduction of a 2% symmetric inflation target and (2) the commitment to forceful or persistent policy easing when the effective lower bound is nearby (as it is at the moment). The ECB has incorporated these into forwarding guidance, sending a dovish message on rates: no hikes until the ECB "sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon"; in other words: when 2% inflation is 'near and durable.'

Forex

Two things matter of the US dollar. First, the direction for global risk sentiment, which will dictate the pace of US haven demand. And the second, the Fed, could shift the rates needle in either direction at next week's monetary policy meeting depending on how forcefully the US central bank commits to and earlier than December taper.

If they hint at reducing QE sooner than expected ( December), the US dollar could surge.

In the meantime, we should expect choppy range trade as the dollar shifts with the ebbs and flows of risk sentiment. After all, financial conditions are loose, and the S&P 500 is close to its all-time high. Still, there could be a more remarkable penchant for currency traders to fade any further dollar weakness, with half of the street thinking a dovish outcome at the July 28 FOMC meeting unlikely in response to the growing Delta variant beyond outlining downside risks to activity.

Still, range trading could dominate ahead of next week's key FOMC, but with a dovish tilt to the ECB's forward guidance, the EURO could remain one of the market's keen short trades and funder currency. 

EURUSD interest was limited around the ECB announcement and press conference yesterday. The nervous price action suggests risk appetite and core conviction are both on the lower end of the band, but with the ECB confirming a dovish stance, the topside potential for the euro seems capped for now. A break of 1.1750 for EURUSD is crucial for short-term momentum and an eventual move towards the year's low of 1.17

The Pound is still trading near the top of its recent range despite MPC Broadbent providing the third set of reasonably dovish remarks from the Bank of England in a week.

UK consumer confidence data from July rebounded to -7, from -9 in June, with decent gains in components indicating increasing positivity regarding household’s financial situations and attitudes towards making larger ticket purchases as restrictions ease and pent-up savings are potentially deployed.

The UK is the key country to watch in gauging whether global risk sentiment improves in response to the Delta variant. At the front edge of an experiment, it is at the forefront of breaking the link between new COVID cases and overrunning hospital capacity. The numbers are on the UK's side so far, where deaths remain low relative to a new case. But much can happen in the weeks ahead.

Gold

Not unexpectedly, ahead of next week’s FOMC meeting, gold remains range-bound,

Similar to most assets, Precious metals bounced on the back of better risk sentiment. The rally in oil seems to have been the catalyst as it pushes inflation expectations higher, with equities confirming the mood may not be as bad as it appeared earlier in the week.

But range trading proclivities look to be the order of the day, especially heading into the weekend with speculators unlikely to load up on too much risk in either direction ahead of next week key FOMC

Gold’s 20-day rolling correlations with equities and base metals continue to be positive, suggesting that the market remains focused on monetary policy signals.

The Fed maintaining a dovish stance in July should keep gold supported, in addition to some safe-haven interest amid renewed COVID concerns. However, unless economic data deteriorates and the outlook turns negative.

Still, the market should remain somewhat jittery, though, as a fair amount of divergence in the way lockdown rules are being relaxed across the world might make it hard for commodity assets to rally steadily.