Dollar Rises To One-year High On Haven Flows

As we noted yesterday, we would treat any near-term recovery as a short-covering corrective bounce. We see decent chances for equities to resume their declines, here's why.

First, Fed Chair Powell, European Central Bank (ECB) President Lagarde, and Bank of England (BoE) Governor Andrew Bailey shared that inflation remains and could remain elevated for longer than they have estimated. However, they maintained the view that the surge in prices could still prove to be transitory. 

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Their comments added to speculation for earlier than previously expected tightening by the Fed and the BoE. We cannot say the same about the ECB because this Bank made it clear that it can tolerate overshooting inflation and refused to discuss tapering.

The ECB slowed its Pandemic Emergency Purchase Programme (PEPP) purchases at its latest gathering but hinted that it could compensate through other schemes when the program ends. In our view, the ECB would prefer to move late rather than too early.

Meanwhile, the deadlock between Democrats and Republicans persists, increasing the risk of a government default and a shutdown. Senate Democrats have tried to pass a bill that funds the government and prevents a catastrophic default by raising the nation's debt ceiling.

However, Republicans opposed the proposal. The government hits the ceiling on Oct. 18, and lawmakers are due to vote on a potential resolution to fund operations through early December today before funding expires.

A potential breakthrough could provide temporary relief, but it would be far from a permanent solution. Thus, the risk of a possible government shutdown remains well on the table.

Lastly, China's Evergrande failed to make payments yesterday, increasing concerns over a default, which could have a spillover effect on the nation's financial system and the rest of the world. As we noted recently, Evergrande has 30 days past the scheduled date to settle the payments of a specific bond. Otherwise, the bond defaults.

Back to the currencies, the pound was the second loser in line, behind the New Zealand dollar, despite increasing expectations that the BoE could raise its benchmark interest rate in the months to come. The pound has been the best performing one at some point earlier this year, boosted by high expectations over an economic rebound due to the country's vaccination program.

However, it came under intense selling pressure the last couple of days, hitting its lowest since end-2020 against USD on Wednesday, due to concerns about soaring natural gas prices and nearly a week of petrol shortages. People have been panic-buying fuel, as oil firms warned that they don't have enough truck drivers to carry petrol and diesel from refineries to filling stations.

What's more, the correlation between sterling and risk sentiment has increased lately, which leaves the currency vulnerable when investors reduce their risk exposure.

The S&P 500 traded slightly higher after hitting support near the 4355 area, slightly above Tuesday's low of 4345. Overall, the index remains below the last upside support line taken from the low of Mar. 4, and even if the price climbs a bit higher, we still see decent chances for the bears to regain control again at some point soon.

The slide may come after a test near the 4406 level, and could result in another test near the 4355 or 4345 territories. If the bears are willing to drive the battle lower this time around, we could see them aiming for the low of Sept. 20, at about 4305.

To start examining a more robust recovery, we would like to see a move above the inside swing low of Sept. 24, at 4422. This may encourage advances towards Tuesday's high of 4452, the break of which could allow extensions towards Monday's peak, at 4483.