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To start we have some breaking news from Japan, where it appears that former Japanese Prime Minister Shinzo Abe has been shot while making a speech in the city of Nara. Mr Abe is being rushed to hospital as I write apparently. As we wait for more details to unfold, there have been some noticeable impacts on Japanese markets. The Nikkei 225 has unwound all its early rally, falling to unchanged. Meanwhile, some Yen haven buying is going through forex markets, pushing USD/JPY down 0.40% to 135.40. Still, it's only money, and my thoughts are with Mr Abe and his family at this time.

Elsewhere, we saw recession fears ebb on Wall Street overnight once again, with stock markets racing to price in a lower terminal Fed Funds rate because of slower growth, or as I call it, any desperate reason to buy the dip. It came despite a sharp rally in oil markets, where there really is a genuine reason to buy the dip, and despite two Fed officials calling for a 0.75% rate hike this month, pushing US yields slightly higher.

I won’t try to overanalyse it, needless to say, today’s lower terminal Fed Funds buying excuse can just as quickly become tomorrow's recession/inflation sell-everything move. Readers should resist the temptation to get caught up in the day-to-day noise, it's an easy way to end up crossing spreads, and get whipsawed, and it is clear that the US equity market has no idea which way the tree will fall either.

One point of volatility this evening is the US Non-Farm Payroll data. The street is forecasting an additional of 268,000 jobs, down from last month’s blockbuster 390,000 print, but still pretty decent. Unemployment is expected to remain steady at 3.650%. The back-month revisions may drive volatility more than the headline and trying to predict the market reaction ahead of time is usually a lose-lose situation, as is trading it in the 30 minutes after the release as the gnomes go crazy. Given the complacency around the path of Fed rate hikes this week, in the context of an apparently looming recession, my best guess is that a high number will provoke a stock market sell-off. The logic is we were wrong about fewer Fed rate hikes, and better sell equities, especially the Nasdaq. Conversely, a lower number which would point to a slowing economy likely means the gnomes of Wall Street will decide they were right about fewer rate hikes, so buy everything, especially the Nasdaq. Obviously, a recession isn’t a conducive environment for equities either, but why let the detail get in the way of the preferred story?

Other news doing the rounds this morning is that China is considering allowing local governments to bring forward CNY 1.5 trillion ($220 billion) worth of bond issuance from their 2023 quotas, into H2 2022. The bonds, which are mostly used to fund infrastructure, would give a healthy dose of stimulus to try and get the Chinese economy back on track to meet those ever-distant 2022 growth goals. In the short term, that should be a positive for China markets, although the price action on Mainland and Hong Kong equity markets is underwhelming. If true, I would say that it isn’t a sea-change approach from China, more an accounting smoke and mirrors. NPV-ing next year's infrastructure spending into this year would be a nice short-term boost, but if they don’t also increase the 2023 bond issuance quotas as well, net-net, it’s a zero-sum game.

The rest of the day's calendar in Asia is dull, with a recovery in Japanese Household Spending rightly forgotten after the Abe news. Malaysian Industrial Production and Indonesian Consumer Confidence are unlikely to move the needle. Taiwan Industrial Production will only be interesting if the trade balance retreats sharply, raising Asia slowdown concerns. Europe’s data releases are also strictly tier-2 as well, leaving markets to follow the US overnight lead to some degree, or headline watch until the US Non-Farm data is released tonight.

Asian stocks follow Wall Street higher

Wall Street shrugged off some hawkish rhetoric from the FOMC members’ rent-a-crowd overnight, myopically sticking to a recession equals lower rates equals buy stocks mantra. With nothing else to shake that tree, I can’t blame them for their enthusiasm. The buy-the-dippers piled into the growth trade, despite oil and US yields rising. The S&P 500 rallied by 1.50%, with the Nasdaq leaping by 2.28%, and the Dow Jones gaining 1.12%. In Asia, some profit-taking is occurring, pushing futures on all three indexes down by around 0.20%.

In Asia, the Abe shooting wiped out the early rally by the Nikkei 225, which is now unchanged on the day. South Korea’s Kospi has also given back some gains but remains 0.85% higher. Mainland China has barely reacted to either Wall Street overnight, or the China bond issuance story. The Shanghai Composite and CSI 300 are up just 0.20%, while Hong Kong’s Hang Seng Index is just 0.40% higher.

Elsewhere, regional Asia is also booking modest gains as markets appear to be more cautious ahead of the US Non-Farm data tonight and the usual weekend event risk. Singapore is 0.30% higher, with Taipei rising by 0.75%, Kuala Lumpur by 0.50%, and Jakarta by 0.70%. Bangkok is flat while Manila has outperformed again, jumping higher by 1.55%. A slight recovery by resource prices overnight, and a strong Wall Street session, see Australia’s All Ordinaries rising by 0.60%, while the ASX 200 has added 0.35%.

European markets had another day of outsized gains overnight as oil prices slumped, the Norwegian oil strike was averted, and a slumping Euro boosts the Eurozone’s export prospects. Oil’s sharp reversal higher in New York will limit those ambitions today for Europe, and I am expecting just a modestly positive open as they also wait for the US data. UK equities rose on PM Johnson’s resignation yesterday, but it seems more like a protest vote, and not a structural turn in sentiment.

US Dollar consolidates overnight

The US Dollar consolidated its gains overnight, ranging against DM and Asian currencies. The dollar index was almost unchanged at 107.09, where it remains in Asia. There is barely any movement in Asian forex markets today either, as the region happily slips into wait-and-see mode ahead of the weekend and tonight’s US Data. Overall, the technical picture remains constructive for the dollar index though, although the daily relative strength index (RSI) is flirting with overbought territory, suggesting a temporary downward correction is possible. Having broken out of a 5-year triangle at 102.50 in April, its longer-term target remains in the 1.1700 area. More immediate resistance is at 107.25 and 110.00. Support is at the 1.0585 breakout point, and then 1.0500, followed by 1.0350 and 102.50. ​

EUR/USD edged 0.23% lower to 1.0160 overnight, where it remains in Asia, as currency markets took a rest from the volatility of the week. Since breaking a multi-year support line at 1.0850 in April, Euro has looked consistently weak, the recovery rally failing ahead of 1.0850 in a technical analysis nirvana. An oversold RSI could allow for a more extended recovery, with resistance at the 1.0300 and the 1.0350 breakout, followed by 1.0600. Support is just below at 1.0150 and then 1.0000.

GBP/USD rallied by 0.85% to 1.2025 overnight as BoJo finally said Bibi. Johnson’s resignations promise more turmoil ahead as there is no obvious candidate amongst the conservatives with a haircut to replace him. As such, I expect Sterling's strength to be as fleeting as a UK cabinet appointment. Immediate support is at 1.1880 and 1.1800, with 1.1400 the medium-term target. Resistance is at 1.2100 and 1.2200.

USD/JPY was steady at 136.00 overnight as US yields firmed slightly. The Abe shooting this morning pushed USD/JP lower to 135.35, but it is already recovering, rising to 135.65. Despite the tragedy of these events, I do not expect them to provide anything but temporary strength. The US/Japan rate differential remains the primary driver of USD/JPY. ​ USD/JPY has resistance at 136.65 and 138.00, with support at 134.25 and 132.00.

AUD/USD and NZD/USD rose mechanically with investor sentiment overnight, both booking decent gains to 0.6840 and 0.6180. AUD/USD has nearby resistance at 0.6850, and NZD/USD at 0.6200. Support is at 0.6760 and 0.6125 respectively.

Asian currencies are treading water today ahead of the weekend and the US data this evening. The overnight session was non-committal, the US Dollar consolidating gains although the Philippine Peso has fallen to 56.00 to the dollar. The juice will be on South Korean, Philippine, Indian, and Indonesian central banks to signal more vigorous rate-hiking ahead, with no sign that the FOMC will blink. Today is likely to be a dull session.

Oil rallies sharply overnight

Oil had another hugely volatile session overnight, with Brent crude and WTI rallying by over 4.0%, reversing the losses of Wednesday. That came despite a huge increase by US official Crude Inventories by 8.235 million barrels. That was a slightly misleading headline though, with the increase aided by disruptions in US refineries. Notably, gasoline inventories slumped by 2.5 million barrels as well. With US refining capacity running at an unrealistic 94.50%, any disruption will impact refined products and backstop WTI, in particular.

Brent crude finished 4.50% higher at 104.25 a barrel, while WTI rallied by 4.15% to $102.20 a barrel. Oil’s rally actually started yesterday as the $100.00 Brent crude proved an irresistible temptation for Asian physical buyers. The slump in US gasoline inventories helped the process along by highlighting how tight supplies remain, especially in the refined categories. Asia has continued buying the dip today as well, perhaps cognisant of weekend headline risk. Brent crude has risen 0.75% to $105.00, with WTI adding 0.50% to $102.80 a barrel.

Brent crude has resistance at $106.00 and then its 2022 trendline breakout at $108.85, followed by the 100-day moving average (DMA) at 110.50. It has traced a double bottom at $98.60, followed by the 200- day moving average (DMA) at $96.35 a barrel. WTI has resistance right here at $102.00 and then it's 100-DMA at $107.16 a barrel. Support is at $96.60, $95.00, and then its 200-DMA at $93.50 a barrel.

Gold is sideways in Singapore

Without much movement in the currency space overnight, gold remained almost unchanged at $1740.50 an ounce, trading in a narrow range. Asia is equally dull, gold edging lower to $1740.00 an ounce.

Since breaking $1780.00, gold’s technical picture has deteriorated rapidly, and it is clear it remains at the mercy of the US Dollar's direction. The only positive note to be seen is that its RSI has fallen into oversold territory, allowing for a modest corrective rally to occur. Despite a couple of sessions of sideways trading, gold remains anchored at the bottom of its range and only a miracle slump by the US Dollar this evening is likely to move it off the seafloor.

Gold has resistance at $1780.00, $1785.00, and $1820.00, its downward trendline. Support is at $1720.00, followed by $1675.00. Failure of longer-term support at $1675.00 sets in motion a much deeper correction, potentially reaching $1500.00 an ounce.

Daily Pivots: (S1) 0.9699; (P) 0.9724; (R1) 0.9766; More...

No change in USD/CHF's outlook as focus remains on 0.9731 minor resistance. Sustained break there will argue that the consolidation from 1.0063 has completed and bring stronger rally back to retest 1.0063 high. However, another fall below 0.9493 will dampen this view and target 0.9459 resistance turned support.

In the bigger picture, down trend from 1.0342 (2016 high) should have completed with three waves down to 0.8756 (2021 low) already. Rise from 0.8756 is likely a medium term up trend of its own. Next target is 1.0237/0342 resistance zone. This will remain the favored case as long as 0.9471 resistance turned support holds. However, sustained break of 0.9471 will extend long term range trading with another falling leg.

Overall markets are relatively quiet in Asian session today. There is little reaction to the tragic news that former Japanese Prime Minister Shinzo Abe was shot and gravely injured. Dollar and Yen remain the strongest ones for the week while Euro is the runaway loser, followed by Sterling by a distant. Focuses will now turn to job data from the US and Canada.

Technically, EUR/USD appears to be losing some downside momentum. There are two fibonacci projection levels from here to parity that could set a bottom for the pair. But a break of 1.0276 minor resistance is needed to be the first sign of bottoming. Meanwhile, reactions to NFP could be wild and they're two-way. So beware.

In Asia, at the time of writing, Nikkei is up 0.77%. Hong Kong HSI is up 0.07%. China Shanghai SSE is up 0.17%. Singapore Strait Times is up 0.15%. Overnight, DOW rose 1.12%. S&P 500 rose 1.50%. NASDAQ rose 2.28%. 10-year yield rose 0.095 to 3.008.

Fed Waller: Definitely support another 75bps in Jul, probably 50bps in Sep

Fed Governor Christopher Waller said yesterday, "we need to move to a much more restrictive setting" and do that "as quickly as possible."

"I'm definitely in support of doing another 75 basis point hike in July, probably 50 in September, and then after that we can debate whether to go back down to 25s," he added.

"Inflation is a tax on economic activity, and the higher the tax the more it suppresses economic activity," Waller warned. "If we don't get inflation under control, inflation on its own can place us in a really bad economic outcome down the road."

Fed Bullard continues to advocate getting to 3.5% this year

St. Louis Fed President James Bullard "I think it would make a lot of sense to go with the 75 at this juncture", referring to the rate hike in this month's FOMC meeting.

"I've advocated and continue to advocate getting to 3.5% this year, then we can see where we are and see how inflation's developing at that point," he added.

On the economy, Bullard said, there is a "a good chance of a soft landing." "At this point, it appears that the GDI (gross domestic income) measure is more consistent with observed labor markets, suggesting the economy continues to grow."

On the data front

Japan bank lending dropped -0.5% yoy in Jun, below expectation of 0.9% yoy. Current account surplus narrowed to JPY 0.01T, below expectation of JPY 0.16T.

Looking ahead, France trade balance and Italy industrial output will be released in European session. But main focuses will be on US non-farm payroll and Canada employment later in the day.

More on NFP and Canada:

• NFP Preview: 75bps Hike Likely Even if Jobs Disappoint
• Dollar Re-Energized ahead of Fed Minutes, NFP Report Amid Recession Jitters
• NFP This Week Will Test Dollar's Year-Long Trend
• Canadian Jobs Data Eyed after Loonie's Sharp Sell-off
• Canadian Dollar Eyes Job Data in Canada, US

USD/CHF Daily Outlook

Daily Pivots: (S1) 0.9699; (P) 0.9724; (R1) 0.9766; More...

No change in USD/CHF's outlook as focus remains on 0.9731 minor resistance. Sustained break there will argue that the consolidation from 1.0063 has completed and bring stronger rally back to retest 1.0063 high. However, another fall below 0.9493 will dampen this view and target 0.9459 resistance turned support.

In the bigger picture, down trend from 1.0342 (2016 high) should have completed with three waves down to 0.8756 (2021 low) already. Rise from 0.8756 is likely a medium term up trend of its own. Next target is 1.0237/0342 resistance zone. This will remain the favored case as long as 0.9471 resistance turned support holds. However, sustained break of 0.9471 will extend long term range trading with another falling leg.

Economic Indicators Update

St. Louis Fed President James Bullard "I think it would make a lot of sense to go with the 75 at this juncture", referring to the rate hike in this month's FOMC meeting.

"I've advocated and continue to advocate getting to 3.5% this year, then we can see where we are and see how inflation's developing at that point," he added.

On the economy, Bullard said, there is a "a good chance of a soft landing." "At this point, it appears that the GDI (gross domestic income) measure is more consistent with observed labor markets, suggesting the economy continues to grow."

Fed Governor Christopher Waller said yesterday, "we need to move to a much more restrictive setting" and do that "as quickly as possible."

"I'm definitely in support of doing another 75 basis point hike in July, probably 50 in September, and then after that we can debate whether to go back down to 25s," he added.

"Inflation is a tax on economic activity, and the higher the tax the more it suppresses economic activity," Waller warned. "If we don't get inflation under control, inflation on its own can place us in a really bad economic outcome down the road."

DXY:

On the H4, with prices moving above the ichimoku indicator and along the ascending trendline, we have a bullish bias that prices will drop and rise from 1st support at 105.794 where the pullback support, 38.2% fibonacci retracement and 100% fibonacci projection are to 1st resistance at 109.711 in line with 78.6% fibonacci projection and 78.6% fibonacci projection. Alternatively, price may break 1st support structure and drop to 2nd support at 103.401 where the horizontal swing low support and -27.2% fibonacci expansion are.

Areas of consideration:

• H4 time frame, 1st resistance at 109.711
• H4 time frame, 1st support at 105.794

XAU/USD (GOLD):

On the H4, with prices moving below the ichimoku indicator and along a descending trendline, we have a bearish bias that prices will drop to our 1st support at 1721.41 where the horizontal swing low support, 78.6% fibonacci projection and 161.8% fibonacci extension are. Once we have downside confirmation of price breaking 1st support structure, we would expect bearish momentum to carry price to 2nd support at 1678.73 in line with swing low support and 100% fibonacci projection. Alternatively, price could rise to our 1st resistance at 1760.80 in line with overlap resistance.

Areas of consideration:

• H4 time frame, 1st Resistance at 1760.80
• H4 time frame, 1st Support at 1721.41

GBP/USD:

On the H4, with prices moving below the ichimoku indicator and within the descending channel, we have a bearish bias that price will drop to our 1st support at 1.19773 where the horizontal pullback is. Once there is downside confirmation of price breaking 1st support, we would expect bearish momentum to carry price to our 2nd support at 1.17884 where the -27.2% fibonacci expansion and 61.8% fibonacci projection are. Alternatively, price could rise to 1st resistance at 1.21611 in line with the pullback resistance and 61.8% fibonacci retracement.

Areas of consideration:

• H4 1st resistance at 1.21611
• H4 1st support at 1.19773

USD/CHF:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise from our 1st support at 0.97169 where the horizontal pullback support is to our 1st resistance at 0.98065 in line with the 127.2% Fibonacci extension and 61.8% Fibonacci retracement. Alternatively, price may not break 1st support and head for 2nd support at 0.96336 where the horizontal pullback support.

Areas of consideration

• 1st support level at 0.97169
• 1st resistance level at 0.98065

EUR/USD :

On the H4, with price moving below the ichimoku cloud and in a descending trendline, we have a bearish bias that price will continue to drop from the 1st resistance at 1.02118 in line with the 161.8% fibonacci extension and 100% fibonacci projection to the 1st support at 1.00140 in line with the 100% fibonacci projection and -61.8% fibonacci expansion. Alternatively, price may reverse off 1st resistance and rise to the 2nd resistance at 1.03587 at the pullback swing low in line with the 61.8% fibonacci projection.

Areas of consideration :

• H4 1st resistance at 1.02118
• H4 1st support at 1.00140

USD/JPY:

On the H4, with price moving along an ascending trendline and above the ichimoku indicator, we have a bullish bias that price will rise to our 1st resistance at 136.706 in line with the swing high resistance and 100% fibonacci projection. Once there is upside confirmation of price breaking 1st resistance, we would expect bullish momentum to carry price to 2nd resistance at 141.325 in line with 61.8% fibonacci projection and 100% fibonacci projection. Alternatively, price could drop to 1st support at 134.292 in line with the swing low support, 100% fibonacci projection and 23.6% fibonacci retracement.

Areas of consideration:

• H4 time frame, 1st resistance at 136.706
• H4 time frame, 1st support at 134.292

AUD/USD:

On the H4, with price recently breaking out of the descending trendline and RSI moving in an ascending trendline, we have a bullish bias that price will continue to rise from the 1st support at 0.68182 in line with the pullback support and 61.8% fibonacci projection to the 1st resistance at 0.69637 at the swing high in line with the 100% fibonacci projection. Alternatively, price may reverse off the 1st support and drop to the 2nd support at 0.6724 at the swing low in line with the 78.6% fibonacci projection.

Areas of consideration

• H4 1st resistance at 0.69637
• H4 1st support at 0.68182

NZD/USD:

On the H4, with price moving in an ascendig trendline on the RSI, we have a bullish bias that price will continue to rise from the 1st support at 0.61977 in line with the pullback support, 50% fibonacci retracement and 61.8% fibonacci projection to the 1st resistance at 0.63238 at the swing high in line with the 78.6% fibonacci projection and 61.8% fibonacci retracement. Alternatively, price may reverse off the 1st support and drop to the 2nd support at 0.61353 at the swing low in line with th e100% fibonacci projection.

Areas of consideration:

• H4 time frame, 1st support at 0.61977
• H4 time frame, 1st resistance at 0.63238

USD/CAD:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise from our 1st support at 1.29525 where the horizontal pullback support and fibonacci confluence are to our 1st resistance at 1.30780 in line with the horizontal swing high resistance. Alternatively, price may not break 1st support and head for 2nd support where the horizontal swing low support is.

Areas of consideration:

• H4 time frame, 1st resistance at 1.30780
• H4 time frame, 1st support at 1.29525

OIL:

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop to our 1st support at 97.1 where the horizontal swing low support is from our 1st resistance at 104.22 in line with the horizontal pullback resistance and 50% Fibonacci retracement. Alternatively, price may break 1st resistance and head for 2nd resistance at 111.34 where the horizontal swing high resistance and 78.6% Fibonacci retracement is.

Areas of consideration:

• H4 time frame, 1st resistance of 104.22
• H4 time frame, 1st support of 97.1

Dow Jones Industrial Average:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise from our 1st support at 31218 where the horizontal pullback support is to our 1st resistance at 31866 in line with the horizontal swing high resistance. Alternatively, price may not break 1st support and head for 2nd support at 30434 where the horizontal swing low support.

Areas of consideration:

• H4 time frame, 1st resistance of 31866
• H4 time frame, 1st support of 31218

The Reserve Bank Board decided to increase the cash rate target by 50 basis points to 1.35% at its July Board meeting. The decision was expected by Westpac and widely anticipated by the market and other analysts.

The Governor's July decision Statement provides ample flexibility for the next Board meeting on August 2. From our perspective the key objective of scrutinising the Statement is to detect whether there appeared to be any clear signal that the Board planned to scale back the sequence of 50 basis point moves which we have now seen for two consecutive months. Since the RBA began announcing the cash rate publicly in 1990 it has never raised the cash rate in two consecutive meetings by 50 basis points each. However, the Governor's statement made no reference to that historical precedent, something that may have been done if he was signalling the intention to scale back the moves. Neither did he assess that the stance of policy had moved from stimulatory to the neutral range.

He sounded more confident about the inflation outlook, noting that the Bank expected that the inflation rate would peak later in 2022. On the other hand, he did observe that the real time data on the labour market and household spending had lifted. We note that this has been despite the sharp deterioration in consumer confidence. However, the resilience of household spending to date has relied upon a strong reopening effect and the release of spending capacity as the savings rate returns to more normal levels. We see those effects fading through 2022 with spending in the December quarter and 2023 falling well short of long run trend.

The Governor stopped referring to rates as "very low" but did not substitute that term with a more moderate assessment. Of some significance was the strong emphasis in the Statement on the importance of inflationary expectations. And most importantly he implied that the June quarter Inflation Report would be pivotal to future decisions. With all this in mind and given our upbeat forecast for the June inflation report (5.8% headline; 4.5% trimmed mean), we remain comfortable with our expectation that the Board will decide on a further 50 basis point lift at the August 2 meeting. In light of that significant expected lift in inflation both headline and underlying it is appropriate for the Board to lift rates by a further 50 basis points , while the policy setting is still stimulatory, to emphasise its commitment to returning inflation to the target range of 2–3%.

However, we are expecting the Board to pause in September and October. A key to that decision to pause will be the RBA's assessment of the level of rates that constitutes a neutral policy stance. We assess that stance as being in the 1.5–2.0% range. Neutral is the rate at which policy is neither stimulatory nor contractionary.

Given the powerful transmission from the cash rate to the household sector (we assess that 90% of borrowers will be directly affected by the RBA's cash rate policy by end 2023), "neutral" has been falling as households have lifted their leverage.

But we cannot be certain of the level of neutral and many central banks have followed the Greenspan example (paraphrased), "I will tell you where neutral is when we get there!" That is the right approach and argues for a near-term pause in the RBA's tightening cycle to assess the cumulative impact of a series of out sized rate increases.

The concept that neutral is "zero real" when inflation is back at the middle of the target band might be an interesting theoretical approach for a steady state analysis but "zero real" is hardly relevant when annual inflation is trending towards 7%.

For example, if inflation was back at 2.5% the dampening impact on the economy of inflation (through the squeeze on household budgets) would be much weaker than the current situation where inflation is more than double 2.5% and rising. With inflation playing a much more prominent role in restraining real activity the level of interest rates required to align demand with supply is appropriately lower – not higher which would be the result of targeting zero real as "neutral".

Consequently, some notion that "neutral" should be 2.5% (zero real) seems misplaced in this extraordinary cycle. There have been some reports that the RBA sees neutral as 2.5% but that is likely to be a theoretical "steady state" assessment – not an approach which is relevant to the current situation.

But to support our expectation that the Board will pause in September we will need to see a significant change in the wording in the August Statement, highlighting some if not all of: how far rates have moved in such a short time; describing the rate of 1.85% as in the neutral zone; noting the much higher frequency of RBA meetings than other central banks: while firmly indicating that further increases will be required.

It will also be important to assess the Bank's revised forecasts which print on August 5, three days after the Board meeting, with the August Statement on Monetary Policy.

As we have done quite successfully through this current cycle, we have chosen to forecast the best policy rather than follow any implied guidelines from the RBA. For September, having firmly established the RBA's inflation targeting credentials over the previous four meetings, the Board's best policy option will be to pause to assess the high frequency response (confidence; house prices; new lending; housing related spending such as durables) and global developments before resuming the cycle following the September quarter Inflation Report. That Report is likely to see underlying inflation lift further to around 4.8% requiring a further, but scaled back, response of 25 basis points to emphasise that the Board remains focussed on its inflation objectives.

Our expected peak in the cycle (2.6%) is likely to be reached in February 2023, although the Board is unlikely to be able to indicate such an expectation.

A further pause in March in recognition that policy is firmly in the contractionary zone would be appropriate to again observe developments in the economy. By then we expect the very clear indications that the economy has slowed substantially with consumer spending growth well below trend; house prices well on the way to our 14% contraction target by end 2023; housing activity signalling an imminent contraction; the FOMC on hold; and the US economy losing all momentum.

But the key will be the March quarter Inflation Report where we expect to see annual inflation, both headline and underlying showing the first signs of falling (headline 6.6% to 5.6%; underlying 4.8% to 4.2%). Although annual inflation will still not be within the target band the Board will be observing a significant easing in supply side inflation pressures which are likely to continue as global demand slows and supply adjusts to elevated prices. The obvious easing in demand in the economy supplemented by increasing overseas arrivals will be closing the demand/supply gap in the labour market and provide the Board with ample justification to maintain its pause.

Key insights from the week that was.

Policy actions and talk of recession have filled the headlines in Australia and across the world this week.

The July RBA meeting was as expected, with another 50bp hike decided upon by the Board. As detailed by Westpac Chief Economist Bill Evans, there was nothing in the statement to dissuade us of the view that the July hike will prove the second of three consecutive 50bp hikes June through August, necessary to combat historic inflation and associated risks. Arguing in favour of this forecast and our belief that a further 75bps of tightening will be delivered in 25bp increments November through February was the close attention paid by the RBA to the continued rise of Australian inflation as a result of global and domestic pressures; our tight labour market; and recent strength in consumer spending. Downside risks to growth here and abroad are being monitored closely but, at least for the time being, remain secondary to the inflation threat.

On the data front, regarding housing, both dwelling approvalsand housing finance surprised materially to the upside in May, largely due to idiosyncratic factors around lumpy high-rise approvals and the clearing of processing backlogs from April. The underlying detail still echoes a down-beat assessment for Australia’s housing sector however, with a broad-based decline in private detached housing approvals (-2.4%mth) and persistent weakness in owner-occupier financing due to affordability concerns (-3.7%ytd). The backdrop of rising building costs, an aggressive RBA tightening cycle and a housing market correction are set to sustain the down-trend in dwelling construction and home lending over the remainder of 2022.

Australian trade also materially beat expectations in May, the surplus widening to a record high of $16bn on strength in resource exports. Total exports gained 9.5% as resource earnings rose 12.0%. Of particular note for resources, coal export earnings soared 20% on higher prices and volumes. Smaller in scale but also of significance, service exports gained 4.8% as tourism earnings increased 10% following a 29% jump in April as border re-opening continues to take effect. Along with continued strength in domestic demand, the price of oil and a weaker Australian dollar saw imports up 5.8% in May, partially offsetting exports’ strength.

Offshore, the minutes of the FOMC’s June meeting were the focus. There was nothing new in the content or tone of the report, with a clear emphasis on the risks to the outlook for inflation and inflation expectations as well as robust belief in the health of the US economy. That said, for inflation, it was emphasised that a key driver of the current wave is supply not demand – limiting the FOMC’s ability to curb aggregate inflation with rate hikes; and regarding growth, at numerous times in the minutes evidence of building downside risks was provided. Both trends are consistent with our baseline view that another 75bp hike will be delivered in July and be followed by a 50bp hike come September; however, thereafter the pace and scale of rate increases will decrease abruptly, with only another 50bps of tightening occurring across the November and December meetings.

Of greater significance for term interest rates is that we see a series of rate cuts commencing from Q4 2023, totalling 125bps by Q4 2024. This will leave the fed funds rate at 2.125% into the medium-term, with the risk additional cuts will be required. Consequently, we see the US 10 year back at 2.00% from the end of 2024. Whereas historically high inflation in the US is proving transitory (slowly), increasingly it seems the primary risk for their economy is below-trend growth becoming an enduring force. On this risk, note that the US is already on the cusp of two consecutive negative quarters of GDP at June 2022, while the outlook for income, financial conditions and confidence is adverse. These are themes explored in depth in our July edition of Market Outlook, due for release later today on Westpac IQ.

Despite the ongoing deterioration in US economic prospects, the US dollar continues to ride high. Indeed, midweek it reached a new multi-decade high of 107.3 on a DXY basis, now 107.1. The primary trigger for the move was a gas worker strike in Norway which hit already-fragile belief in the security of Europe’s gas supply hard. The strike looks to have already ended, but the weight on Euro from global risk aversion will take a lot longer to lift. With the market effect of the Ukraine conflict receding, and given the resilience the Euro Area economy has shown to date, we believe Euro will rebound in the second half of this year and continue on this uptrend through 2023. The relative and absolute economic foundations of FX markets are also a key topic of discussion in Market Outlook.

• AUD/USD has spend four consecutive weeks below 0.70
• RBA interest rate hike expectations have cooled since June

AUD/USD Under Pressure

AUD/USD has spent four consecutive weeks below 0.70, a region of major support, which also marked the bottom of its longer-term structural range. The gradual pairing back in RBA interest rate hike expectations, global recessionary concerns, and the Fed talking tough on interest rates, all seem to be at play here. Potentially, that doesn’t bode well for AUD/USD in the near term. In my mind, the only fundamental path for the AUD to really outperform is if global inflation pressures ease; that Fed interest rate hike expectations drop dramatically; and global recession is avoided. The way conditions stand at the moment, that seems an unlikely trinity.

RBA Rate Expectations Fall

Only this June, interest rate markets were pricing the RBA policy rate at 4% by year end. At the time of writing, that figure was c 3.2%, while guidance from the RBA sits at 2.5%. Markets, in my opinion, risk a gradual convergence toward the RBA guidance rather than the other way around. That’s not to say the RBA is not serious about fighting inflation, which stood at 5.1% in Q1. Aside from global inflation pressures, Australia’s low unemployment rate and strong Q1 GDP number all warrant tighter monetary policy. Hence why the RBA has raised interest three times this year, most recently by 50 bps in July to 1.35%. More is also likely to come by way of a 50 bps hike in August.

Fast Paced Transmission

Instead, markets may be underestimating the relative speed of RBA monetary policy transmission. This is visible in the housing market, which is financed largely by variable rate mortgages, and is already coming under strain for the current interest rate rises. A recent article in the Guardian newspaper, does a very good job highlighting the level of mortgage stress in the Australian economy. PMI data also points to services sector activity slipping in Q2, after a relatively strong start to April. As a result, the RBA guidance may be closer reality than what's currently implied by the market.

Narratives Need to Change

On that basis, the RBA is going to have trouble keeping pace with the Fed’s advertised tightening path. That may not be a good outcome for a high yielding currency like AUD/USD. Were the Fed to switch gears after slipping the world into recession, that would likely be equally unfavourable for a growth sensitive currency such as the Australian dollar. In other words, the narrative that suits AUD/USD isn’t currently any of those circulating financial markets at the moment.

• EURGBP broke key support level 0.8500 50
• Likely to fall to support level 0.8430

EURGBP currency pair recently broke the key support level 0.8500 (which stopped the previous waves a and (4), as can be seen below).

The breakout of the support level 0.8500 coincided with the breakout of the 50% Fibonacci correction of the upward impulse from April.

Given the strongly bullish sterling sentiment, EURGBP can be expected to fall further toward the next support level 0.8430 (target for the completion of the active ABC correction (2)).