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In a speech, Fed Governor Christopher Waller expressed his support for the additional tightening to combat inflation. Despite this week's data showing a decrease in core CPI in June, Waller remains cautious, maintaining that "one data point does not make a trend."

Arguing for a proactive stance, Waller voiced his view that "two more 25-basis-point hikes" this year would be "necessary to keep inflation moving toward our target."

Waller believe there is "no reason why" the first hike should not occur this month. "If inflation does not continue to show progress and there are no suggestions of a significant slowdown in economic activity," he added", "then a second 25-basis-point hike should come sooner rather than later, but that decision is for the future."

Furthermore, Waller anticipates a need to keep policy restrictive for a while to encourage inflation to settle around the 2% target. "I am going to need to see this improvement sustained before I am confident that inflation has decelerated," he warned, calling for sustained evidence of improvement before he's fully convinced of any deceleration in inflation.

Full speech of Fed Waller here.

Key insights from the week that was.

Beginning in Australia, the Westpac-MI Consumer Sentiment survey delivered a lacklustre update on confidence. At 81.3, the headline index remains firmly entrenched at extremely pessimistic levels, an outcome that has only been associated with major economic dislocations over the survey’s near fifty-year history. Driving this sustained weakness in sentiment has been a marked deterioration in views over the economy’s prospects and family finances for the year ahead, with these sub-indexes now 10% and 16% below their respective long-run averages. The cost-of-living remains a considerable constraint for households, the sub-index covering spending intentions on ‘major household items’ nearly 40% below its long-run average.

Another key theme discussed by Chief Economist Bill Evans after the July survey’s release is the impact of inflation and interest rates on confidence. Curiously, the RBA’s decision to leave the cash rate unchanged in July offered no support; indeed, sentiment was much weaker after the meeting than before (77.9 vs. 88.0). Available data gives context to this result. Evidence over the past year suggests inflation has had a greater impact on confidence than interest rates. May’s deceleration in the Monthly CPI Indicator from 6.8%yr in April to 5.6%yr and the consequent rally in sentiment pre-RBA to 88.0 also support this thesis. However, in noting “Some further tightening of monetary policy may be required”, the RBA made clear that policy will likely have to be tightened further to get inflation sustainably back to target. The material chance of further hikes and a lengthy period of above-target inflation arguably drove confidence back down to 77.9 post-RBA, 1.6% below the final June outcome.

The emerging weakness evident in business conditions is becoming more consistent with consumers’ pessimistic view on the state of the economy. The NAB business survey indicates that the current assessment of business conditions has taken a material step back over the last two months, down from +15 in April to +9 in June. With forward orders posting consecutive declines over May/June against a backdrop of soft and fragile business confidence, the survey’s shift in tone is clear, foreshadowing the prospect of a further slowing in the economy over the remainder of the year.

Before moving offshore, it is worth highlighting that RBA Deputy Governor Michele Bullock has been appointed as RBA Governor for a seven year term commencing September 18. This development comes at a time where the RBA’s monetary policy processes and communication guidelines are being assessed and modified in light of the Government’s Review.

Events offshore this week also provided a number of notable headlines.

The Bank of Canada raised rates again by 25bps to 5% as fears of persistent inflation prompted action. This is the second rate hike since the BoC decided to pause earlier this year. Inflation has eased off the back of lower energy prices; however, broad-based strength remains elsewhere. Spending data shows evidence of excess demand across the economy, with household consumption driving GDP growth in the March quarter and more timely indicators like retail sales suggesting consumers have plenty of cash to splash. This comes alongside a housing market that is starting to find its floor. New projections suggest the CPI will hover around 3% for a year. The BoC experience is a perfect example of why central banks must be wary of the risks of ending their tightening cycle too soon.

South of the border, the US CPI made headlines as it came in softer than expected at 0.2%mth for both headline and core inflation. There were clear signs of a broad-based deceleration as momentum in goods and services ex-shelter continued to slow. However, shelter continues to cause concern, contributing a whopping 2.1ppts to annualised headline inflation in Q2 thanks to its 35% weight and 6.0% gain. Here is evidence that shelter has the capacity to create at or above target outcomes for inflation by itself should rent inflation hold up rather than decelerate as is our base expectation.

The Federal Reserve’s July Beige Book was also constructive for the inflation outlook. Economic activity was reported to have “increased slightly since May”, employment only “modestly”. Most significant for inflation is that the “unusually high [labour market] turnover rates in recent years appear to be returning to pre-pandemic norms” and contacts “in multiple Districts reported that wage increases were returning to or nearing pre-pandemic levels”. Despite this, signs of labour market slack have yet to show up meaningfully. Initial jobless claims fell to 237k, driving down the four-week average to 246.8k.

Across the Tasman meanwhile, the Reserve Bank of New Zealand kept rates steady at 5.5% in line with expectations. The statement noted “monetary conditions are constraining domestic spending as expected” and there was nothing to indicate their thinking had changed vis a vis keeping the OCR on hold until the second half of 2024. The next meeting will reflect the Committee's view of the June CPI print and labour report. Should either come in stronger than expected, the central bank will be keen to get on the front foot and raise the policy rate by 25bps. It is Westpac’s view that they likely will.

Over east, the Chinese June price outcomes were weak, the CPI flat year-over-year and the PPI down 5.4%yr. Base effects are significant for these outcomes, the impact of Russia's invasion of Ukraine on supply chains and energy and commodity prices falling out. However, excess capacity across the economy and a continued push to grow industry further amid a modest post-COVID rebound is also at play.

To counteract some of this weakness, the government has eased key policy rates and increased liquidity. They are also likely encouraging lending by the banks behind the scenes. Aided by these steps, M2 money supply rose 11.3%yr off a strong base in 2022, and new loans came in well above expectation in June at CNY3050bn. Benefitting both now and the medium-term, the trade balance remained wide in June at US$70.6bn albeit shy of expectations, US$74.9bn. To sustain this sizeable income inflow, Asian demand has to make up for weak and deteriorating developed-world demand.

Key Highlights

• USD/JPY declined heavily below 142.00 and 140.00.
• It traded below a key bullish trend line with support near 144.20 on the 4-hour chart.
• EUR/USD rallied further above 1.1150.
• GBP/USD surged above the key 1.3000 resistance zone.

USD/JPY Technical Analysis

The US Dollar started a major decline from the 145.00 zone against the Japanese Yen. USD/JPY traded below a key bullish trend line with support near 144.20.

Looking at the 4-hour chart, the pair settled below the 142.00 support, the 200 simple moving average (green, 4 hours), and the 100 simple moving average (red, 4 hours).

There was a sharp move below the 140.00 support. The pair tested the 138.00 zone and remains at risk of more losses. Immediate support is near the 138.00 level. The next major support is at 137.40, below which there could be a drop to 136.50.

On the upside, immediate resistance is near the 139.10 level. The next major resistance is near 139.80. The first major resistance is near the 140.00 level.

If there is a move above the 140.00 resistance, the pair could rise toward 140.80. Any more gains might send the pair toward the 142.00 resistance zone, where the bears might emerge.

Looking at EUR/USD, the pair gained strength and rallied above 1.1150. Similarly, GBP/USD surged above the 1.3000 and 1.3050 resistance levels.

Economic Releases

• US Import Price Index for June 2023 (MoM) – Forecast -0.2%, versus -0.6% previous.
• US Export Price Index for June 2023 (MoM) – Forecast -0.2%, versus -1.9% previous.

• FTSE100 reversed from key support level 7300.00
• Likely to rise to resistance level 7550.00

FTSE100 index recently reversed up sharply after the index failed to break below the key support level 7300.00, which has been reversing the price from last November.

The upward reversal from the support level 7300.00 stopped the intermediate downward impulse (C)-wave from June.

FTSE100 index can be expected to rise further toward the next resistance level 7550.00 (previous minor reversal high from the end of last month).

• NZDCHF reversed from support level 0.5440
• Likely to rise to resistance level 0.5565

NZDCHF recently reversed up with the daily Morning Star from the key multi-month support level 0.5440, which has been reversing the price from the end of April.

The upward reversal from the support level 0.5440 stopped the C-wave of the previous ABC correction B from May.

Given the strength of the support level 0.5440, NZDCHF can be expected to rise further toward the next resistance level 0.5565 (top of the previous minor correction (ii)).

• USDCHF falling inside impulse wave 3
• Likely to fall to support level 0.8500

USDCHF continues to fall strongly after the price broke below the pivotal support level 0.8820, former monthly low from May.

The breakout of the support level 0.8820 accelerated the active short-term impulse wave 3 of the weekly downward impulse wave C from the start of March.

Given the strong multi-year downtrend and widespread dollar sales, USDCHF can be expected to fall further toward the next support level 0.8500 (target for the completion the active impulse wave 3).

Markets

Yesterday’s US inflation numbers still resonated during European trading hours. Both headline and core inflation rose a tad less than forecast (0.2% M/M vs 0.3% M/M) with base effects pulling especially headline inflation (one last month?) significantly down. They triggered a huge rally in US Treasuries – extended to core bonds in general – and stock markets while pulling the dollar below first support levels on a trade weighted basis and against most majors. The absence of European eco data resulted in a countdown to the early US releases. Minutes of the previous ECB meeting provided some minor distraction but confirmed general thinking of a certain 25 bps rate hike in July followed by a very likely 25 bps rate hike in September. They showed broad consensus for the delivered 25 bps hike in June, but revealed that some called for a 50 bps move. Doubts over core inflation are key going forward. June US producer price inflation and weekly jobless claims… gave conflicting signals. In the same vein that last week’s activity data and labour market numbers caused a hawkish market sell-off, this week’s (inflation) survey and actual price figures triggered a dovish rebound. US weekly jobless claims fell from 249k to 237k whereas markets expected a stabilization. They are now firmly back in the +- 230k-245k range they were in since early March with the exception of a tick-up (to 260k area) early June. Headline and core PPI both increased by 0.1% M/M (vs +0.2% M/M expected). The annual figure for final demand slowed to 0.1% Y/Y, the smallest since 2020. Excluding food and energy, the increase was 2.4% Y/Y (smallest since Jan 2021). The post US CPI-moves petered out after the mixed figures. US yields lose 11 bps (2-yr) to 3 bps (30-yr) at the time of writing. The US 10-yr yield tested last week’s broken resistance-turned-support at 3.8%. German yields fall by 7 bps (30-yr) to 10 bps (5-yr). The trade-weighted dollar currently changes hands at 100.16 from an open at 100.52 and confirming yesterday’s break below the YTD low at 100.82. EUR/USD trades at 1.1180 from a start at 1.1129 and confirming yesterday’s break above the YTD top at 1.1095. High profile resistance stands at 1.1274 (62% retracement from 2021-2022 decline). European stock markets add 0.5% to 1% with major indices opening around 0.5% higher.

News & Views

Czech inflation eased further in June as expected. Consumer prices rose by 0.3% M/M. Price growth compared to same month last year slowed from 11.1% in May to 9.7% in June. It was the first time since January 2022 for Y/Y inflation to print below 10%. Recreation and culture prices jumped 2.2% M/M mainly due to seasonal package holidays. Prices for hotels and restaurants also continued to rise (0.7% M/M). Prices of household equipment declined 0.6% M/M. In a comment at its website, the CNB highlighted that the slowdown in inflation was faster than the MPR Spring forecast (10.1%). According to CNB the slowdown is mainly due to weaker than expected core inflation. A faster decline in fuel prices also contributes to the positive development. Price growth in administered prices remained somewhat higher than expected in the spring forecast. The CNB concludes that “observed price developments bear out the expectations of the spring forecast that inflation will continue to fall sharply during spring and summer”. Inflation will decline to the CNB’s 2% target over the monetary policy horizon. The Czech 2-yr swap yield today declines an additional 20 bps to 5.24%. Even so, the koruna still gains modestly on the global risk-on sentiment (EUR/CZK 23.75).

In its July 2023 fiscal risk and sustainability report, the UK office for Budget Responsibility painted a rather alarming picture on the UK budged and debt situation. This rapid succession of shocks has delivered the deepest recession in three centuries, the sharpest rise in energy prices since the 1970s, and the steepest sustained rise in borrowing costs since the 1990s the report says. It pushed government borrowing to its highest level since the mid-1940s, the stock of government debt to its highest level since the early 1960s, and the cost of servicing that debt to its highest since the late 1980s. At the same time, the government growing costs from ageing, a warming planet and rising geopolitical tensions have an impact in the near future. In a scenario labeled as rather optimistic, the UK debt might reach 310% of GDP by the mid 2070’s. A higher degree of inflation-linked financing and shorter maturities, amongst others make UK debt more vulnerable than other peers.

Daily Pivots: (S1) 1.1044; (P) 1.1092; (R1) 1.1180; More...

Intraday bias in EUR/USD stays on the upside for the moment. Current up trend should target 1.1273 fibonacci level next. On the downside, below 1.1127 minor support will turn intraday bias neutral and bring consolidations first, before staging another rise.

In the bigger picture, as long as 1.0515 support holds, rise from 0.9534 (2022 low) would still extend higher. Sustained 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 (2021 high).

Daily Pivots: (S1) 1.2928; (P) 1.2964; (R1) 1.3024; More...

GBP/USD continues today and matched 61.8% projection of 1.0351 to 1.2445 from 1.1801 at 1.3095. There is no sign of topping and intraday bias stays on the upside. Sustained trading above 1.3095 will target 100% projection at 1.3895. On the downside, below 1.2983 minor support will turn intraday bias neutral first. But retreat should be contained by 1.2847 resistance turned support to bring another rally.

In the bigger picture, the strong support from 55 W EMA (now at 1.2341) is a medium term bullish sign. Outlook will stay bullish as long as 1.2445 resistance turned support holds. Rise from 1.0351 medium term bottom (2022 low) is expected to extend further to retest 1.4248 key resistance (2021 high).