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Near-term action remains directionless, with new low at 0.9900 offering strong support and keeping the downside protected, while upticks through parity were so far short-lived and repeatedly failed to register close above, keeping the pair within a narrow range.

Daily and weekly techs remain in bearish configuration and maintain downside pressure, as the pair is on track for the third consecutive strong monthly fall.

From the fundamental side, bears were underpinned by hawkish Fed and Chair Powell’s signals that the period of high interest rates is likely to last until high inflation eases.

On the other side, investors turn their focus on the ECB’s policy meeting next week, expecting the central bank to show strong hawkish stance and go for more aggressive action in policy tightening, as soaring inflation harm the economy.

Markets eye German CPI data today (Aug y/y 7.8% f/c vs July 7.5%), with higher than expected Aug figure to add to expectations of ECB’s 0.75% hike that would offer fresh support to the single currency.

Expect initial bullish signals on close above parity (reinforced by falling 10DMA), which would require confirmation on lift through 1.0080/1.0115 zone (Fibo 38.2% of 1.0368/0.9900/falling 20DMA).

Conversely, sustained break of 0.9900 base would signal bearish continuation.

Res: 1.0029; 1.0079; 1.0115; 1.0134.
Sup: 0.9979; 0.9946; 0.9900; 0.9853.

GBPUSD has been underperforming over the past two days, meeting a new 29-month low at 1.1670. When looking at the bigger picture, the pair has been developing within a descending channel since February with the technical indicators confirming the bearish structure.

The MACD oscillator is heading south below its trigger and zero lines, while the RSI is holding near the oversold territory. In trend indicators, the 20- and 40-day simple moving averages (SMAs) posted a bearish crossover and are following the current market price action.

If the 1.1670 support fails, then the focus would be to the downside again towards the 1.1410 mark, registered in March 2020. Additional declines from here may next pause near the 1.1300 psychological mark.

In the event of an upside reversal, the 1.1890-1.1995 resistance area, which encapsulates the short-term SMAs, could be a crucial region to have in mind. A break above it would take the market until the 23.6% Fibonacci retracement level of the downward wave from 1.3640 to 1.1670 at 1.2120, which stands near the descending trend line. More advances may switch the near-term picture to slightly positive, meeting the 1.2300 handle and the 38.2% Fibonacci of 1.2410.

Turning to the long-term picture, the market seems to be in a bearish mode given that the pair is trading below the 200-day SMA and within a downward sloping channel.

EURJPY had an impressive start to the week, but despite its bold bullish correction up to a one-month high of 138.96, the pair could not exit the bearish channel nor could it close above the 50-day simple moving average (SMA) at 139.00.

Although the MACD keeps pushing towards the positive territory and the stochastics remain positively charged, the RSI suggests that some caution is warranted as the indicator is struggling to overcome its July high.

Should buyers breach the wall at 139.00, resistance could immediately commence somewhere between the 23.6% Fibonacci retracement of the 124.38 – 144.26 upleg at 139.57 and the 140.00 round level. Slightly higher, some congestion may develop within the 141.00 – 142.00 region before the way clears towards the 7½-year high of 144.26.

If the bears take charge soon below the inside swing of 138.39, the 20-day SMA and the 38.2% Fibonacci of 136.67 may attempt to prevent any depreciation towards the 135.00 mark and the 200-day SMA currently intersecting the 50% Fibonacci of 134.32. In the event the sell-off further exacerbates from here, the bears may push for a downtrend resumption under the key support area of 133.15 – 132.70 with scope to reach the channel’s lower boundary around the 61.8% Fibonacci of 130.70.

Summing up, EURJPY is looking cautiously bullish as the price is fighting for an upside channel breakout for the second consecutive day. If efforts prove successful this time, the next barrier could pop up within the 139.57 – 140.00 territory. Otherwise, the next move could be south at 136.67.

XAGUSD seems to be forming a correction wave b of the cycle degree, which is part of a large zigzag.

Apparently, correction b is a primary triple zigzag Ⓦ-Ⓧ-Ⓨ-Ⓧ-Ⓩ. The first four parts of it have already been fully completed, now we see the construction of the last wave Ⓩ.

Most likely, the wave Ⓩ will be an intermediate triple zigzag (W)-(X)-(Y)-(X)-(Z). It seems that the formation of the actionary intermediate wave (Y) has come to an end, it has taken the form of a double zigzag W-X-Y. Thus, now we see growth in the intermediate intervening wave (X).

It can be assumed that the wave (X) will end in the form of a minor double zigzag W-X-Y near 21.169. At that level, it will be at 50% along the Fibonacci lines of sub-wave (Y).

Alternatively, it is assumed that the bearish primary wave Ⓩ may end in the form of a double zigzag (W)-(X)-(Y).

Most likely, the market is now in the final part of the actionary wave (Y), or rather in its final minor sub-wave C.

Wave C may end in the form of an impulse consisting of minute sub-waves.

To complete this impulse, a final sub-wave ⓥ is needed. The end of the specified impulse is possible near 12.473. At that level, primary wave Ⓩ will be at 200% of actionary wave Ⓨ.

Equities remain under pressure as investors brace for more aggressive hikes from central banks. The FTSE 100 lost its momentum as it came closer to the triple top (7650) from the daily chart. An initial fall below 7460 triggered some profit-taking. Then a break below 7400 invalidated the latest rebound and forced buyers to bail out. 7310 is the closest support and the RSI’s oversold condition may cause a limited bounce. The index could be vulnerable to another round of liquidation unless the bulls manage to reclaim 7500.

The Australian dollar bounced higher after upbeat retail sales in July. Its previous failed attempt to clear the psychological level of 0.7000 led to a new round of sell-off below 0.6850. This is a sign that the bears may have regained control of the price action. A bearish MA cross on the daily chart may further weigh on sentiment. After the RSI sank into oversold territory, some bargain hunting tried to push back. However, stiff selling pressure could be expected near 0.7000. 0.6800 would be the next stop when volatility returns.

The Japanese yen steadied after July’s unemployment met expectations. A close above 138.80 has put the greenback right under last July’s peak at 139.40, hitting a 24-year high. A bullish breakout would attract more buying interests and resume the uptrend in the medium-term. In the meantime, an overbought RSI may cause a limited pullback as intraday traders take profit in the supply zone. Fresh selling as a last attempt by the short side might drive the pair lower. 136.30 is a key support to keep the momentum going.

EUR/USD

The single European currency is trying to stop its depreciation against the U.S. dollar and has been moving in a range between 1.0089 and 0.9901 for the past five days. While attempts by the bulls to settle more permanently above the resistance at 0.9999 are not particularly successful for the time being, the bears cannot gain the upper hand in their attempts to overcome the support at 0.9901, either. Despite the struggles to form a consolidation, the downward movement cannot be said to be over just yet. Economic indicators that may influence the course of today’s session is the U.S. consumer confidence data at 14:00 GMT.

USD/JPY

In the past session, the yen continued to lose ground against the dollar and headed towards the resistance at 136.60. A possible breach of the next important resistance at 139.37 would give the bulls an even more serious advantage, but if the price does not hold above it, then we could witness a double top and a downward movement, which would weaken the currency pair’s current trend.

GBP/USD

The bears failed to overcome the support formed at 1.1649, but this does not necessarily mean that they have given up all hope. The bulls need to breach at least three important resistances – 1.1725, 1.1792 and 1.1855 – before it could be said that they have achieved any temporary success at all. Sentiment remains negative and the bears are likely to head south and breach the support at 1.1648.

EUGERMANY40

The downward movement of the German index was limited for now and the bears failed to reach the support at 12693. On the other hand, the performance of the bulls so far is equally unconvincing as their target – the resistance at 13066 – is still yet to be reached. If this resistance is not overcome, then it is very likely that the bears will “settle down” for longer than initially expected. The release of the data on the preliminary consumer prices in Germany at 12:00 GMT might rattle the markets and lead to an increase in volatility.

US30

The U.S. blue-chip index is trying to recover from the sell-off in the past week, holding its course above the support level at 31942. On the other hand, the bulls' target – the resistance at 32473 – is also still left intact. If it remains this way, then we are likely to witness the return of the bears to the market and another attack on the support at 31942.

Swiss KOF Economic Barometer dropped from 90.5 to 86.5 in August, below expectation of 88.6. KOF said the reading is "quite considerably below its long-term average". Accordingly, "for the near future the outlook for the Swiss economy appears less than encouraging."

KOF added: " The decline is primarily due to indicators broadly associated with private consumption, but the manufacturing sector and the construction industry are emitting negative signals, too. The other indicators included in the barometer show hardly any changes."

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Markets

Yesterday, last week’s repositioning on US and European interest rate markets simply continued with European markets again underperforming. Chair Powell on Friday was very clear that the Fed will do ‘whatever it takes’ to bring inflation back to the 2.0% target, even as that may cause pain in terms of lower growth and higher unemployment. US yields rose further between 2.7 bps (2-y) and 6.2 bps (10-y). Interestingly, the move this time wasn’t the usual bear flattening that often dominated recent repositioning. Is the faster pace of QT in September weighing on bonds with longer maturities? Technical considerations might also be in play as the US 2-y yield is retesting the cycle top near 3.42%. Anyway the rise in US yields was fully driven by higher real yields. EMU swap yields jumped between 15.3 bps (2-y), 11.9 bps for the 10-y yield and 4.9 bps for the 30-y. The 2-y swap jumped above the 2.0% June top to close at a new cycle peak of 2.08% after hawkish ECB members on Friday and over the weekend started the debate on a 75 bps rate hike at next week’s meeting. ECB’s Lane isn’t in the camp of this kind aggressive frontloading yet and prefers a gradual/protracted approach to minimize negative consequences. Still current market pricing sees a chance of 75% of a 75 bps hike rather than a 50 bps step. The (broad) tightening of monetary conditions that the Fed is aiming for also continued via equity markets. US indices again lost up to 1.0% (Nasdaq). The EuroStoxx50 declined 0.92%, but a correction in European gas prices helped equities to close off the intraday lows. The dollar is holding strong, but a clean break higher didn’t occur (yet?). DXY touched a minor cycle top at 109.47, but gains couldn’t be sustained (close 108.83) despite the rise in US real yields. USD/JPY (close 138.72) also just missed the July top. The euro gains some reprieve from the catching up move in European yields (EUR/USD close 0.9997).

Asian equities this morning mostly trade in positive territory with China underperforming (-0.75/-1.0%). The PBOC with a stronger than expected fixing is again leaning against recent yuan depreciation. Still the onshore yuan weakens slightly further to USD/CNY 6.9165. Later today, the calendar is well filled with the preliminary German (and Spanish) August inflation, the EC confidence indicators, US house prices and consumer confidence (Conference Board). The Bund future gains some ground on a (mildly) softer than expected North Rhine Westphalia CPI. However, there is still a decent chance for the Y/Y figure to return to (or above) the 8.7% May top (HICP) . In a data-dependent approach, this leaves a solid case for bold frontloading ECB action. For now, we don’t anticipate a sustained correction to the established trend of higher US and European yields. On FX markets, the dollar apparently needs a clear sign to break beyond recent cycle peak levels. Maybe some consolidation might be on the cards with Friday’s payrolls a potential trigger to decide on the next directional move. The euro probably isn’t out of the woods yet, but a further correction in the gas price might help to keep the EUR/USD pair away from the 0.99 short-term.

News Headlines

European Commission President von der Leyen said that the EU was working on emergency intervention measures as well as structural reforms to the power market. She pointed to decoupling electricity prices from the gas price with the exorbitant surge of the latter influencing the former. The EU also wants to ensure that renewable energies are generated at lower costs, that those costs are transferred to consumers and that windfall profits are used to help vulnerable households. Von der Leyen wants those emergency instruments to be triggered very quickly, perhaps in weeks. The announcement helps explain yesterday’s setback in gas prices with the reference Dutch TTF future dropping 15% after last week’s test of the YTD high set in the wake of the start of the Russian invasion.

The Fed’s balance-sheet roll-off (Quantitative Tightening) is set to hit max speed. From Thursday, monthly caps for maturing assets will be raised to $60bn for Treasuries and $35bn for mortgage-backed securities. If the Fed’s portfolio doesn’t allow for such amounts, it will use its $326bn T-bill portfolio to make up for what’s left. More specifically, we’re already looking at $16.4bn of Bills in September and $13.6bn in October.