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• German inflation dips to 6.1%

The data calendar is light on Friday and EUR/USD is trading at 1.0707 in Europe, up 0.09%. There are no tier-1 events out of the eurozone or the US, which means we can expect subdued movement from the euro for the remainder of the day.

The euro is poised to record a losing week for an eighth straight time. The euro has plunged about 500 points during that time, as the US dollar thrives over concerns that the Fed may have to keep hiking in response to the resilient labour market. The currency continues to struggle at 3-month lows and there aren’t any encouraging signs that the downturn is about to change.

The economic outlook in the eurozone remains weak. Recent eurozone numbers have been soft and Germany hasn’t resembled the locomotive which could always be trusted to lift the eurozone economy. German PMIs pointed to contraction in the services and manufacturing sectors in August, and today’s inflation report was a reminder that the largest economy in Europe is grappling with high inflation and weak growth.

German CPI remained unchanged in August for a third straight month. On a yearly basis, CPI was confirmed at 6.1% y/y, down a notch from 6.2%, while core CPI remained unchanged at 5.5% y/y. Food and energy prices rose but there was a bit of good news as services inflation ticked lower to 5.1%, down from 5.2% in July.

The ECB meets next week and it remains unclear what Lagarde & Co. will decide. Inflation, which is at 5.3%, remains much higher than the ECB target of 2%. The ECB wants to lower inflation but further rate increases could tip the weak economy into a recession. The markets have priced in a pause at the September meeting at around 70%, which means that a rate hike still remains on the table despite weak economic conditions..

EUR/USD Technical

• EUR/USD is testing resistance at 1.0716. Above, there is resistance at 1.0831
• There is support at 1.0658 and 1.0593

Daily Pivots: (S1) 1.0677; (P) 1.0705; (R1) 1.0723; More...

Intraday bias in EUR/USD stays neutral for consolidation above 1.0685 temporary low. Stronger recovery cannot be ruled out, but outlook will stay bearish as long as 1.0944 resistance holds. Below 1.0685 will resume the fall from 1.1274 to 1.0609/34 cluster support.

In the bigger picture, fall from 1.1274 medium term top is seen as a correction to up trend from 0.9534 (2022 low). Deeper decline would be seen to 1.0634 cluster support (38.2% retracement of 0.9534 to 1.1274 at 1.0609). Strong support could be seen there, at least on first attempt, to bring rebound. Yet, medium term outlook will be neutral for now, as long as 1.1274 resistance holds. However, sustained break of 1.0609/34 will raise the chance of bearish trend reversal, and target 61.8% retracement at 1.0199.

Daily Pivots: (S1) 1.2441; (P) 1.2476; (R1) 1.2506; More...

No change in GBP/USD's outlook as consolidation continues above 1.2443 temporary low. Stronger recovery cannot be ruled out. But upside should be limited by 1.2618 support turned resistance. Below 1.2443 will resume the fall from 1.3141 to 100% projection of 1.3141 to 1.2618 from 1.2799 at 1.2276.

In the bigger picture, fall from 1.3141 medium term top is seen as a correction to up trend from 1.0351 (2022 low). Deeper decline would be seen to 38.2% retracement of 1.0351 to 1.3141 at 1.2075. Strong support would be seen there to bring rebound on first attempt. But outlook will be neutral at best as long as 1.3141 resistance holds, and consolidation from there is set to extend, until further development.

Daily Pivots: (S1) 0.8911; (P) 0.8926; (R1) 0.8942; More....

No change in USD/CHF's outlook as consolidations continue below 0.8943 temporary top. Another retreat cannot be ruled out. But further rally is expected as long as 0.8743 support holds. On the upside, above 0.8943 will resume the rally from 0.8551 to 0.9146 cluster resistance next.

In the bigger picture, rebound from 0.8551 medium term bottom is currently seen as a correction to the downtrend from 1.0146 (2022 high). Further rally would be seen to 0.9146 cluster resistance (38.2% retracement of 1.0146 to 0.8551 at 0.9160). Strong resistance could be seen there to limit upside, at least on first attempt.

Daily Pivots: (S1) 146.93; (P) 147.40; (R1) 147.76; More...

No change in USD/JPY's outlook as consolidation continues below 147.88. Intraday bias remains neutral first. While deeper retreat could be seen, outlook will stay bullish as long as 144.43 support holds. On the upside, above 147.88 will resume larger rally from 127.20, to retest 151.93 high.

In the bigger picture, overall price actions from 151.93 (2022 high) are views as a corrective pattern. Rise from 127.20 is seen as the second leg of the pattern and could still be in progress. But even in case of extended rise, strong resistance should be seen from 151.93 to limit upside. Meanwhile, break of 137.22 support should confirm the start of the third leg to 127.20 (2023 low) and below.

The Canadian labour market added 39.9k positions in August, with full-time employment up 32.2k and part-time employment up 7.8k.

The unemployment rate was unchanged at 5.5% and the participation rate dropped 0.1 percentage point to 65.5%.

Employment by sector exhibited the rubber band effect, with gains in professional, scientific and technical services (+52k) and construction (+34k) offsetting losses in prior months. Same for educational services (-44k), which had strong gains prior.

Lastly, total hours worked were up 0.5% month-on-month and wages were up 4.9% year-on-year (vs 5.0% in July).

Key Implications

The job market is keeping everyone guessing. While the positive job gain provided an offset to weakness in prior months, the population boom (+103k!) is causing labour force growth (+54k) to outpace hiring. The number of unemployed workers has now grown by 137.6k over 2023. As we highlighted in our recent job market outlook, there are many ways the once high-flying labour market can come back down to earth. So far, it has been a smooth transition. But this will be no easy task, and we expect turbulence in the months ahead.

Bank of Canada Governor Tiff Macklem spoke yesterday about the clear evidence that past interest rate hikes are working to slow the economy. While the evidence became a little less clear today, when we look under the surface, the story still holds. Consumer spending is slowing under the weight of 475bps in rate hikes over the last 18 months, and the real estate market is rolling over again after the BoC's June/July rate hikes. Given that markets are pricing a 50/50 chance of another BoC hike this year, it is clear that market participants are still looking for more evidence of an economic slowdown.

Daily Pivots: (S1) 1.3648; (P) 1.3671; (R1) 1.3711; More....

Intraday bias in USD/CAD is turned neutral with today's retreat, and some consolidations could be seen below 1.3693. But the favored case is still that correction from 1.3976 has completed at 1.3091. Further rally is expected as long as 1.3488 support holds. Above 1.3693 will resume the rally from 1.3091 to 1.3860 resistance, and then 1.3976 high.

In the bigger picture, price actions from 1.3976 are viewed as a corrective pattern only. Upon completion, rise from 1.2005 (2021 low) would resume through 1.3976. Next target is 61.8% projection of 1.2005 to 1.3976 from 1.3091 at 1.4309. For now, this will remain the favored case as long as 55 D EMA (now at 1.3436) holds.

Canadian Dollar is having a notable uplift in early US session, propelled by stronger than expected employment data that underscores a persistently robust and tight labor market scenario in the country. The revelations from the data could potentially pose hurdles in the path of Canada's disinflation journey, a process which, according to BoC governor Tiff Macklem, has already slowed. Despite BoC's decision to maintain rates unchanged earlier this week, the potential for future hikes remains, especially if the tight labor market persists and threatens the disinflation progress.

While Canadian Dollar displayed strength, US Dollar seemed to be retracting some of its recent gains, landing it among the day's underperformers. This setback for the greenback is potentially a mere digestion of its near-term ascents. Yen, after momentarily benefiting from Japan's verbal interventions, also showed signs of softening. Across the Atlantic, Euro recorded modest declines against its European counterparts. This slip can be attributed to anticipations of economic contraction in Germany - the Eurozone's economic powerhouse - this year, as forecasted by a leading German research institute.

Technically, EUR/CAD's fall from 1.4822 resumes after the Canadian job release. This decline is seen as the third leg of the consolidation pattern from 1.4879. Deeper fall is expected as long as 1.4661 resistance holds, to 1.4482 support, or further to 100% projection of 1.4879 to 1.4482 from 1.4822 at 1.4425.

In Europe, at the time of writing, FTSE is up 0.11%. DAX is down -0.07%. CAC is up 0.34%. Germany 10-yaer yield is down -0.0005 at 2.611. Earlier in Asia, Nikkei dropped -1.16%. China Shanghai SSE dropped -0.18%. Singapore Strait Times dropped -0.58%. Japan 10-year JGB yield dropped -0.0071 to 0.651.

Canada employment grew 39.9 in Aug, unemployment rate steady at 5.5%

Canada employment grew 39.9k in August, well above expectation of 20.0k. Unemployment rate was unchanged at 5.5%, below expectation of 5.6%, stabilized after three consecutive monthly increases. Employment rate fell -0.1% to 61.9%.

Average hourly wages rose 4.9% yoy, down from July's 5.0% yoy. Total hours worked rose 0.5% mom, 2.6% yoy.

Germany poised for mild economic contraction in 2023, DIW reports

Germany stands on the brink of being the only major economy to register a contraction in 2023, with German economic research institute, DIW, projecting a -0.4% dip in the nation's economic output for the year. This downturn is primarily attributed to sluggish domestic consumption and a falter in export dynamics, exacerbated by a slowed Chinese economy.

Looking forward, however, the institute holds a more positive outlook, forecasting a steady 1.2% growth in both 2024 and 2025. Geraldine Dany-Knedlik, the co-head of forecasting and economic policy at DIW, envisages that a pronounced increase in wages and salaries would spur household expenditure, kickstarting a recovery phase.

Timm Bönke, also a co-head at the DIW's forecasting department, anticipates a notable improvement in the consumer sentiment owing to a substantial dip in inflation rates in the forthcoming period. Households will be encouraged to enhance their spending, propelled by improved financial conditions and a potentially steadier inflation environment.

Japan cash earnings growth slows to 1.3% yoy, real wages down for 16th month

In July, Japan experienced slowdown in growth of labor cash earnings, recording increase of 1.3% yoy, a figure notably below expectation of 2.4% yoy. This decline comes in the wake of a 2.3% yoy surge in June and a 2.9% yoy hike in May.

Drilling down into the details, while the base annual salary grew 1.6% yoy, outpacing June's 1.3% yoy rise, overtime pay experienced a reduced uplift of 0.5% yoy, a significant deceleration from the 1.9% yoy in June.

One of the more concerning revelations is the continued drop in real wages, which adjusted for inflation, decreased by -2.5% yoy, a deepening from June's -1.6% yoy decline. This marks the 16th consecutive month of falling real wages, spotlighting inability of salaries to keep pace with escalating prices, thereby exacerbating the financial strain on households.

Corroborating this trend is separate data published earlier this week which highlighted a pronounced drop in household spending in July, plummeting -5.0% yoy, marking its most substantial decline in close to two and a half years.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.3648; (P) 1.3671; (R1) 1.3711; More....

Intraday bias in USD/CAD is turned neutral with today's retreat, and some consolidations could be seen below 1.3693. But the favored case is still that correction from 1.3976 has completed at 1.3091. Further rally is expected as long as 1.3488 support holds. Above 1.3693 will resume the rally from 1.3091 to 1.3860 resistance, and then 1.3976 high.

In the bigger picture, price actions from 1.3976 are viewed as a corrective pattern only. Upon completion, rise from 1.2005 (2021 low) would resume through 1.3976. Next target is 61.8% projection of 1.2005 to 1.3976 from 1.3091 at 1.4309. For now, this will remain the favored case as long as 55 D EMA (now at 1.3436) holds.

Economic Indicators Update

Canada employment grew 39.9k in August, well above expectation of 20.0k. Unemployment rate was unchanged at 5.5%, below expectation of 5.6%, stabilized after three consecutive monthly increases. Employment rate fell -0.1% to 61.9%.

Average hourly wages rose 4.9% yoy, down from July's 5.0% yoy. Total hours worked rose 0.5% mom, 2.6% yoy.

Full Canada employment release here.

GBPUSD is taking a breather at 1.2500 zone as larger bears face headwinds on approach to pivotal 200DMA support (1.2425).

Bounce from Thursday’s new multi-week low (1.2445) was so far limited and unable to sustain gains above 1.2500 mark, suggesting that bears hold grip.

Weekly close below cracked 100WMA (1.2521) will deliver initial bearish signal, with close below 1.2482 (Fibo 23.6% of 1.0348/1.3141) to strengthen bearish structure for break through 200DMA, which would spark fresh acceleration and expose next key support at 1.2307 (May 25 trough).

BOE Governor Bailey said that the central bank is much nearer to the top of its tightening cycle, although with possibility further hikes if inflation remains stubbornly high, adds to pound’s growing negative sentiment.

Near-term action is expected to remain biased lower while capped by falling 10DMA (1.2586).

Res: 1.2482; 1.2500; 1.2521; 1.2586.
Sup: 1.2445; 1.2425; 1.2368; 1.2307.