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• A higher interest rate for longer looks to be the way forward for Federal Reserve. We expect it to hike Fed Funds rate at least another 125bp and keep it here.
• The market agrees and discounts another 121bp hikes this year and now only discounts 14bp of interest cuts next year from 50bp in July.
• In our view, the US output gap turned positive and the economy needs a period of restrictive monetary policy to return to equilibrium.

If the US economy is on the brink of recession, the front end of the US money market curve is not paying attention. The money market discounted 50bp interest cuts from Federal Reserve next year in July. It only discounts 14bp now. We find it reasonable for the market to pull back on expectations for interest rate cuts next year. Further, a couple of excerpts from the latest FOMC Minutes published on Wednesday backs our view.

"Even so, with inflation elevated and expected to remain so over the near term, some participants emphasized that the real federal funds rate would likely still be below shorter-run neutral levels after this meeting's policy rate hike."

The 1Y real interest rate based on consumer's inflation expectations (we use an average of surveys from University of Michigan, New York Federal Reserve and Conference Board) is about 1.5pp below the peak in 2018. In our view, Federal Reserve needs to increase the real interest rate to at least this level to combat inflation and possible even more. At least another 125bp of hikes over the coming months, as we expect, in combination with a moderation of inflation expectations would likely do the trick.

Financial conditions eased over the summer and some commodity prices started to recover - another signal that monetary policy is not restrictive enough yet. Thus, in order to avoid a resurgence in inflation, Federal Reserve needs to appreciate the USD, increase yields, weaken equities and/or widen credit spreads through tighter monetary policy.

"Some participants indicated that, once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time to ensure that inflation was firmly on a path back to 2 percent."

Real GDP recovered near the pre-pandemic trend, but labour force participation remains lower. We do not think the economy has reached a new equilibrium, but rather that the output gap turned positive. The imbalance is the most evident in labour markets, where despite the recent easing in labour demand, job openings per unemployed remain near record-levels.

Unless demand is brought back to equilibrium, US economy could face an extended period of inflation exceeding the 2% target. Keeping interest rates at a mildly restrictive level for a period of time is one way to get rid of excess demand. Another would be to raise interest rates to a very restrictive level, e.g. by another 2-300bp. That would lead to a faster normalisation and open up for interest cuts next year. The money market, Federal Reserve and we lean towards the former scenario.

USDCHF is in the process to post the fifth straight day of gains, following the pullback off the 0.9367 support level. The pair jumped above the 200-day simple moving average (SMA) again and is trying to have a closing day beyond the short-term declining trend line from June 15. Moreover, there is another tentative line a bit higher, so a break above it should be a confirmation of a bullish correction move.

In trend indicators, the MACD oscillator is holding above its trigger line in the negative territory, while the stochastic is standing in the overbought region, both suggesting that the next move would be to the upside rather to the downside.

Should USDCHF make another run higher, it’s likely to meet resistance at the immediate 40-day SMA at 0.9610 as this level has strongly capped prices over the last month. A successful climb above this key resistance area would open the way for the 0.9650 barrier, which coincides with the next descending trend line. A penetration of this line too, would endorse the positive momentum, driving the market until the 0.9885 high.

If prices turn lower, the 20-day SMA at 0.9530 is the nearest support that could halt steeper declines. A potentially more important support, though, is the 200-day SMA at 0.9440. If breached, it would shift the focus to the downside and prices would slip towards 0.9367 before creating a lower low near 0.9195.

Overall, USDCHF would need to make a sustained climb above 0.9650 in order for the outlook to become convincingly bullish.

Market picture

Bitcoin was almost flat on Thursday but started Friday with a 6% plunge, momentarily dropping to $21.5K. Ethereum is losing 4.5% overnight to $1760. Leading altcoins are down 7% (XRP) to 12% (Solana).

Total crypto market capitalisation is down 4.2% to $1.07 trillion, according to CoinMarketCap.

Bitcoin’s fall below $22.5K is a formal break of the upward corridor of the past two months, as a sequence of increasingly higher local lows is broken. Currently, BTCUSD is testing the 50-day moving average, which could act as an uptrend indicator.

The current dip has made the fight for the 200-week average, which is now near $23K, relevant again. Closing the week below this level risks triggering another round of liquidation.

Altcoins are losing even more significantly, reflecting a dramatic shift in enthusiast sentiment from cautious buying to simultaneously locking in quick profits across a wide range of coins.

Additionally, the weakening of global equity indices and the deteriorating macroeconomic backdrop is worrying factor. At the same time, the crypto market is no longer oversold but not yet attractive to long-term investors.

We believe we will see similar sharp market movements again in the coming months.

News background

Arthur Hayes, former head of crypto exchange BitMEX, talked about two scenarios after Ethereum moves to the Proof-of-Stake (PoS) mining algorithm. If the fork is unsuccessful, ETH could fall sharply but hold above $800. If the merger is successful, an ETH rally should be expected, although it may be delayed, as in the case of bitcoin halving.

Korean authorities are investigating 16 crypto exchanges accused of breaking local laws and providing digital asset trading services to Korean citizens.

Tether, the issuer of the largest USDT stablecoin by capitalisation, has announced a partnership with accounting firm BDO Italia. Tether plans to move from reporting quarterly financial results to monthly reporting.

USDCHF is in the process to post the fifth straight day of gains, following the pullback off the 0.9367 support level. The pair jumped above the 200-day simple moving average (SMA) again and is trying to have a closing day beyond the short-term declining trend line from June 15. Moreover, there is another tentative line a bit higher, so a break above it should be a confirmation of a bullish correction move.

In trend indicators, the MACD oscillator is holding above its trigger line in the negative territory, while the stochastic is standing in the overbought region, both suggesting that the next move would be to the upside rather to the downside.

Should USDCHF make another run higher, it’s likely to meet resistance at the immediate 40-day SMA at 0.9610 as this level has strongly capped prices over the last month. A successful climb above this key resistance area would open the way for the 0.9650 barrier, which coincides with the next descending trend line. A penetration of this line too, would endorse the positive momentum, driving the market until the 0.9885 high.

If prices turn lower, the 20-day SMA at 0.9530 is the nearest support that could halt steeper declines. A potentially more important support, though, is the 200-day SMA at 0.9440. If breached, it would shift the focus to the downside and prices would slip towards 0.9367 before creating a lower low near 0.9195.

Overall, USDCHF would need to make a sustained climb above 0.9650 in order for the outlook to become convincingly bullish.

The internal XAUUSD structure suggests a global correction pattern, which takes the form of a cycle triple zigzag.

On the current chart, we see the structure of the bearish cycle intervening wave x, which looks completed in the form of a primary triple zigzag Ⓦ-Ⓧ-Ⓨ-Ⓧ-Ⓩ.

Perhaps, after the completion of the cycle wave x, the market turned around and began to move up. That is, the initial part of the cycle wave z is being built now. It can take the form of a primary standard zigzag Ⓐ-Ⓑ-Ⓒ, as shown in the chart.

The price of gold in the wave z may rise to the price mark of 1980.51. At that level, it will be at 76.4% of previous actionary wave y of the cycle degree.

In an alternative scenario, a continuation of the downward price movement in the cycle wave x is expected. Wave x is also a triple zigzag Ⓦ-Ⓧ-Ⓨ-Ⓧ-Ⓩ, but the final primary wave is still under development.

A downward movement of XAUUSD is expected in the near future. The primary wave Ⓩ may take the form of an intermediate zigzag (A)-(B)-(C).

The final of the correction pattern zigzag (A)-(B)-(C) is possible near 1566.77. At that level, it will be at 76.4% of primary wave Ⓨ.

After reaching this level, we can expect a market reversal and the beginning of a cycle wave z.

The struggling Japanese yen is in negative territory for a fourth straight day. In the European session, USD/JPY is trading at 136.71, up 0.61%.

Japanese Core CPI hits 14-year high

Japan’s core inflation continued to accelerate, with a gain of 2.4% YoY in July. This matched the forecast and was higher than the 2.2% reading in June. The reading is significant as it is the highest inflation level since 2008 and is the fourth straight month where inflation has exceeded the Bank of Japan’s target of 2%.

For years, Japan grappled with deflation, which resulted in fiscal and monetary policy with an accommodative stance. The world has changed dramatically since the Russian invasion of Ukraine, however, which has set off a massive rise in inflation. Japan’s inflation rate is nowhere near those in the US or the UK, but nevertheless, higher inflation has forced the BoJ to explain why it is not tightening policy. Governor Kuroda has repeatedly stated that the BoJ’s number one priority is to stimulate weak growth, and he has vigorously defended a cap on JGB yields. Kuroda has argued that inflation is not being driven by strong domestic demand, but rather by higher import prices due to the surge in wheat and oil prices. Until wage growth strengthens, which would point to broad-based inflation, we can expect “business as usual’ from the BoJ.

The price for the BoJ’s ultra-accommodative stance has been the sharp depreciation of the yen, which hit 140 in July, its lowest level since 1998. If inflation’s upward trend continues and CPI hits 3%, the BoJ may have to reconsider whether to make changes to policy.

USD/JPY Technical

• There is resistance at 1.3744 and 139.30
• 135.46 has switched to support, followed by 1.3350

GBPJPY faced another rejection from the 20-day simple moving average (SMA) at 162.66 on Thursday, which has been capping bullish corrections since the start of the month, but the pullback was only mild, with the price immediately pausing around 161.95.

The momentum indicators remain cautious as the RSI keeps oscillating sideways marginally below its 50 neutral mark and the MACD has yet to distance itself above its red signal line. Having said that, as long as the safety net of 160.35 – 159.86 formed by two support lines and the 50% Fibonacci retracement of the 150.96 – 168.70 upleg holds, hopes for a new bull run are reasonable.

Should the pair close above the 20-day SMA, some consolidation could initially take place near the 50-day SMA at 163.65 before the door opens for the resistance line at 165.00. A sustainable move higher from here could then test the 166.31 barrier ahead of the 167.80 – 168.70 ceiling.

In the bearish scenario, where the price depreciates below 159.86, the 200-day SMA may first attract attention at 158.80. If the latter proves fragile, the decline may continue towards the key 61.8% Fibonacci of 156.64, a break of which could next take a breather somewhere between May’s low of 155.58 and the 78.6% Fibonacci of 154.80.

All in all, GBPJPY looks indecisive within the 162.66 – 161.95 territory at the moment. Any violation at the boundaries could navigate the market accordingly, though only a downfall below 159.86 or a rally above 165.00 would question the negative trend in the short-term picture.

USDCAD is heading north above the short-term simple moving averages (SMAs) after a bounce off the 200-day SMA, which holds near the 1.2730 support level. According to the technical indicators, the MACD is gaining ground above its trigger and zero lines, while the RSI successfully surpassed above the neutral threshold of 50.

Should the price close comfortably above the 1.2985 resistance, which has been unbreakable over the past month, traders could add more value to the pair, pushing the market up to 1.3175. More advances could lead the way for a retest of the 20-month peak of 1.3225.

In the negative scenario where the 40- and the 20-day SMA halts upside movements, the market could retest to the bottom of 1.2730. If this proves easy to overcome this time, the decline may next pause somewhere near the uptrend line at 1.2650, while even lower, investors could shift attention to the 1.2517 level.

In brief, USDCAD is in a bullish mode in the very short-term and any moves beyond 1.2985 could confirm the current positive bias.

The Nasdaq 100 consolidates as the Fed stays committed to raising rates to rein in inflation. The market mood further improved after a close above last May’s high at 13500. However, the RSI has edged again into the overbought zone on the daily chart and suggests that the bull run could use some breathing room. The index is consolidating its gains above 13280 which coincides with the 20-day moving average. Buying interest could be expected in this congestion area. A rally above 13700 could lift offers towards 14200.

The Japanese yen softened as July’s core CPI was in line with expectations. A break above this month’s high at 135.50 indicates renewed interest in the US dollar. As the uptrend remains intact in the medium-term, the bulls may look for opportunities to accumulate. An extended recovery could pave the way for a trend continuation. 137.40 at the start of a sell-off in late July is an important resistance. Its breach may carry the pair to the recent peak at 139.40. On the downside, 134.80 is the first support in case of a pullback.