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The Australian dollar slipped as risk appetite subsided across the board. The pair met stiff selling pressure at the start of the liquidation in June (0.7130). A fall below 0.6950 has put the bulls on the defensive and invalidated this month’s recovery in the process. Then a follow-up dip below 0.6870 could further weigh on sentiment. 0.6800 at the origin of a previous bullish breakout is the next level to gauge buying interest. 0.6960 has become a key resistance where the bears could be expected to sell into strength.

The US dollar rallies as Fed officials reiterate an aggressive tightening stance. A bearish RSI divergence as the pair grinded the supply zone at August’s high (0.9650) turned out to be a false alert for lack of confirmation. Instead, a bullish breakout has prompted sellers to cover their positions and might trigger an extended rally towards 0.9740. An overbought RSI could drive the greenback lower temporarily as intraday traders take profit. 0.9580 at the base of the latest momentum is the closest support and 0.9540 a second layer.

Asian shares were painted red on Tuesday, tracking a heavy sell-off on Wall Street overnight as concerns over upcoming aggressive Fed hikes sapped risk sentiment. European shares took a beating in the previous session amid fears around the region’s energy crisis. Stocks are expected to open lower again this morning thanks to the negative sentiment and recession fears.

In the currency space, king dollar flexed its safe-haven muscles while EURUSD cut through parity like a hot knife through butter, touching levels not seen since 2002. Oil bulls regained hope overnight thanks to comments from Saudi Arabia regarding potential production cuts. And despite the risk-off mood, gold was hammered by a stronger dollar and rising Treasury yields.

There is a strong sense of unease across financial markets as investors grapple with inflation concerns, jitters over tightening US monetary policy, and recession fears. This will be a big week for markets thanks to the annual Jackson Hole Economic Symposium where central bankers and financial heavyweights congregate to discuss major economic issues. Investors hope to use this major event to gain fresh insight into the Fed’s thoughts on inflation, economic growth, and monetary policy. All eyes will be on Federal Reserve Chair Jerome Powell’s speech on Friday which is the main risk event and potential market shaker. What Powell reveals during the speech or chooses to hold back could set the tone for global markets in the weeks ahead.

On the data front, investors will be keeping an eye on the August S&P global flash PMIs for the eurozone due to be published this morning. Further declines are forecast as the energy crisis takes its toll on demand in manufacturing and services.
Will Fed’s Powell support dollar bulls?

The dollar continues to draw ample strength from risk aversion and fears over the Fed reasserting its hawkish message this week. Investors are looking for fresh clarity over how big future rate hikes will be and the strength of the US economy in the face of high inflation. If Powell fortifies expectations around the Fed moving ahead with another jumbo rate hike in September and more tightening ahead, this could boost the dollar. Alternatively, a cautious- sounding Powell that expresses concerns over the US economic outlook may reduce the odds of big rate moves, weakening the dollar.

Currency spotlight – EURUSD

After sinking back below parity, how much lower can the EURUSD trade? An appreciating dollar made easy work of the 1.000 level yesterday as prices tumbled to levels not seen since late 2002. The downside momentum is potent with the first level of interest at 0.9900.

A solid breakdown and daily close under this point could open the doors towards 0.9650 which acted as strong support back in the autumn of 2002. Should 0.9900 prove to be reliable support, prices could experience a bounce back to parity before resuming the downtrend.

Commodity spotlight – Gold

It has not been a great start to the week for gold. The precious metal was smothered by a stronger dollar, rising Treasury yields, and Fed rate hike jitters.

Prices are trading at $1736 as of writing with the next key level of support found at $1724. The potential for volatility in the precious metal is high this week, thanks to Jackson Hole and Powell’s remarks potentially acting as a fresh fundamental spark for gold. If prices are able to breach $1724, a selloff towards $1700 is on the cards. Alternatively, a move back above $1752 may open a path back towards $1770 and $1800, respectively.

Daily Pivots: (S1) 1.2996; (P) 1.3029; (R1) 1.3085; More...

USD/CAD's rise from 1.2726 is still in progress. Corrective decline from 1.3222 should have completed with three waves down to 1.2726. Further rally would be seen back to retest 1.3222 high. On the downside, break of 1.2933 minor support will mix up the outlook and turn intraday bias neutral again.

In the bigger picture, down trend from 1.4667 (2020 high) should have completed at 1.2005, after defending 1.2061 long term cluster support. Rise from there should target 61.8% retracement of 1.4667 to 1.2005 (2021 low) at 1.3650. This will remain the favored case now as long as 1.2516 support holds.

Daily Pivots: (S1) 0.6850; (P) 0.6889; (R1) 0.6917; More...

Despite some loss of downside momentum, intraday bias in AUD/USD stays on the downside. Corrective rebound from 0.6680 should have completed with three waves up to 0.7135. Deeper decline should be seen for retesting 0.6680 low next. On the upside, above 0.6969 minor resistance will mix up the outlook and turn intraday bias neutral first.

In the bigger picture, price actions from 0.8006 (2021 high) is seen more as a corrective pattern to rise from 0.5506 (2020 low). Or it could also be a bearish impulsive move. In either case, outlook will remain bearish as long as 0.7282 resistance holds. Next target is 61.8% retracement of 0.5506 to 0.8006 at 0.6461.

Daily Pivots: (S1) 136.89; (P) 137.27; (R1) 137.84; More...

Despite some loss of upside momentum, intraday bias in USD/JPY stays on the upside for retesting 138.37 high. Strong resistance could be seen from 139.37 high to bring another fall from to extend the corrective pattern from there. On the downside below 134.61 minor support will turn intraday bias back to the downside for 131.72 support.

In the bigger picture, price actions from 139.37 medium term top are seen as a corrective pattern to up trend from 101.18 (2020 low). While deeper decline cannot be ruled out, outlook will stays bullish as long as 55 week EMA (now at 123.21) holds. Long term up trend is expected to resume through 139.37 at a later stage, after the correction finishes.

Daily Pivots: (S1) 0.9592; (P) 0.9625; (R1) 0.9677; More...

USD/CHF's rise from 0.9369 is still extending, and the break of 55 day EMA is a bullish signal. Intraday bias stays on the upside with focus on 0.9648 resistance. Firm break there will argue that whole corrective pattern from 1.0063 has completed, and bring stronger rally back to 0.9884 resistance next. On the downside, below 0.9551 minor support will revive near term bearishness and bring retest of 0.9369 low.

In the bigger picture, while 0.9471 support (2021 high) was breached, there was no follow through selling. Outlook is mixed for now. On the upside, firm break of 0.9648 resistance will revive the case that price actions from 1.0063 are just a corrective pattern, and the larger up trend is no over yet. However, another fall through 0.9369 will affirm the case that medium term up trend from 0.8756 has completed with three waves up to 1.0063.

Daily Pivots: (S1) 1.1726; (P) 1.1782; (R1) 1.1822; More...

GBP/USD's break of 1.1759 support confirms resumption of larger down trend. Intraday bias stays on the downside. Next target is 1.1409 long term support. On the upside, above 1.1835 minor resistance will turn intraday bias neutral and bring consolidations. But recovery should be limited well below 1.2292 resistance to bring another decline.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2292 resistance holds. Next target is 1.1409 low. However, firm break of 1.2292 will bring stronger rise back to 55 week EMA (now at 1.2859).

Markets

The new surge in European gas prices extended the core bond sell-off yesterday. They worsen the inflation outlook with central banks not blinking to increased recession risks and favoring frontloading policy normalization/tightening in their inflation crusade. The Dutch benchmark future (TTF) moved above the March peak (early stages Russian war in Ukraine). European bonds underperformed US Treasuries. German yields added 4.7 bps (30-yr) to 8.9 bps (5-yr). The breakdown of the 10-yr yield movement showed inflation expectations responsible for the lion share of yesterday’s move. German inflation expectations move above 2.5% for the first time since early May. EU swap rates underperformed bonds with the curve bear steepening. Swap rates added 6.8 bps (30-yr) to 14.8 bps (2-yr). Changes on the US yield curve varied between +1.3 bps (30-yr) and +9.1 bps (3-yr) with the curve turning more inverse again. The US 10-yr yield passed the 3% mark for the first time in a month. The fierce sell-off in core bonds spilled again to the equity market with European indices losing up to 2% and US gauges even closing up to 2.5% lower. Rising European inflation expectations and a global risk-off climate pulled EUR/USD one big figure lower, losing parity for a second time this year. We think that the break will this time be sustained. The pair set a new sell-off low this morning around 0.9920. The technical downward trend channel since February suggests more downside towards 0.97. USD/JPY moved to 137.50 with the YTD high at 139.39. Cable suffers a more or less similar faith as EUR/USD with GBP/USD testing the YTD low at 1.1760. EUR/GBP for now failed to regain the 0.85 big figure with the test of the incoming downward trend line ongoing.
 
We expect ruling trends to continue today (stronger dollar, weaker bonds and lower stocks). Even weak August EMU PMI’s probably won’t come to ailing bonds’ rescue. For EUR/USD’s demise, they just risk adding fuel to the fire. UK and US PMI’s will be released as well, but might have less market influence. Ahead of Fed Powell’s Jackson Hole speech, more repositioning on the money market is likely as well with the 2023 rate cut idea still not abandoned. We expect Powell to stress the need for frontloading with the December meeting offering a recalibration point to set out the 2023 framework. Even higher and stable rates are the most likely outcome in our view. ECB executive board member Panetta speaks in an ECB policy panel in Milan. It will be interesting to see whether the Italian follows recent German views in favour of pursuing an aggressive tightening cycle.

News Headlines

In an answer to questions from Bloomberg News, Saudi Arabian Energy Minister Price Abdulaziz Bin Salman indicated that recent extreme volatility and the lack of liquidity in the futures oil market are signs that the futures market is increasingly disconnected from underlying fundamentals. The Oil minister also blamed ‘unsubstantiated’ information about demand destruction, confusion about sanctions, embargoes and price caps as driving the recent decline in oil prices, while he still sees high risk of supply disruptions and thin global spare capacity. According to the Saudi Oil Energy minister OPEC+ has the means to address current problems by cutting production going forward. Brent oil yesterday reversed an initial drop below $93/b to close the session slightly higher near $96.5/b.
 
According to the Valueguard HOX index, Swedish Home prices declined for the fourth consecutive month in July. Prices declined 2.9% M/M to be 2.6% lower compared to the same month last year. Given the high levels of private debt in Sweden, the Riksbank already several times warned for the stability risks of higher inflation and higher interest rates. The Swedish krone this month underperformed other pears with EUR/SEK rising from the 10.35 are mid-August to currently trade near 10.65.

Short Term Elliott Wave View in GBPUSD suggests the rally from 7.14.2022 low ended a wave (4) hit our blue box in 4 hour chart at 1.2298. Then pair was rejected and did a leading diagonal structure as wave 1 ended at 1.2000. The market bounce doing a zig zag correction, testing the high and completed wave 2 at 1.2276. From this point, the pound has continued lower forming wave 3 Elliott wave impulse structure.

Down from wave 2, wave ((i)) ended at 1.2006, and rally in wave ((ii)) ended at 1.2142. Expect wave ((iii)) to end soon with possibly a few more marginal lows, then it should rally in wave ((iv)) in 3, 7, or 11 swing before turning lower again in wave ((v)) and finish wave 3. Wave (i) of ((iii)) finished at 1.2026 and bounce in wave (ii) of ((iii)) ended at 1.2088. Pair extend lower around 1.1739 and we are still looking for a marginal low to complete wave (iii) of ((iii)). Near term, expect any rally to fail in 3, 7, or 11 swing for further downside.

GBPUSD 60 Minutes Elliott Wave Chart