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The dollar index remains at the front foot, underpinned by dominating factors, such as high inflation, rising interest rates and global growth concerns.

Bounce from Aug 10/11 double-bottom (104.50) retraced 50% of corrective 109.12/104.50 downleg, with bulls being supported by rising daily cloud, but started to lose traction in past three days after strong acceleration last Mon/Fri.

Rally faces strong headwinds from significant barrier at 106.81 (daily Kijun-sen / 50% retracement) and holding below here for the third consecutive day, though the sentiment remains positive and current congestion is seen as a consolidation ahead of fresh push higher, with positive stance seen while the price action stays above daily cloud top, also current range floor (106.20).

Strengthening positive momentum and daily moving averages turning to full bullish configuration, along with rising daily cloud underpinning the action, point to positive technical studies on daily chart and adding to supportive fundamentals.

Eventual break of 106.81 pivot would signal bullish continuation and expose next strong obstacle at 107.36 (Fibo 61.8%) break of which is needed to confirm higher base at 104.50 and an end of corrective phase from 109.12 (July 14 top).

Res: 106.81; 107.12; 107.36; 108.03.
Sup: 106.41; 106.20; 106.02; 105.68.

Markets:

An interview by ECB Schnabel grabs most headlines today. She told Reuters that concerns about the inflation outlook, which triggered a 50 bps rate hike in July, have not been alleviated. The move wasn’t enough to alter the outlook and even a recession on its own would not be enough to tame inflation pressures. Inflationary pressures won’t vanish quickly and tackling the risk of inflation expectations becoming de-anchored primes downside growth/recession risks. Schnabel’s comments are a very strong nod towards a new 50 bps rate hike at the September 8 policy meeting. Such move is discounted in money markets, but we think that markets are too dovish further down the line. They discount a deposit rate of around 1% by year-end, suggesting the ECB will slowdown its tightening to 25 bps moves in October and December. Our preferred scenario includes more 50 bps moves. The hawkish Schnabel comments come on the heels of this week’s core bond sell-off and didn’t trigger that much of reaction. German Bunds do underperform US Treasuries. German yield rise slightly across the curve whereas US yields lose 2 bps (30-yr) to 5 bps (2-yr).

US eco data can’t explain the difference. US jobless claims declined slightly, from 262k to 250k while the July Philly Fed business outlook parted ways with a horrible Empire manufacturing survey earlier this week. The Philly Fed gauge unexpectedly improved from -12.3 to 6.2. Details showed an increase in new orders and shipments as well as number of employees. Prices paid fell to the lowest level since December 2020 in the only similarity with NY survey. This likely reflects a decline in energy costs. The six-month forward outlook remains depressed compared with the current situation. FX markets remain stoic. EUR/USD still trades in the 1.01-1.02 area with EUR/GBP flipping sides around 0.8450.
 
News Headlines:

The Norwegian central bank raised its key policy rate as expected by 50 bps, from 1.25% to 1.75%. It’s the second consecutive move from this size since the Norges Bank switched strategies back in June: from gradualism to frontloading. And that’s exactly what the central bank will continue to do. Governor Wolden Bache indicates that the policy rate will most likely be raised further in September based on the current assessment of the outlook and the balance of risks. Economic activity is high with little spare capacity. Inflation has been considerably higher (CPI-ATE 4.5% Y/Y in July) and more broad-based than projected in June with a risk that it remains higher for longer and becomes entrenched in inflation expectations. A markedly higher policy rate is needed to ease pressures in the Norwegian economy and to bring inflation down to target even as there is a risk of sharper slowdown in (global) growth and a cooling down of the housing market. This suggests a faster rise in the policy rate so that the central bank doesn’t need to tighten policy even sharper later on. Norwegian money markets discount a policy cycle peak of 3.75% early next year. The Norwegian krone gained some ground after the decision with EUR/NOK sliding from 9.90 towards 9.83. The NOK swap curve turns even more inverse today with front-end yields rising around 5 bps.
 
The Turkish central bank cut its policy rate unexpectedly from 14% to 13% in a context of 80% Y/Y inflation (24-yr high) and an extremely weak currency. Turkish president Erdogan is an outspoken follower of his own unorthodox theory that monetary policy easing tackles inflation. He finally found a TCMB-governor willing to walk the talk. The official statement nevertheless points to the economic side of story. Leading indicators for the third quarter point to some loss of momentum in economic activity. The MPC deems it important that financial conditions remain supportive to preserve growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as escalating geopolitical risk. Therefore, it cut the policy rate by 100 bps, but judges this one-off cut as appropriate given the outlook. The Turkish lira pays the price with EUR/TRY approaching the YTD high at 18.50.

Daily Pivots: (S1) 1.0149; (P) 1.0176; (R1) 1.0206; More...

Intraday bias in EUR/USD stays neutral first, and risk stays on the downside as long as 1.0368 resistance holds. Rebound from 0.9951 should have completed at 1.0368 after rejection by 55 day EMA, as well as falling channel resistance. Break of 1.0121 minor support will target a retest on 0.9951 low. Firm break there will resume larger down trend.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, outlook will stay bearish as long as 1.0773 resistance holds, in case of strong rebound.

Daily Pivots: (S1) 1.2008; (P) 1.2075; (R1) 1.2123; More...

Intraday bias in GBP/USD remains mildly on the downside at this point. Rebound from 1.1759 could have completed at 1.2292, after rejection by 55 day EMA. Deeper fall should be seen to retest 1.1759 low. Break there will resume larger down trend. On the upside, above 1.2142 minor resistance will mix up the outlook and turn intraday bias neutral first.

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 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.2897).

Daily Pivots: (S1) 0.9461; (P) 0.9488; (R1) 0.9522; More...

No change in USD/CHF's outlook and intraday bias stays neutral first. Recovery from 0.9369 should be limited well below 0.9648 resistance to bring another fall. On the downside, break of 0.9369 will resume larger decline from 1.0063 towards 0.9149 support next. However, firm break of 0.9648 will turn bias back to the upside for 0.9884 resistance instead.

In the bigger picture, break of 0.9471 support turned resistance argues that medium term up trend from 0.8756 has completed with three waves up to 1.0063. Long term sideway pattern might have started another falling leg. Deeper decline would now be in favor as long as 0.9648 resistance holds, to 0.9149 structural support. Sustained break there could pave the way back to 0.8756.

Daily Pivots: (S1) 134.15; (P) 134.83; (R1) 135.74; More...

Intraday bias in USD/JPY stays neutral at this point. Overall, corrective pattern from 139.37 will extend further. On the upside, above 135.57 will resume the rebound to retest 139.37 high. But a decisive break there is not expected this time. On the downside, below 131.72 will resume the fall from 139.37 through 130.38 support.

In the bigger picture, fall from 139.37 medium term top is seen as correcting whole 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 122.70) holds. Long term up trend is expected to resume through 139.37 at a later stage, after the correction finishes.

The markets are generally rather quiet today, with major pairs and crosses trading inside yesterday's range, as well as last week's range. For now, Dollar is the strongest ones, followed by Sterling and then Euro. Australian and New Zealand Dollars are the weakest. Yen and Swiss Franc are mixed together with Canadian.

Technically, Dollar's rally this week is not making much progress so far. Even Gold's pull back is relatively shallow. As long as 1754.13 support holds, rise from 1680.83 is still in favor to resume through 1807.66. Nevertheless, firm break of 1754.13 will probably bring reversal for retesting 1680.83 low. That might be accompanied by stronger rise in the greenback.

In Europe, at the time of writing, FTSE is up 0.16%. DAX is up 0.53%. CAC is up 0.24%. Germany 10-yaer yield is up 0.022 at 1.110. Earlier in Asia, Nikkei dropped -0.96%. Hong Kong HSI dropped -0.80%. China Shanghai SSE dropped -0.46%. Singapore Strait Times rose 0.33%. Japan 10-year JGB yield rose 0.0139 to 0.200.

US initial jobless claims dropped to 250k, below expectations

US initial jobless claims dropped -2k to 250k in the week ending August 13, below expectation of 261k. Four-week moving average of initial claims dropped -2750 to 247k.

Continuing claims rose 7k to 1437k in the week ending August 6. Four-week moving average of continuing claims rose 13k to 1413.

Also released Philly Fed manufacturing survey improved from -12.3 to 6.2 in August. Canada IPPI dropped -2.1% mom in July. RMPI dropped -7.4% mom.

ECB Schnabel: Our concerns was not alleviated after Jul 50bps hike

ECB Executive Board member Isabel Schnabel said in an interview that there was a "strong indication that growth is going to slow". She would not rule out a technical recession in Eurozone, "especially if energy supplies from Russia are disrupted further". Downside risks also increased due to "additional supply-side shocks, caused by droughts or the low water levels in major rivers."

Regarding inflation she said the increasing inflation rates are a "broad-based development". "Inflationary pressures are likely to be with us for some time; they won't vanish quickly," she added. "I would not exclude that, in the short run, inflation is going to increase further.... it's very difficult to predict when inflation is going to peak."

Regarding September meeting, Schnabel said that "the concerns we had in July have not been alleviated". Back in July, ECB raised interest rate by 50bps. "At the moment I do not think this outlook has changed fundamentally," she added.

Eurozone CPI finalized at 8.9% yoy in Jul, core CPI at 5.4% yoy

Eurozone CPI was finalized at 8.9% yoy in July, comparing with June's 8.6% yoy. CPI ex-energy, food, alcohol, and tobacco was finalized at 5.4% yoy (up from June's 4.9% yoy). The highest contribution to the annual Eurozone inflation rate came from energy (+4.02%), followed by food, alcohol & tobacco (+2.08%), services (+1.60%) and non-energy industrial goods (+1.16%).

EU CPI was finalized at 9.8% yoy, up from June's 9.6% yoy. The lowest annual rates were registered in France, Malta (both 6.8%) and Finland (8.0%). The highest annual rates were recorded in Estonia (23.2%), Latvia (21.3%) and Lithuania (20.9%). Compared with June, annual inflation fell in six Member States, remained stable in three and rose in eighteen.

Australia lost -40.9k jobs, but unemployment rate dropped to 3.4%

Australia employment contracted -40.9k in July, much worse than expectation of 25.0k growth. Full time jobs decreased by 86.9k while part time jobs rose 46k.

Unemployment rate dropped from 3.5% to 3.4%. Participation rate dropped notably from 66.8% to 55.4%. Monthly hours worked in all jobs dropped -16m hours, or -0.8% mom.

"The fall in unemployment in July reflects an increasingly tight labour market, including high job vacancies and ongoing labour shortages, resulting in the lowest unemployment rate since August 1974," Bjorn Jarvis, head of labour statistics at the ABS, said.

RBNZ Orr: Monetary policy was too loose for a period

RBNZ Governor Adrian Orr told a parliamentary committee, "our core inflation is too high and that suggests at some point monetary policy was too loose for a period."

"I have already apologized for the current level of inflation. I have already said that the Reserve Bank was party to that," he added.

However, "the worst mistake we could be having would be fighting deflation, unnecessary unemployment and economic collapse," he said. "We have ended up with the better problem -- but it is a problem -- which is inflation, core inflation of 4-6% that we need to put back in the bottle."

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 134.15; (P) 134.83; (R1) 135.74; More...

Intraday bias in USD/JPY stays neutral at this point. Overall, corrective pattern from 139.37 will extend further. On the upside, above 135.57 will resume the rebound to retest 139.37 high. But a decisive break there is not expected this time. On the downside, below 131.72 will resume the fall from 139.37 through 130.38 support.

In the bigger picture, fall from 139.37 medium term top is seen as correcting whole 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 122.70) holds. Long term up trend is expected to resume through 139.37 at a later stage, after the correction finishes.

Economic Indicators Update

US initial jobless claims dropped -2k to 250k in the week ending August 13, below expectation of 261k. Four-week moving average of initial claims dropped -2750 to 247k.

Continuing claims rose 7k to 1437k in the week ending August 6. Four-week moving average of continuing claims rose 13k to 1413.

Full release here.

The US dollar slowly added for the third trading session, returning to levels of three weeks ago. While the published FOMC meeting minutes did not cause a sharp reaction, the FX dynamics of the past week are more indicative of the end of a corrective pullback. And we would not be surprised if the Dollar’s growth will shift to the next gear in the coming days.

The market’s primary focus has been whether there will be a 75-point rate hike next. These expectations have changed little since the futures market, as has been the case for the last week or so, is laying down a roughly 40% chance of a third consecutive such move.

However, the central bank officials are concerned that the inflation threat could quickly return if policy tightening does not suppress expectations. So, the FOMC is in the mood to press the monetary brake pedal more firmly than the market expects. This is now roughly the same signal Powell sent in autumn 2018, resulting in a violent sell-off in the equity market.

It seems that markets are setting expectations for a lower final rate hike than the Fed. The FOMC has been using more and more channels lately to explain its view, from comments from committee members and minutes to explanatory articles in the WSJ.

It is well visible that the currency market has been taking note of these signals for at least a week now, although investors continued to push stocks up until yesterday. The currency market often goes half a step ahead of stocks, so we see the reversal of the Dollar Index to growth over the last ten days as the end of a corrective decline and the start of a new wave of dollar strength.

Apart from the Fed, there are also several fundamental factors on the Dollar’s side right now, from slowing retail sales and a collapse in the housing market to strong demand for LNG, which the US exports to Europe. These factors are reducing pressure on the Dollar through the trade balance.

At the same time, money markets are paying increasing attention to rising bond yields in the US. While the two-year US bonds most sensitive to Fed policy are trading at with 3.2% yield, compared to similar Chinese bonds at just 2.07% and German as low as 0.75%. This disposition attracts buyers to dollar securities, which further support its exchange rate.

The Dollar Index has managed to quickly return above its 50-day moving average, maintaining it as support for over a year. If we are right, the Dollar could soon reach a retest of the July highs, when the DXY was above 109, and the EURUSD was down to 1.0. And with a new retest, we should expect dollar buyers to be able to push it to renew multi-year highs unless the macroeconomic situation changes drastically.

The Australian dollar edged lower following today’s Australian employment report but has reversed directions. In the European session, AUD/USD is trading at 0.6957, up 0.28%.

Australian employment report disappoints

Australia released the July employment report, and the numbers were surprisingly soft. The economy lost 40.9 thousand jobs, well below the estimate of 25.0 thousand. This follows a strong gain of 88.4 thousand in May. Making the report sting even more, full-time positions fell by 86.9 thousand. The silver lining was a drop in the unemployment rate to 3.4%, down from 3.5%. However, that was likely due to the participation rate falling to 66.4%, down from 66.8%. The Australian dollar lost ground following the job report release but has reversed directions.

The Aussie tumbled 1.23% on Tuesday, as ominous developments in China are weighing on the currency. The latest news was the Chinese central bank lowering its 1-year MLF loans to 2.75%, down from 2.85%. The spike in Covid cases and the worsening property crisis have resulted in a decline in credit growth, and the PBOC has loosened policy in an effort to boost credit demand. The Aussie is sensitive to developments in China, which is Australia’s number one trading partner.

The RBA meets next on September 6th and another rate hike is likely, even with the weak job report. The markets have priced in a 25 basis point hike, which would bring the cash rate to 2.10%. The RBA minutes, published on Tuesday, indicated that further rate hikes were coming, but reiterated that the Bank would be guided by economic data and the inflation forecast.

AUD/USD Technical

• There is resistance at 0.7053, followed by a monthly resistance line at 0.7122
• AUD/USD has support at 0.6968 and 0.6902.