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• Rate cut odds for the December FOMC meeting now stands at 15.1% vs 16% yesterday
• Protection against yen strength rises to a four-month high
• Bearish tones emerging for USD/JPY as top Ichimoku cloud tested

The Japanese yen is catching modest bids here as stocks soften on Microsoft’s disappointing AI outlook and as pressure builds for the BOJ to tighten.

Microsoft’s results were adequate, but that won’t be enough to keep the mega-cap tech/AI trade going.  Profit taking will likely remain the dominant theme for tech, especially if Meta disappoints after the close.  Microsoft’s slowdown with their cloud business and lowering the bar for their AI growth should only trigger a modest pullback.  Microsoft is still winning the AI race and still seems to have a robust long-term outlook.

The BOJ got some solid advice about their yield curve control program from the IMF Chief Economist Gourinchas.  He said, “Our advice for the Japanese authorities is that right now monetary policy can remain accommodating, but it needs to prepare itself for the need to maybe start tightening.”

The clock is ticking on the BOJ and they may want to move away from YCC sooner than later as an abrupt change could cause unwanted market chaos.

Fed

Ahead of the Fed, it seems Wall Street is extremely confident the Fed will be one-and-done.  Fed Chair Powell will argue that one cool inflation report doesn’t mean their inflation fight is almost over and that another rate hike will depend on the data.  The Fed will skip tightening in September and the economic slowdown should allow them to refrain from raising rates in November.  The market is starting to price in rate cuts in December and that will probably be met with a strong rebuttal from Powell.  Powell will say they are not cutting this year and that higher for longer should be the outlook for rates.

Yen

The big trade in FX this week might be the Japanese yen.  Leading up to the BOJ decision, traders are putting on hedges in case Governor Ueda surprises us with a tweak to YCC.  The one-week risk reversals for USD/JPY are now at the lowest levels in four months.  If more hedges keep piling in, that could provide some more short-term strength for dollar-yen.

It might be hard to see significant positioning before the FOMC decision, but if yen strength remains the dominant theme post-Powell, this trade could continue to Friday’s BOJ event.  On a break of the 140.00 level, momentum traders could see prices target 139.14, which is the 38.2% Fibonacci retracement level of the March low to July high move.

Market picture

The crypto market is maintaining a wait-and-see approach, moving in a narrow range after the sell-off on Monday. The markets appear to be waiting for the directions after Fed’s decision.

Bitcoin stuck to its 50-day moving average, trading just above $29.1K. One of the following sharp moves could stop the recent mini-lull, determining the future trend.

A drop under $28.8K would mark the transition to a deeper correction scenario down to $27K, where the 200-week average and the lower boundary of the ascending corridor lie.

However, Bitcoin has about the same chance of returning to growth. We will get more confidence when the price strengthens to $29.7K.

Dogecoin has added over 14% since the beginning of the week on the back of Twitter’s logo change. The rebranding to “X” has increased networking activity and altcoin’s value. Elon Musk promised to make Twitter a financial hub.

News background

Glassnode recorded “unloading” among Bitcoin whales (from 1000 BTC). Since 30 May, the aggregate balance of bitcoins owned by whales, excluding exchange wallets, has decreased by 255k BTC. The monthly rate of decline in the metric (148k BTC) was the fastest in history.

Changpeng Zhao is going to get the Commodity Futures Trading Commission (CFTC) lawsuit against Binance cancelled. The exchange is preparing two motions to quash the CFTC lawsuit filed in federal court in Chicago.

Stablecoin issuers whose reserves consist of derivatives or covered bonds will receive additional regulation, according to a draft of new European Banking Authority (EBA) rules. The document suggests increased capital requirements for such firms if the tokens they issue are deemed “significant”.

YouTube blogger Bitboy Crypto said he remains optimistic about XRP as the coin returns to cryptocurrency exchanges.

Markets

The countdown to a Fed decision most often is a long-drawn yawn with eco data often ignored. Today, even these ’to be ignored‘ data were almost completely absent. US new home sales, to be published after finishing this report for sure won’t break the stalemate. Uncertainty on growth and how much further tightening still to expect from the Fed and the ECB combined with mixed results caused equity investors to stay at bay. European stocks underperform with the EuroSroxx 50 losing 1.5%+. US indices opened about 0.5% lower. The risk-off hardly any impact on US Treasuries. Except for a benchmark change in the 5-y (-2.5 bps), US yields are changing less than 1 bp in a daily perspective. Despite the broader risk-off and recent unconvincing EMU data, German yields ‘rebound’ between 3 bps (30-y) and 5.3 bps (5-y). The German 2-yield (3.10%) is supported by the 3.0% big figure. The 10-y (2.46%) is locked in a tight range near the 2.5% pivot. 10-y Intra-EMU spreads also show only small moves going into tomorrow’s ECB meeting. Greece continues to outperform (-4 bps). In FX markets, the dollar is losing modestly after a solid data driven comeback over the previous 10 days. DXY trades near 101.2. EUR/USD hovers close to  1.1070 from an open near 1.105. The yen outperforms (USD/JPY 140. from an open at 140.9). The risk-off helps, but investors maybe also stay cautious on yen shorts going into Friday’s BoJ meeting. Is there a (small?) chance for the BoJ tweaking its yield curve control. Even if it’s only a tail-risk, the impact if it happens could be big, including for the yen. Quite a divergent performance of CE currencies. The Czech koruna (EUR/CZK 24.05) and the especially Polish zloty (EUR/PLN 4.42) are well bid. The zloty even nears the YTD strongest against the euro. The forint is fighting an uphill battle (EUR/HUF 383.5 from an open below 380). MNB yesterday for the third consecutive month cut the O/N ‘emergency’ depo tender rate by 100 bps to 15.0%. Some forint investors apparently see a declining premium as changing the risk-reward balance.

The main dish for markets of course is the Fed decision and Powell’s press conference. As the MPC in June raised the dots signalling a peak in the target range to 5.50/5.75% and considering Fed comments since then, anything different from a 25 bps hike would be a big surprise. Even with latest payrolls and CPI slightly softer than expected, other data suggest that the US economy is holding resilient and that no recession in imminent. Demand probably stays too strong for the Fed to already feel comfortable that (core) inflation will sustainably return to 2%. In this context, we expect Powell to keep the door open for a further 25 bps step in September (or later) depending on the data. For markets, such a scenario shouldn’t be a big surprise. Even if Powell holds a hawkish tone, it won’t be easy for the 2-y and 10-y to surpass big figures yields at 5.0% and 4.0% respectively. Such a test probably needs solid payrolls (next week) and/or higher than expected inflation (August 10). Given recent good US data (especially compared to EMU), the dollar might stay well bid post-Fed, with EUR/USD 1.1012 (22 June top)/1.10 first next reference.

News & Views

Credit rating agency Fitch raised Brazil’s long-term foreign currency debt rating to BB from BB-, two levels below investment grade. It retains a stable outlook. Fitch is referring to a better-than-expected macroeconomic and fiscal performance amid successive shocks in recent years, proactive policies and reforms for the upgrade. It acknowledges lingering political tensions and said the new leftist Lula government advocates a shift away from the liberal economic agenda of the past governments. But Fitch expects pragmatism and the country’s broader institutional checks-and-balances should prevent radical policy changes. New fiscal rules, even as some have yet to be approved, and major tax reforms should result in an improvement in the in 2023 worsened fiscal position, Fitch said. Underpinning Brazil’s rating today are its large and diverse economy, deep domestic markets and high per-capita income. A flexible exchange rate creates shock-absorption capacity and the country disposes of robust international reserves and a sovereign net external creditor position. Risks mainly arise from high government debt, fiscal rigidities, weak economic growth potential and relatively low governance scores. The Brazilian real reacts stoic to Fitch’s decision. From a broader perspective though, the currency is trading at its strongest level since June 2022. USD/BRL is changing hands around 4.74.

Daily Pivots: (S1) 140.60; (P) 141.17; (R1) 141.47; More...

Intraday bias in USD/JPY remains neutral for the moment. Further rise is mildly in favor with 139.74 minor support intact. On the upside, above 141.93 will resume the rebound from 137.22 to 145.06 first. Firm break there will target 61.8% projection of 129.62 to 127.22 from 145.06 at 146.76 next. On the downside, below 139.74 minor support will bring retest of 137.22 instead.

In the bigger picture, overall price actions from 151.93 (2022 high) are views as a corrective pattern. Current development suggests that the second leg (the rise from 127.20) might not be over yet. 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.

Daily Pivots: (S1) 0.8616; (P) 0.8659; (R1) 0.8681; More...

Intraday bias in USD/CHF remains neutral for the moment. Outlook stays bearish with 0.8818 support turned resistance intact. Break of 0.8553 will resume larger down trend from 1.0146. On the upside, above 0.8599 will resume the rebound towards 0.8818 instead.

In the bigger picture, the break of 0.8756 (2021 low) indicates break out from the long term range pattern. For now, medium term outlook will stay bearish as long as 0.9146 resistance holds. Further fall would be seen to 61.8% retracement of 0.7065 (2011 low) to 1.0342 (2016 high) at 0.8317 next.

Daily Pivots: (S1) 1.1022; (P) 1.1054; (R1) 1.1088; More...

Intraday bias in EUR/USD stays neutral at this point. Near term outlook will stay bullish as long as 1.1011 resistance turned support holds. Above 1.1146 minor resistance will turn bias back to the upside for retesting 1.1274 high first. However, firm break of 1.1011 will argue that larger correction is underway. Deeper fall would then be seen to 1.0832 support next.

In the bigger picture, rise from 0.9534 is still expected to continue as long as 1.1011 resistance turned support holds. Decisive break of 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 will solidify the case of bullish trend reversal and target 1.2348 resistance next. However, firm break of 1.1011 will indicate rejection by 1.1273 and raise the chance of reversal.

Daily Pivots: (S1) 1.2840; (P) 1.2872; (R1) 1.2935; More...

GBP/USD's recovery from 1.2796 continues today but stays below 1.2963 minor resistance. Intraday bias remains neutral at this point. On the downside, below 1.2796 will resume the fall from 1.3141 to 55 D EMA (now at 1.2703) and possibly below. On the upside, break of 1.2963 minor resistance will turn bias back to the upside retest 1.3141 high instead.

In the bigger picture, as long as 1.2678 resistance turned support holds, rise from 1.0351 (2022 low) is expected to continue. Next target is 100% projection of 1.0351 to 1.2445 from 1.1801 at 1.3895. However, sustained break of 1.2678 will argue that it's at least correcting this rally, with risk of bearish reversal.

The financial markets appear to be a little on risk-off mode today, as FOMC rate decision is awaited. Additionally, ECB will announce policy decision tomorrow, followed by BoJ on Friday. Commodity currencies are the worst performers so far, as led by Aussie which was pressured following CPI data earlier today. Yen is currently the strongest, followed by Swiss Franc, and then Euro. Dollar, however, is overall just steady.

Fed will raise interest rate by another 25bps to 5.25-5.50% later today, and there is practically no chance for a deviation from this widely expected decision. The question is whether Chair Jerome Powell would give any guidance on the next move. And the answer is likely a "no", given that two rounds of inflation and employment data are coming in before next FOMC meeting in September. Therefore, unless the Fed shifts from a wait-and-see stance and its commitment to quelling inflation, the event may not significantly roil the markets.

In Europe, at the time of writing, FTSE is down -0.75%. DAX is down -1.20%. CAC is down -2.15%. Germany 10-year yield is up 0.032 at 2.457. Earlier in Asia, Nikkei dropped -0.04%. Hong Kong HSI dropped -0.36%. China Shanghai SSE dropped -0.26%. Singapore Strait Times rose 0.57%. Japan 10-year JGB yield dropped -0.0191 to 0.448.

AUD/JPY gaining downside momentum towards 93.22 support and below

While Dollar is treading water ahead of FOMC rate decision, AUD/JPY is stealing the show as the top mover as markets enter into US session. Aussie's selloff is gaining some momentum as markets continue to digest lower than expected CPI reading from Australia released earlier today. There are increasing calls for RBA to stand pat again on August 1, i.e. next Tuesday.

On the Japanese front, despite the prevailing anticipation that BoJ will maintain its monetary policy and yield curve control unchanged on Friday, traders might be rethinking their positions. This follows the advice of IMF's Chief Economist encouraging BoJ to start planning for rate hikes and gradually distance itself from YCC. BoJ's track record of catching the market off guard—acting when least expected and remaining idle when action is anticipated—complicates any definite predictions.

Anyway, the break of 94.63 minor support indicates that AUD/JPY's corrective recovery from 93.22 has completed at 95.84 already, after hitting near term falling trend line resistance. Deeper fall is expected to retest 93.22 support first. Firm break there will resume the whole decline from 97.66.

Fall from 97.66 could be interpreted as a correction to rise from 86.04, or the third leg of the medium term pattern from 99.32. In either case, the next near term target after decisively breaking 93.22 will be 100% projection of 97.66 to 93.22 from 95.84 at 91.40.

Australian Q2 CPI records slowest quarterly rate since Q3 2021, annual inflation eases again

In Q2, Australia's CPI decelerated from 1.4% qoq to 0.8% qoq, coming in below the expected 1.0% qoq. This marked the lowest quarterly rate since Q3 2021. Year-on-year, CPI eased from 7.0% to 6.0%, falling short of anticipated 6.2% yoy. Annual inflation rate has been on a downtrend for two consecutive quarters since peaking at 7.8% in Q4 2022.

RBA's trimmed mean CPI registered at 0.9% qoq and 5.9% yoy, which were below forecast of 1.1% qoq and 6.0% yoy respectively. While CPI for goods slowed from 7.6% yoy to 5.8% yoy, CPI for services rose from 6.1% yoy to 6.3% yoy, hitting its highest level since 2001.

Michelle Marquardt, ABS head of prices statistics, noted the shift in inflationary drivers, stating, "This is the first time since September 2021 that services inflation has been higher than goods, highlighting the change from 12 months ago when goods like new dwellings and automotive fuel were driving inflation. Now price increases for a range of services like rents, restaurant meals, child-care and insurance are keeping inflation high."

In June, monthly CPI slipped from 5.5% yoy to 5.4% yoy, in line with expectations. CPI excluding volatile items and holiday travel eased from 6.4% yoy to 6.1% yoy, and trimmed mean CPI fell from 6.1% yoy to 6.0% yoy.

Gold rebounding, eyeing more upside

Gold rebounds notably today and immediate focus is now on 1973.59 minor resistance. Firm break there should confirm that pull back from 1987.22 has completed at 1951.54. Further rise should then be seen through 1987.22 to resume whole rally from 1892.76.

More importantly, the support from 55 D EMA (now at 1950.61) is a sign of near term bullishness. The bounce from this EMA could be strong enough to push Gold through the next obstacle at 61.8% retracement of 2062.95 to 1892.76 at 1997.93, which is just inch below 2000 psychological level.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2840; (P) 1.2872; (R1) 1.2935; More...

GBP/USD's recovery from 1.2796 continues today but stays below 1.2963 minor resistance. Intraday bias remains neutral at this point. On the downside, below 1.2796 will resume the fall from 1.3141 to 55 D EMA (now at 1.2703) and possibly below. On the upside, break of 1.2963 minor resistance will turn bias back to the upside retest 1.3141 high instead.

In the bigger picture, as long as 1.2678 resistance turned support holds, rise from 1.0351 (2022 low) is expected to continue. Next target is 100% projection of 1.0351 to 1.2445 from 1.1801 at 1.3895. However, sustained break of 1.2678 will argue that it's at least correcting this rally, with risk of bearish reversal.

Economic Indicators Update

Gold rebounds notably today and immediate focus is now on 1973.59 minor resistance. Firm break there should confirm that pull back from 1987.22 has completed at 1951.54. Further rise should then be seen through 1987.22 to resume whole rally from 1892.76.

More importantly, the support from 55 D EMA (now at 1950.61) is a sign of near term bullishness. The bounce from this EMA could be strong enough to push Gold through the next obstacle at 61.8% retracement of 2062.95 to 1892.76 at 1997.93, which is just inch below 2000 psychological level.

While Dollar is treading water ahead of FOMC rate decision, AUD/JPY is stealing the show as the top mover as markets enter into US session. Aussie's selloff is gaining some momentum as markets continue to digest lower than expected CPI reading from Australia released earlier today. There are increasing calls for RBA to stand pat again on August 1, i.e. next Tuesday.

On the Japanese front, despite the prevailing anticipation that BoJ will maintain its monetary policy and yield curve control unchanged on Friday, traders might be rethinking their positions. This follows the advice of IMF's Chief Economist encouraging BoJ to start planning for rate hikes and gradually distance itself from YCC. BoJ's track record of catching the market off guard—acting when least expected and remaining idle when action is anticipated—complicates any definite predictions.

Anyway, the break of 94.63 minor support indicates that AUD/JPY's corrective recovery from 93.22 has completed at 95.84 already, after hitting near term falling trend line resistance. Deeper fall is expected to retest 93.22 support first. Firm break there will resume the whole decline from 97.66.

Fall from 97.66 could be interpreted as a correction to rise from 86.04, or the third leg of the medium term pattern from 99.32. In either case, the next near term target after decisively breaking 93.22 will be 100% projection of 97.66 to 93.22 from 95.84 at 91.40.