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• Euro slips below 1.08 but recovers
• German GfK consumer climate falls
• US consumer confidence and job openings decelerate

The euro fell below the 1.08 line on Tuesday after a weak German consumer confidence report but has recovered in the North American session after soft US data. EUR/USD is currently trading at 1.0840, up 0.20%.

Germany is the eurozone’s largest economy and is considered the powerhouse of the bloc. That has changed dramatically as the German economy is looking more like a dead weight than a locomotive. With the economy sputtering, it’s no surprise that German business and consumer confidence is in the doldrums.

Germany’s GfK Consumer Climate is forecasting a reading of  -25.5 for September, down from the revised downward figure of -24.6 in August and below the consensus estimate of -24.3. This was the lowest reading since May, with consumers pointing to high inflation and concern about potential unemployment as key reasons for concern. Last week, German Ifo Business Climate fell in August for a fourth straight month to 85.7, down from an upwardly revised 87.4 and shy of the market consensus of 86.7 points.

German CPI expected to fall to 6.0%

Germany will release the July inflation report on Wednesday. Inflation is currently at 6.2% and is expected to dip to 6.0%, considerably higher than eurozone inflation which is at 5.3%. The ECB is committed to bringing inflation back to the 2% target but it’s unclear if the central bank will raise rates for an eighth straight time or take a pause and monitor how the economy is performing. The benchmark rate is relatively low at 3.75%, but the eurozone and German economies aren’t in the best shape and higher interest rates would raise the likelihood of a recession.

In the US, it was a bad day at the office.  The Conference Board Consumer Confidence Index fell sharply to 106.1 in July, compared to 116.0 in August. JOLTS Jobs Openings slowed to 8.82 million in July, down from 9.16 million in June and well off the estimate of 9.46 million. The data is further evidence that the US economy is slowing as high rates continue to filter through the economy.

EUR/USD Technical

• EUR/USD is testing support at 1.0830. The next support line is 1.0731
• There is resistance at 1.0896 and 1.0996

US Conference Board Consumer Confidence fell from 114.0 to 106.1 in August, well below expectation of 116.5. Present Situation Index fell from 153.0 to 144.8. Expectations Index fell from 88.0 to 80.2.

Dana Peterson, Chief Economist at The Conference Board:

• "Consumer confidence fell in August 2023, erasing back-to-back increases in June and July."
• "Write-in responses showed that consumers were once again preoccupied with rising prices in general, and for groceries and gasoline in particular.
• "Assessments of the present situation dipped in August on receding optimism around employment conditions
• "Expectations for the next six months tumbled back near the recession threshold of 80, reflecting less confidence about future business conditions, job availability, and incomes."

Full US Consumer Confidence release here.

Markets

The economic calendar turned somewhat more interesting today but the most critical data points (US JOLTS job openings and Conference Board consumer confidence) unfortunately are scheduled for release after this report. We did receive the June US house prices in time. They rose for a fifth month in a row by 0.92% m/m, more than the 0.80% expected. The yearly measure still stood at a negative -1.17% but that was less than the -1.73% in May, thereby snapping a protracted decline that started in April 2022. Some German data is definitely worth mentioning as well, even as markets didn’t quite pick it up. The federal statistical office said wages in the country grew 6.6% in the second quarter, up from 5.6% in Q1 and the fastest pace since data collection began in 2008. With the latest inflation number (July) coming in at 6.5%, real wage growth was positive for the first time since 2021. With every further inflation deceleration (6.3% in August, according to consensus for Thursday’s publication), real wage growth turns more positive … potentially helping consumer spending to rebound … which could thwart the disinflationary process. It’s a catch 22 that requires a restrictive monetary policy for long enough to escape from.

Turning to FI and FX markets now. US yields dipped lower in Asian dealings with the front end again outperforming before hitting a bottom early in the European session. The 2-y yield, even though still losing about 2.7 bps, holds north of the symbolic 5% barrier. Other tenors moved higher before paring gains as the US entered. German yields showed a similar pattern with early (yet minor) losses being erased to trade more or less unchanged compared to yesterday’s close. The front underperforms. Gilts underperform global peers with UK yields adding 3.1-5.8 bps across the curve on the first UK trading day of the week. Sterling doesn’t profit with EUR/GBP hovering around opening levels in the 0.858 area. The dollar is trading with a minor strengthening bias, gaining against all G10 peers. EUR/USD flipped opening gains for losses to trade near the recent lows of 1.0786. The trade-weighted index rises from 103.95 to 104.33 and seems to be preparing for a new attack on the May high (104.7). USD/JPY already broke beyond previous resistance of 146.63, surging to 147.24.

News & Views

Czech GDP in the April-June quarter rose by 0.1% Q/Q, a more refined estimate of the Czech statistical office showed. Activity was still 0.4% lower Y/Y. Quarterly growth was supported by a 3.4% Q/Q growth in fixed capital formation as investments in transport equipment, ICT and other machinery and equipment gained rebounded. Dwelling investment and other buildings and structures decreased. Inventories contributed negatively. Final consumption expenditure rose 0.3% Q/Q. It was the first time in six quarters for this factor to contribute positively. Government consumption rose 0.3% Q/Q. Exports (-0.5% Q/Q) and imports (-1.2% Q/Q) both declined. The CNB on its website said that Q2 growth was slightly stronger than its latest projection (-0.7% Y/Y expected). It indicated that the modest quarter consumption growth was fostered by gradually decreasing inflation. Also gross fixed capital formation was better than CNB expected. The CNB states that the economy already emerged from a shallow recession. The koruna today trades little changed near 24.15. Czech money market rates hardly reacted. The Czech 2-y yield even eases marginally further to 5.38% as the market still sees a potential start of the CNB easing cycle in Q4. Czech Central bank governor Michl today reiterated that inflation is still at unacceptable high levels.

The National Bank of Hungary today as expected further reduced to overnight deposit rate to 14%. The official base rate was left unchanged at 13% as is this is seen as keeping monetary conditions sufficiently tight. MNB still expects that domestic CPI inflation and core inflation will continue to decrease at a rapid pace in coming months. It also sees real interest rates to move in positive territory soon. The NMB stressed the faster an expected improvement in the external balance. Looking ahead, the bank repeated that that financial market stability is key to achieving price stability. In the current environment, a cautious and gradual approach is warranted. At the press conference, Deputy Governor Virag also said that the MNB will simplify the MNB toolkit when the 1 day rate will be aligned with the base rate. The forint gains modestly after the decision to currently trade near EUR/HUF 382.15.

The Japanese yen continues to lose ground on Tuesday. In the North American session, USD/JPY is trading at 147.26, up 0.50%. The yen broke above the 147 level for the first time since November 2022.

Tokyo says battle with inflation has reached turning point

Just a few days after Bank of Japan Governor Kazuo Ueda’s speech at the Jackson Hole summit, the Japanese government released a potentially significant white paper. To say that the two events were contradictory might be a stretch, but they appeared to present a very different stance towards inflation.

At Jackson Hole, Ueda stuck to the BoJ’s well-worn script that underlying inflation remains lower than the BoJ’s target of 2%. As a result, the BoJ has insisted it will stick with the current ultra-easy policy until there is evidence that inflation remains sustainably above target. The white paper sounded a different tone, noting that “Japan has seen price and wage rises broaden since the spring of 2022. Such changes suggest the economy is reaching a turning point in its 25-year battle with deflation” and “a window of opportunity may be opening to exit deflation.”

Could this be a turning point that leads to a tightening in policy? The government hasn’t acknowledged that deflation is over, despite the fact that core inflation has remained above the 2% target for 16 successive months. Wages are also on the rise after companies significantly bumped up employee wages earlier in the year.

The white paper spoke of the need to “eradicate the sticky deflationary mindset besetting households and companies”, but I wonder if the BoJ also suffers from the same mindset, even with inflation remaining above target month after month. Investors should remain on guard for a shift in central bank policy, especially if the yen continues to head towards the key 150 level.

USD/JPY Technical

• There is resistance at 147.19 and 147.95
• 146.30 and 145.10 are providing support

European currencies, along with the yen and commodity currencies, came under pressure again last week. After Jerome Powell's hawkish talk at the Jackson Hole symposium, GBP/USD fell below 1.2600, EUR/USD broke support at 1.0800, and USD/JPY came close to 2023 extremes near 147. In the event of a breakout of these levels, the upward movement of the USD may increase sharply, which will lead to exponential growth. Conversely, a rebound from current levels could lead to a full-blown correction in almost all directions.

GBP/USD

The British currency, which is sensitive to the risky mood of market participants, broke through important support at 1.2600 last week and set a new August low at 1.2540. Jerome Powell's statements about the Fed's readiness to further raise the rate, if necessary, sharply strengthened the dollar, contributing to the collapse of GBP/USD. Nevertheless, at the beginning of the current five-day trading period, buyers of the pound managed to return the pair above 1.2600 and at the moment they intend to test 1.2700. If bulls meet serious resistance near the range of 1.2600-1.2700, another downward impulse may occur, the target of which will be a test of 1.2400-1.2200. If the pair gains a foothold above 1.2700, the resumption of growth to 1.3000-1.3100 may happen.

EUR/USD

The EUR/USD currency pair managed to get back above 1.0800 despite the break of this support last week. The pair's downward momentum is not as strong as in the case of the pound, and if the current situation does not change, euro buyers may be able to seize the initiative and test 1.0900 again. This level is very important for further pricing of the pair. A sharp rebound from this resistance could help bears break 1.0700 and move down towards 1.0600-1.0500.

From the point of view of fundamental analysis, today at 13:00 GMT+3, we are waiting for the publication of economic forecasts for the European Union. At 17:00 GMT+3, traders will pay attention to the data on the US CB consumer confidence for August.

XAU/USD

Despite a sharp increase in the US dollar last week, precious metals managed to find significant support and form reversal bullish combinations on higher timeframes. So, in the XAU/USD pair, we observe a bullish reversal bar near 1,900.00. The behaviour of the price at the nearest resistance, which is located near the alligator lines on the daily timeframe, will be important for the development of a further upward correction.

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Daily Pivots: (S1) 1.0773; (P) 1.0801; (R1) 1.0812; More...

EUR/USD is still bounded in consolidation above 1.0764 and intraday bias stays neutral. Outlook stays mildly bearish as long as 1.0929 resistance holds. Below 1.0764 will resume the fall from 1.1274 to 1.0609/34 cluster support next.

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.

Daily Pivots: (S1) 1.2531; (P) 1.2576; (R1) 1.2593; More...

Intraday bias in GBP/USD stays neutral as consolidation continues above 1.2546. Near term outlook remains mildly bearish as long as 1.2799 resistance holds. On the downside, break of 1.2546 will resume whole fall from 1.3141 to 61.8% projection of 1.3141 to 1.2618 from 1.2799 at 1.2476. Firm break there could prompt downside acceleration to 100% projection at 1.2276.

In the bigger picture, for now, 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) 0.8779; (P) 0.8819; (R1) 0.8839; More....

USD/CHF is still extending the consolidation pattern below 0.8874 and intraday bias stays neutral at this point. Further rally is expected as long as 0.8758 support holds. On the upside, break of 0.8874 will resume the rise 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. Nevertheless, medium term outlook is neutral at best as long as 0.8551 holds, until further developments.

Daily Pivots: (S1) 145.83; (P) 146.30; (R1) 146.52; More...

USD/JPY's rally accelerates to as high as 147.63 today so far. The strong break of 61.8% projection of 129.62 to 145.06 from 137.22 at 146.76 indicates solid underlying momentum. Intraday bias stays on the upside, and the rise from 127.20 should target a test on 151.93 high. On the downside, below 146.26 minor support will turn intraday bias neutral first. But near term outlook will remain mildly bullish as long as 144.52 support holds.

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.

In a relatively uneventful trading day, the notable standout is the rally in the USD/JPY currency pair, which has now reached its highest level this year. The bullish momentum for Dollar against Yen raises questions about whether traders are positioning themselves ahead of crucial employment and inflation data set to be released from the US this week. An upside surprise in either of these indicators could add fuel to expectations for another Fed rate hike this year, even if not as soon as September. Meanwhile, Japanese Yen is facing some headwinds following a higher-than-expected unemployment rate in Japan, which has undoubtedly put some pressure on the currency.

On the flip side, despite hawkish comments from incoming RBA Governor Michele Bullock, Australian Dollar is showing signs of weakness. Its near-term recovery appears to be stalling, raising prospects for further downside. Market participants will closely watch the upcoming monthly CPI data from Australia to gauge the currency's direction. New Zealand Dollar trails as the third weakest for the day, while Swiss Franc and Canadian Dollar claim spots as the second and third strongest currencies, respectively. Both Euro and Sterling are delivering a mixed performance.

On the technical front, focus will shift to whether the U.S. Dollar's rally can gain broader momentum. Key levels to keep an eye on include a temporary low of 1.076 in EUR/USD, 1.2546 in GBP/USD, and a temporary top of 0.8874 in USD/CHF. Simultaneous break of these levels could firmly set the Dollar's tone leading into the highly anticipated non-farm payroll report due on Friday.

In Europe, at the time of writing, FTSE is up 1.44%. DAX is up 0.20%. CAC is up 0.27%. Germany 10-year yield is down -0.0114 at 2.571. Earlier in Asia, Nikkei rose 0.18%. Hong Kong HSI rose 1.95%. China Shanghai SSE rose 1.20%. Singapore Strait Times rose 0.29%. Japan 10-year JGB yield dropped -0.0210 to 0.647.

RBA Bullock sets eyes on inflation, signals possibility of further rate hikes

Incoming RBA Governor Michele Bullock made clear her primary focus would be tackling the country's persistently high inflation. As Bullock prepares to take the helm of RBA on September 18, replacing her current role as deputy governor, her comments carry considerable weight for markets and policymakers alike.

"My first priority is to keep very focused on inflation. Inflation is still too high in Australia. It is coming down and we're forecasting it to continue to come down, but it's still too high," said Bullock.

While she stopped short of providing a timeline for how long interest rates may remain elevated, Bullock did hint at the possibility of additional hikes in the future.

"I'm reluctant to give any sort of predictions on how long interest rates might have to stay high. In Australia's case, all I can say is that we might have to raise interest rates again, but we're watching the data very carefully," she said.

Additionally, Bullock clarified that rate-setting decisions would, for the time being, be made on a "month-by-month" basis until at least next year.

German consumer sentiment slides to -25.5, dashing hopes for a late-year recovery

Consumer sentiment in Germany continues to languish as the GfK Consumer Sentiment Index for September slipped to -25.5, missing market expectations of -24.3 and marking a decline from last month's -24.6.

"The consumer sentiment is currently not showing a clear trend, neither downward nor upward – and that at a very low level overall," stated Rolf Bürkl, consumer expert at GfK.

Adding to the gloom, Bürkl warned, "The chances that consumer sentiment can sustainably recover before the end of this year are dwindling more and more."

He cited "persistently high inflation rates, especially for food and energy supplies," as the main obstacles hindering any meaningful advance in consumer sentiment.

The sub-components of the index painted an equally disheartening picture. Economic expectations in August plummeted from 3.7 to a worrying -6.2, marking the lowest level since last December's -10.3. Meanwhile, income expectations saw a significant drop from -5.1 to -11.5. The propensity to buy, another crucial sub-index, also declined, falling from -14.3 to -17.0.

Japan's unemployment rate up to 2.7%, first rise in four months

Japan's job market showed unexpected signs of weakening in July, as the unemployment rate rose to 2.7%, defying expectations of remaining steady at June's 2.5% level. This marks the first uptick in unemployment in four months. The data reveals that the number of employed workers decreased by -100k during the month, while the ranks of those without jobs swelled by 110k.

Adding to the concern, jobs-to-applicants ratio—a leading indicator of labor market health—dipped to 1.29 in July from 1.30. This is the third consecutive monthly decline, counter to median economist forecasts that predicted the ratio would remain flat. These figures indicate that there were only 129 job openings for every 100 applicants, a metric that is closely watched for signs of labor market tightness or slack.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 145.83; (P) 146.30; (R1) 146.52; More...

USD/JPY's rally accelerates to as high as 147.63 today so far. The strong break of 61.8% projection of 129.62 to 145.06 from 137.22 at 146.76 indicates solid underlying momentum. Intraday bias stays on the upside, and the rise from 127.20 should target a test on 151.93 high. On the downside, below 146.26 minor support will turn intraday bias neutral first. But near term outlook will remain mildly bullish as long as 144.52 support holds.

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.

Economic Indicators Update