European stocks weakened on Thursday, taking their cue from earlier sell-offs in Asia and the US, with regional investors reacting to the Federal Reserve’s decision and its cautious outlook on the economy. Powell said that while the recovery was looking better than anticipated, “overall activity remains well below its level before the pandemic and the path ahead remains highly uncertain”. At that, he stressed the need for more stimulus from Washington. His call for more fiscal help came as US lawmakers seem unable to find common ground on a new package.
Elsewhere, the Bank of England's Monetary Policy decided to leave the policy rate unchanged at 0.1% at its September policy meeting as expected. The BOE has moved from saying that sub-zero borrowing costs are in the toolkit to being briefed on how to implement them effectively. Dovish comments sent the sterling lower across the board.
Against this backdrop, the UK FTSE 100 index edges lower by 0.44% to 6,052, Italy’s FTSE MIB sheds 1.31 percent to 19,703, France’s CAC 40 declines by 0.84 percent to 5,031, while German DAX 30 sheds 0.74% to 13,157. U.S. stock index futures are falling, pointing to another slide as investors continue to react to a cautious outlook from the Fed.
In currencies, the euro trimmed intraday losses in recent trading after an earlier dip to August 12 lows around 1.1740. Now, the pair is flirting with the 1.18 handle. Despite the correction, downside risks continue to persist in the short-term as dollar demand has picked up slightly after the Fed decision. In other words, the latest decline exposed the 1.17 handle that could be challenged once the pressure reemerges.
GBPUSD fell on the wake of the Bank of England decision as the central bank signaled that it won’t raise interest rates or unwind its bond-buying QE program hastily while the UK economy looks a little stronger than a month ago but the UK economy remains unusually uncertain. The officials also warned that that rising unemployment is a key risk, especially with Covid-19 cases rising. Dovish comments coupled with the persisting Brexit uncertainty added to the pressure surrounding sterling after three days of modest gains. Now, as GBPUSD is back under the 1.29 handle, the focus is on the 200-DMA that should act as support if the pressure intensifies in the short term.
Nathan Lambert, Head of Global FX Analytical Department