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European Trade Commissioner Cecilia Malmstrom said today that EU is ready to retaliate with extra tariff on EUR 35B in US imports, if the latter goes ahead with tariffs on EU cars.

She added, "we will not accept any managed trade, quotas or voluntary export restraints and, if there were to be tariffs, we would have a rebalancing list."

And, "it is already basically prepared, worth 35 billion euros. I do hope we do not have to use that one."

BoE Chief Economist Chief Haldane said today that business investment was "strikingly and significantly subdued" ahead of Brexit. And the economy stalled in the Q2. Though he added, "my personal view though is that I would be very cautious about considering a monetary policy loosening, barring some sharp economic downturn."

Additionally, "with the economic road ahead potentially forking, the case for holding rates until the road becomes clearer is strong."

On Brexit, Haldane warned "if a 'no deal' were to lead to a sharp fall in sterling and a sharp rise in inflation expectations, it is not clear the MPC could cut interest rates, as the market expects, if it was to meet its inflation mandate."

Markets

The German Bund started off lower but managed to eke out small gains eventually. Markets err on the side of caution ahead of tomorrow’s EMU PMI’s and Thursday’s ECB meeting which yields a lot of market moving potential. The announcement of UK’s new PM (see below) had little impact as the outcome was as expected. Still, with Brexit and all of its uncertainty now back on the radar, it can be considered a marginal Bund positive too. Yields decline about 0.6 bps in the 2-yr, 5-yr and 10-yr tenor. Peripheral spreads narrow from -3 bps (Italy) to -5 bps (Greece). Portugal and Spain underperform (both +2 bps). In the UK, the Treasury department cashed in on the strong gilt rally and saw it’s 10-yr auction printing at 0.789%, the second-lowest yield on record after an auction in the wake of 2016’s Brexit vote. US yields traded a choppy pattern near opening levels before heading north on US Kudlow’s remarks. He confirmed yesterday’s reports by Chinese media and said that the US trade official’s trip to China is likely to happen. US yield changes vary from +2.3 bps (2-yr) over +1.3 bps (5-yr) to +2 bps (10-yr).

EUR/USD drifted below the 1.12 big figure in Asian trading hours. This gradual but protracted decline continued throughout the day. There was no specific driver to explain the move. The dollar remains strong overall as was already the case yesterday. Interest rate differentials are widening in favour of the US currency, but only marginally. Market pricing on the outcome of ECB meeting didn’t change much today. However, euro investors apparently don’t want to be wrong-footed in case Draghi would bring an extremely soft message or cut rates already this week. The break below the 1.1180/90 support area worsened the MT picture for the EUR/USD cross rate. The pair is currently trading in the 1.1160 area. The door is open for a retest of the key 1.11 support area. USD/JPY extends gains north of 108 as global equities show solid gains and US yields rose a few bps.

Sterling remained under pressure this morning. Some investor caution ahead of the announcement of the new conservative party leader was in play. At the same time, BoE policy maker Saunders indicated that the uncertain economic outlook due to Brexit can bring the Bank in a position not to raise rates even as the its own forecasts suggest to do so. This ‘soft’ twist of a hawkish member of the BoE validated market pricing that a BoE rate cut is unlikely anytime soon and weighed on sterling. EUR/GBP returned to the 0.90 area. However, sterling selling already dried up before the UK conservative party at noon announced that Boris Johnson will become the next UK PM. Some sterling shorters took profit causing an early (but modest) buy-the-rumour sell-the fact reaction already before the official announcement. In his speech Johnson avoided any specific indications on how he intends to solve the Brexit stalemate. He reiterated his intention to leave the EU on October 31 and also indicated action to ‘energize’ the economy (fiscal stimulus?). The CBI order and confidence data published around noon at least suggested that any help for the UK economy is highly welcome. Both CBI confidence and order data fell off a cliff. EUR/GBP is currently trading in the 0.8980 area. Cable hovers in the 1.2440 area. For now, there is no indication of substantial profit taking on sterling shorts yet. Today’s sterling repositioning is only of intraday significance at best.

News Headlines

Spanish Socialist leader Sanchez did not receive enough backing by parliament to form a government today. He now has two days to try to hammer out a coalition deal with far-left Podemos before a second vote is due. If Thursday’s vote delivers no majority either, further and final votes could be held in September before a repeat election will be held on November 10.

The IMF again lowered 2019 global growth forecasts from 3.3% in April to 3.2% and warned for policy “missteps” on trade and Brexit, which could derail a projected rebound in 2020 (to 3.5%). US growth has been revised upwardly (from 2.3% to 2.6%) while China saw its growth cut to 6.2% (-0.1% point). World trade is expected to rebound to 3.7% vs. 3.9% earlier.

NZDJPY recorded a bounce up in the short-term, from the five-and-a-half-month low of 70.25 on June 18, and in the last month has pushed north into the Ichimoku cloud. The price stalled ahead of the upper boundary of the cloud coupled with the 100-day simple moving average (SMA) in the previous session.

There is a lack of direction in momentum indicators, as the short-term Tenkan-sen line is pointing upwards, although the Kijun-sen is flattening. Furthermore, the MACD is moving sideways in positive area and the RSI approached the overbought level and turned down. The ADX suggests a strong trend persisting.

Shifts downwards would require the near resistance of 72.92 to hold, while a budge to the price below the 38.2% Fibonacci retracement level of the down leg from 76.77 to 70.25 around of 72.75, could see the 23.6% Fibo of 71.80 be tested alongside the 50-SMA. If the run down keeps up, a breach of the support of 71.50 would open the scenario of the low of 70.25.

Congested overwhelming pressure to the upside exists initially from the upper boundary of the Ichimoku cloud and the 100-SMA, with looming 50.0% Fibo of 73.50 moving inside a gap that was reached on May 6. If these are breached, price could face the 200-SMA, which stands near the 61.8% Fibo of 74.28.

Overall, in the short-term picture, traders should wait for a penetration of the Ichimoku cloud in either direction for clear tendency.

The ever-changing landscape of modern-day politics in the United Kingdom has taken yet another twist, following the confirmation that Boris Johnson has been named as the new UK Prime Minister.

Johnson secured more than 92,000 votes in the Tory leadership contest, in comparison to rival candidate, Jeremy Hunt who got approximately 46,000 votes.

When considering the high probability that Boris Johnson would be declared the undisputed victor when he entered the leadership race a few weeks ago, the results do not signal a whitewash victory but this is still a strong win for the new UK Prime Minister.

What does Boris Johnson’s election victory mean for Brexit?

Of course, the key question for investors now that it has been confirmed that Johnson has become the new UK Prime Minister is what does this mean exactly for Brexit?

The new Prime Minister is after all assuming the mantle of leadership at a time where there is no clear majority in Parliament, the clock is ticking fast to the October 31 Brexit deadline and with a troubled Pound that has been left in limbo by Brexit confusion for the majority of time that has passed since the historic 2016 EU referendum.

Given how the new Prime Minister has repeatedly pledged to leave the European Union with or without a deal on October 31, investors will be observing nervously if Johnson can “walk the walk” after “talking the talk” on securing Brexit.
EU unlikely to reopen negotiations despite Johnson win

Amid all the uncertainty and chaos swirling around Brexit, there are few things that are clear. But, one of them is that the European Union is highly unlikely to re-open talks on the Brexit withdrawal agreement - leaving Johnson’s options as highly restrictive.

A difficult task ahead for new PM as Brexit clock counts down

Johnson certainly has a mammoth task ahead of the EU exit date as he inherits a Conservative party fractured by Brexit. With Chancellor Philip Hammond intending to resign on Johnson becoming Prime Minister and Sir Alan Duncan already quitting as Foreign Office minister, matters do not bode well for political certainty.

Make no mistake, Boris Johnson’s first speech as UK Prime Minister when entering 10 Downing Street for the first time on Wednesday is absolutely critical. Any comment that is made on Brexit will be like letting a pin drop in a silent space.

Should Johnson unexpectedly dial down on his Brexit “do or die” by October 31 rhetoric, the Pound will be handed a completely unexpected lifeline as concerns over a no-deal Brexit recede. As unexpected as this might seem.

Next season of Brexit saga to feature Boris Johnson as main character

One thing that is clear is that the real action in the next feature film on Brexit is that this is just the beginning of a new era. Investors should fasten their seat belts and prepare for a turbulent ride in the months ahead for the British Pound as “Brexit season 4: Boris in Power” kicks off.

Pound still remains sick man of G10 space

Sterling jumped towards 1.2480 against the Dollar before later surrendering most of the gains, following news that Boris Johnson secured the title as the new Prime Minister.

The Pound still remains one of the sick men in the G10 space as it has weakened against every single G10 currency this month. Where the British Pound concludes this week will be heavily influenced by how markets react to the new Prime Minister’s speech to the nation on Wednesday.

Technical traders will continue to observe closely how the GBPUSD behaves around 1.2420. An intraday breakdown below this point may open a path towards 1.2400 and 1.2350 in the near term.

Daily Pivots: (S1) 107.69; (P) 107.88; (R1) 108.06; More...

Intraday bias in USD/JPY remains neutral for the moment. On the upside, break of 108.37 will extend the correction from 106.78 with another rise, possibly through 108.99 resistance. On the downside, break of 107.21 will resume the fall from 108.99 to 106.78 low. Decisive break there will resume whole decline from 112.40.

In the bigger picture, decline from 118.65 (Dec 2016) is still in progress, with the pair staying inside long term falling channel. Break of 104.62 will target 100% projection of 118.65 to 104.62 from 114.54 at 100.51. For now, we'd expect strong support above 98.97 (2016 low) to contain downside to bring rebound. In any case, break of 112.40 is needed to the first serious sign of medium term bullishness. Otherwise, further decline will remain in favor in case of rebound.

Daily Pivots: (S1) 0.9803; (P) 0.9822; (R1) 0.9840; More...

Intraday bias in USD/CHF remains neutral for the moment. Further decline is in favor with 0.9908 resistance intact. Below 0.9803 will extend the fall from 0.9951 to retest 0.9695 low. On the upside, break of 0.9908 resistance would resume the rebound from 0.9695, through 0.9951, to 1.0014 resistance.

In the bigger picture, up trend from 0.9186 (2018 low) should have completed at 1.0237 already. Deeper decline would be seen to 61.8% retracement of 0.9186 to 1.0237 at 0.9587 and below. For now, USD/CHF is seen as in long term range pattern between 0.9186 and 1.0342. Hence, we'd pay attention to bottoming signal below 0.9587. However, sustained break of 1.0014 will revive medium term bullishness and turn focus back to 1.0237 high.

Daily Pivots: (S1) 1.2449; (P) 1.2484; (R1) 1.2513; More....

GBP/USD is still staying in range of 1.2382/2579 and intraday bias remains neutral first. Further decline remains in favor too as long as 1.2579 resistance holds. Sustained break of 1.2391 key support will resume larger down trend for 61.8% projection of 1.4376 to 1.2391 from 1.3381 at 1.2154 next. Though, break of 1.2579 will indicate short term bottoming and bring stronger rebound back to 1.2783 resistance. In this case, consolidation from 1.2391 would extend with another rise, towards 1.3381 resistance, before completion.

In the bigger picture, down trend from 1.4376 (2018 high) is still in progress. Break of 1.2391 would target a test on 1.1946 long term bottom (2016 low). For now, we don't expect a firm break there yet. Hence, focus will be on bottoming signal as it approaches 1.1946. In any case, medium term outlook will stay bearish as long as 1.3381 resistance holds, in case of strong rebound.

Daily Pivots: (S1) 1.1202; (P) 1.1213; (R1) 1.1221; More...

EUR/USD drops further to as low as 1.1163 so far in early US session. Intraday bias remains on the downside for retesting 1.1107 low. At this point, we're not expecting a break there yet. Thus, focus will be on bottoming signals around 1.1107. Though, break of 1.1282 resistance is needed to signal completion of fall from 1.1412. Otherwise, further decline is in favor even in case of recovery.

In the bigger picture, on the one hand, 1.1107 is seen as a medium term bottom on bullish convergence condition in weekly MACD. On the other hand, rejection by 55 week EMA retains medium term bearishness. Outlook stays neutral for now. On the downside, break of 1.1107 will resume the down trend from 1.2555 (2018 high) to 78.6% retracement of 1.0339 to 1.2555 at 1.0813. Meanwhile, break of 1.1412 will resume the rebound to 38.2% retracement of 1.2555 to 1.1107 at 1.1660.

Sterling has a very brief recovery today after Boris Johnson reaches the most important checkpoint to become the next UK prime minister. But the Pound quickly lost momentum and is back under pressure. Though, for now, New Zealand Dollar is the weakest one, followed by Euro, then Sterling. On the other hand, Dollar is extending recent this week's rebound, and gains further momentum in early US session. Swiss Franc is currently the second strongest, followed by Australian.

Technically, EUR/USD's break of 1.1193 support earlier today is the first sign of Dollar strength. It's on tract to retest 1.1107 low. USD/CAD's break of 1.3143 resistance is the second sign. A short term bottom is formed at 1.3016 and stronger rebound should be seen. 108.37 in USD/JPY will be an immediate focus now. Break will likely resume recent rebound from 106.78 through 108.99 resistance.

In Europe, currently, FTSE is up 0.97%. DAX is up 1.62%. CAC is up 1.01%. German 10-year yield is down -0.0005 at -0.346. Earlier in Asia, Nikkei rose 0.95%. Hong Kong HSI rose 0.34%. China Shanghai SSE rose 0.45%. Singapore Strait Times rose 0.47%. Japan 10-year JGB yield dropped -0.0123 to -0.147.

Johnson wins UK Conservative leaders, EU Barnier look forward to work constructively

Boris Johnson wins the six-week Conservative leadership race and is set to become the next UK Prime Minister. Johnson defeated his rival Foreign Minister Jeremy Hunt with 92153 to 46656 votes of party members. It's seen by some as a spectacular victory of the public face of the Brexit campaign. Current Prime Minister Theresa May will leave office tomorrow after meeting Queen Elizabeth, who's expected to formally appoint Johnson afterwards.

Brexit, due date on October 31, is the first thing for Johnson to handle. He said the three priorities are to "deliver Brexit, unite the country and defeat Jeremy Corbyn." Also, "We are going to energize the country. We are going to get Brexit done on Oct. 31 and we are going to take advantage of all the opportunities it will bring in a new spirit of can do."

EU Timmermans: Hard Brexit a tragedy for all sides

EU chief Brexit negotiator Michel Barnier said EU looks forward to "working constructively with Johnson when he takes office, to facilitate the ratification of the Withdrawal Agreement and achieve an orderly Brexit. Also, EU is ready also to rework the agreed Declaration on a new partnership in line with EUCO guidelines.

European Commission Vice President Frans Timmermans reiterated that "The United Kingdom reached an agreement with the European Union and the European Union will stick to that agreement". And, "this is the best deal possible".

He added, "we will hear what the new prime minister has to say when he comes to Brussels." "A no-deal Brexit, a hard Brexit, would be a tragedy – for all sides, not just for the United Kingdom," Timmermans said. "We are all going to suffer if that happens."

BoE Saunders: There's a tension, disparity between forecasts and actual policy vote

Comments of BoE hawk Michael Saunders suggest that he won't be pushing for rate hike for now. He said in a Bloomberg interview that "the economy right now is clearly not overheating - the underlying pace of growth, stripping out all of the funny effects, inventories, car shutdowns and so forth, is weak and below trend". Thus, "the link from the forecast to my actual vote was quite loose."

He added, the most recent "forecast of excess demand and above-target inflation didn't at that point prompt me to vote for higher rates". And, "what you get then is a tension, a disparity, between the forecasts and the actual policy vote."

Regarding policy reaction to Brexit on October 31, he reiterated the central bank's stance that response wouldn't be automatic. "It's hard to know how it would play out with any certainty," he said. "I wouldn't want to give a strong steer now as to which way policy would go." Nevertheless, no matter what the BoE does, "monetary policy could not prevent a no-deal Brexit being painful for the economy, for businesses and for households."

Japan cabinet office: Weakness continues in exports, but investment increase at moderate pace

According to the monthly economic report by Japan's Cabinet Office, the economy is "recovering at a moderate pace," but there was "weakness continuing mainly in exports." Asia bound exports were particularly poor due to China's slowdown and weaker demand for high-tech products. .

Nevertheless, the reference to weakness in "industrial production" in the June report was dropped. Instead, production of "transport goods continued to increase, while the decline in machinery production could be seen easing a little,"

Businesses show "cautiousness further" but investment is still "on the increase at a moderate pace". Also, employment situation is "improving steadily" while private consumption is "picking up".

Japan FM Aso: We won public trust for sales tax hike

In Japan, Kyodo news reported today that Chief Cabinet Secretary Yoshihide Suga and Finance Minister Taro Aso will likely retain their posts in a cabinet reshuffle. Prime Minister Shinzo Abe said he has noted decided on the cabinet yet, after winning a solid majority in the upper house election on Sunday. The new cabinet will likely be announced in September.

Separately, Aso said after a cabinet meeting that the election gave the ruling coalition a stable political footing. Hence, he said, "I believe we won public trust for the sales tax hike".

This somewhat echoed Abe's comment yesterday that based on a stable political basis, the Abe cabinet will take more aggressive and bold economic measures than ever."

RBA Kent: Without rate cuts, Aussie dollar might have been higher

RBA Assistant Governor Kent said in the Q&A of a speech that the exchange rate transmission from interest rate cuts have been "broadly working as you would expect." Though, the Australian Dollar exchange rate was supported by a "welcome" increase in commodity prices, as well as dovish turn in other major central banks. That came even after the central bank's back-to-back rate cuts in June and July.

Kent emphasized that "doesn't mean the reductions in the cash rate here have not had their effect on the exchange rate in the normal way, it's just that there have been other forces." And, "you could say well, absent reductions in the cash rate, the Aussie dollar might have been higher."

On monetary policy, he said RBA is "a long way away from something like" quantitative easing. He noted elsewhere, QE was started "in the depths of the financial crisis when the credit system was quite impaired". But "that's not the sort of thing I think people have at the back of their minds here." And monetary policies should be tailored to "your own economic circumstances".

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1202; (P) 1.1213; (R1) 1.1221; More...

EUR/USD drops further to as low as 1.1163 so far in early US session. Intraday bias remains on the downside for retesting 1.1107 low. At this point, we're not expecting a break there yet. Thus, focus will be on bottoming signals around 1.1107. Though, break of 1.1282 resistance is needed to signal completion of fall from 1.1412. Otherwise, further decline is in favor even in case of recovery.

In the bigger picture, on the one hand, 1.1107 is seen as a medium term bottom on bullish convergence condition in weekly MACD. On the other hand, rejection by 55 week EMA retains medium term bearishness. Outlook stays neutral for now. On the downside, break of 1.1107 will resume the down trend from 1.2555 (2018 high) to 78.6% retracement of 1.0339 to 1.2555 at 1.0813. Meanwhile, break of 1.1412 will resume the rebound to 38.2% retracement of 1.2555 to 1.1107 at 1.1660.

Economic Indicators Update