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Entering into US session, Sterling is the weakest one for today despite solid employment data. UK unemployment rate stayed at 45-year low while wage growth accelerated. But that's overshadowed by renewing no-deal Brexit fear. Both runners Boris Johnson and Jeremy Hunt rejected Irish backstop in any part of Brexit deal. Such position will make Brexit negotiations very tough ahead. Euro is the second weakest as German ZEW Economic Sentiment deteriorated further in July.

On the other hand, New Zealand Dollar is the strongest one as CPI accelerated in Q2 as expected. Dollar follows as the second strongest. However, the greenback will face tests from retail sales and industrial production data.

In Europe, currently:

• FTSE is up 0.43%.
• DAX is up 0.19%.
• CAC is up 0.51%.
• German 10-year yield is down -0.013 at -0.265.

Earlier in Asia:

• Nikkei dropped -0.69%.
• Hong Kong HSI rose 0.23%.
• China Shanghai SSE dropped -0.16%.
• Singapore Strait Times rose 0.36%.
• Japan 10-year JGB yield dropped -0.0071 to -0.121.

Sterling tumbles despite strong wage growth

Sterling has taken a tumble this morning to hit fresh two year lows. The declines started early in European trade and have continued throughout the morning.

The decline accelerated when the pound broke below 1.25 against the dollar and is now pushing 1.2450. A selection of Brexit reports may have contributed to the decline, but its interesting that the UK jobs report failed to slow the decline.

GBPUSD Daily Chart

While unemployment was unchanged and the claimant count rose, wages were strong which if sustained and no deal can be avoided would surely strengthen the case for no rate cuts and maybe even rate hikes. Unfortunately, traders are finding it hard to look past no-deal risks or at the very least a delay and hard Brexit, which continues to weigh on the currency.

There have been various Brexit headlines that have been attributed to the decline including both Boris Johnson and Jeremy Hunt last night claiming they have no interest in a time limited backstop, which has been read as further evidence that no-deal Brexit is more likely. While I’m not convinced that is necessarily the case, particularly in the case of Hunt, that’s not particularly important.

The question now is whether the break will act as a catalyst for further declines or quickly reverse and prove to be a false breakout. So far it’s looking good and has moved back towards 1.24 – down 0.8% on the day – but the momentum indicators are yet to truly support it.

Both the stochastic and MACD moving averages are failing to make new lows. This may just be a matter of time but if the move reverses before they do, it would not be an encouraging sign. At that point, its response around 1.2450 and 1.25 would be interesting, being the most recent areas of support. The latter also falls between the 50 and 61.8 fib, from last week’s highs to today’s lows (assuming we don’t push below again).

GBPUSD 1-Hour Chart

Of course we can’t forget the role that the dollar may play in the pair going forward and with US companies reporting earnings this morning and retail sales data being released, this could increasingly be a driver for the pair as the day progresses.

Global equities continue to maintain a cautious tone ahead of key earnings results from the banks that will paint a clearer picture of how of the strength of the US consumer. So far Citigroup and JP Morgan noted that the US consumer is healthy. US futures are little changed as European stocks trade mix. Germany’s ZEW survey came in softer than expected and supports the argument that the ECB could act soon to mitigate the downward pressures to the eurozone’s largest economy. The ongoing trade dispute between the world’s largest economies continues to weigh on the expectations for the German export sector.

USD

The dollar rallied against most of its trading partners, with the strongest gains against both the euro and pound. The dollar’s gains could be short-lived however if we see the morning release of US retail sales and factory data continue the recent string of further deterioration. While market pessimism is running high, traders should not be surprised if we a slightly better performance with the morning data since yesterday’s Empire manufacturing survey showed some signs of stabilization and Citigroup’s earnings highlighted a strong US consumer.

The dollar’s gains were strongest to the British pound as some analysts see the risks of a no-deal Brexit rising to a coin flip. Brexit negotiations seem to firmly be deadlocked and we will likely see tough banter until we see the next Prime Minister take office next week. The Irish backstop will once again be a key sticking point that the EU, that will likely see either candidate, Hunt or Johnson, argue it needs to go or we will see a hard Brexit. The UK economy is still surprising with decent data, labor came in mixed, while wages rose more than expected.

JP

JP Morgan shares initially fell despite an earnings beat as they joined other banks in cutting their Net Interest Income outlook. Just like Citigroup, equities trading took a hit for JP Morgan down 12% on annual basis, slightly worse than the analysts’ consensus. The results overall were not too and the key takeaway for the overall economy is that they see positive momentum with the US consumer and healthy confidence levels.

Oil

Crude prices are stabilizing after yesterday’s slide as Gulf of Mexico production begins to come back online as the first major test of Hurricane season eased. US stockpiles are expected to ease for a fifth consecutive weak, with stockpiles dropping nearly 3 million barrels last week. The situation between the Persian Gulf remains tense as Iran continue to take the next steps in enriching uranium beyond levels specified under the 2015 nuclear deal. Geopolitical risks and disruptions with US production could support crude prices in the short-term.

Gold

Gold prices continue a summer doldrum consolidation pattern as market participants await further clarity on how dep the Fed’s rate cut path will be. The four largest central banks are set to unleash fresh stimulus in the second half of the year and gold’s bullish outlook remains intact with short-term resistance resting at the $1,500 an ounce level.

Bitcoin

Treasury Secretary Mnuchin joined the crypto-skeptic club yesterday, reiterating the Trump’s administration concerns on privacy and security. The regulatory future for Bitcoin and other digital coins is going to be a bumpy road. Facebook’s Libra has a dartboard on its back and eventually, that could help Bitcoin.

With the new UK Prime Minister not expected to be announced until next week, Brexit news could remain scarce for now, shifting the focus back to data. Inflation figures for June are due on Wednesday, before retail sales numbers on Thursday, both at 08:30 GMT. The pound remains at very low levels as fears of a no-deal Brexit have returned, and while the worst may not be over in this sense, there is a saving grace: further weakness in the US dollar that offsets losses in sterling.

The British currency is back under the microscope, as the person that will likely become Prime Minister next week – Boris Johnson – continues to promise that the UK will leave the EU on October 31 “come what may”, hinting at a no-deal Brexit if an agreement isn't reached. Admittedly, some of that may be political theatre aimed at generating negotiating leverage, echoing Theresa May's famous catchphrase: “no-deal is better than a bad deal”.

What makes Johnson's threat more credible though, and therefore terrifying for the pound, is that the Tories have lost so much ground in opinion polls lately that their next leader could truly consider leaving without a deal, for fear of losing more support as a party if Brexit is delayed again. Most of their voters have defected to the Brexit party, which means they are losing ‘hardcore Brexiteers', and thus amplifies this argument. In a nutshell, the risk of a no-deal is as prominent as ever.

Taking a step back from politics, the upcoming data may also attract some attention. Inflation figures for June are forecast to show little movement, with the headline CPI rate expected to have held steady at 2.0% in yearly terms, and the core rate to tick up to 1.8% from 1.7% previously.

Meanwhile, retail sales are projected to have declined somewhat on a monthly basis, though such prints would still lift the yearly rate, as the plunge back in June 2018 – the month that will drop out of the yearly calculation now – was more severe.

Mark Carney, the Bank of England (BoE) chief, changed his tone recently by indicating that trade tensions combined with a slowing global economy have amplified downside risks for the British economy. This may be an early hint the Bank will abandon its rate hike plans soon, though admittedly, that will hardly be a surprise for markets – which currently price in roughly even odds for a rate cut before year end.

Overall, the outlook for the pound remains bleak, as the growing threat of a no-deal Brexit accompanied by a dovish BoE imply more pain. That said, the potential saving grace for the British currency may be further weakness in the US dollar, as the Fed can cut rates much more than any other major central bank, pushing the greenback lower over time. Since the FX market is a zero-sum game, in that weakness in one currency must translate to strength in another, this could limit any severe losses in the pound.

Taking a technical look at sterling/dollar, further declines may stall around 1.2440, the July 9 lows, with a bearish break opening the door for a test of 1.2360 – the April 2017 trough.

On the upside, a clear break above 1.2580 could see the bulls challenge the 1.2660 zone initially, which capped multiple declines in late June.

Notes/Observations

• Germany's Ursula Von Der Leyen (EU Commission head nominee) lays out her vision ahead of an EU Parliamentary vote to confirm her
• UK May Wage data beats expectations German July ZEW Survey misses estimates with blame pointed to global trade dispute

Asia:

• RBA July Minutes stated that it was prepared to cut rates further if necessary and was watching the job market closely
• New Zealand Q2 CPI data stays within target range for the 11th straight quarter (YoY: 1.7% v 1.7%e)
• China PBOC Dep Gov Pan Gongsheng stated that China would expand yuan use in cross border investment; govt had big room to further open its financial market

Europe/Mideast:

• UK PM candidate Johnson: Not unrealistic to say could get new Brexit deal done before Oct 31st. Would not accept a time-limited backstop; the backstop was dead

Americas:

• Treasury Sec Mnuchin: Treasury Dept was very concerned that Libra cryptocurrency could be used by terrorist financiers and for other illicit activity. US regulators very concerned about the speculative nature of Bitcoin and cryptocurrencies, their value is based on thin air. Urged congress to raise the debt ceiling before they recess; did not anticipate US government will shut down. On Trade: expected to have another call with Chinese counterparts this week on trade; If there was significant progress in US China conversations, good chance officials would travel to China later

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 +0.10% at 388.14, FTSE +0.23% at 7,549.14, DAX +0.17% at 12,407.81, CAC-40 +0.24% at 5,592.24, IBEX-35 +0.27% at 9,348.35, FTSE MIB +0.13% at 22,206.50, SMI +0.24% at 9,832.50, S&P 500 Futures +0.08%]
• Market Focal Points/Key Themes: European Indices trade slightly higher across the board following a mixed session in Asia and slightly higher US futures as markets continue to consolidate. On the corporate front, Rio Tinto shares edge lower after its Q2 production update with increased Capex at Oyu Tolgoi weighed on the stock; Burberry gains sharply following a rise in Q1 sales, which was ahead of consensus, with Yara, Schibsted, Semcon and XLMedia also rising on earnings. Renault declines on a fall in first half car sales; Telenor falls over 5% after missing on earnings and lowering outlook, A.G Barr falls over 20% on a profit warning, while Experian, Hays and Bonava are among other decliners on earnings. In other news Ryanair rises after warning on slow capacity growth on the back of Boeing Max delivery delays; CRH confirmed the divestment of its European distribution business to Blackstone and WANdisco gains on a partnership with Databricks. Looking ahead earnings continue to pick up with banking names JP Morgan, Goldman Sachs, Wells Fargo as well as Dow components Johnson & Johnson expected to report among others.

Equities

• Consumer discretionary: Burberry [BRBY.UK] +8% (trading update), Ryanair [RYA.UK] +1% (cuts capacity), Hays [HAS.UK] -2% (trading update), BillerudKorsnas [BILL.SE] -4% (earnings), Experian [EXPN.UK] -1.5% (earnings)
• Healthcare: Bayer [BAYN.DE] +2% (court decision)
• Industrials: Renault [RNO.FR] -1.5% (sales), Daimler [DAI.DE] -1.5% (analyst action), Fiat Chrysler [FCA.IT] -3.5% (analyst action), Yara International [YAR.NO] +5% (earnings)
• Technology: AMS [AMS.CH] -3% (OSRAM talks), WANdisco [WAND.UK] +7% (partnership)

Speakers

• ECB's Villeroy (France) reiterated General Council view on need to structural reforms to compliment monetary policy; ECB to act if and when needed at coming meetings. Reiterated Draghi's view that ECB could not be market dependent but rather to react on data
• Germany's Ursula Von Der Leyen (EU Commission head nominee): Would be open for a longer brexit delay for a good reason but defended the current Withdrawal Agreement
• Germany Finance Ministry said to see Facebook's Libra currency as a risk for the Euro. Saw a risk of sovereignty being undermined. Govt and Bundesbank should assess how to prevent Facebook's Libra digital coin from becoming alternative currency. Germany in touch with France, U.K. and U.S. to discuss how governments should react to Libra
• Greece Fin Min Staikouras: Top priority for new govt was tax reform
• ESM's Regling: Greece should make growth its top priority while at the same time maintaining the agreed primary surplus
• UK Parliamentary member Grieve (Conservative): Might be difficult for Parliament to block a no-deal Brexit. Expected former Tory ministers to oppose a no-deal Brexit. General election would be a way out of the current political crisis but its outcome would not be definitive and could create a 4-party system German ZEW Economists noted that lasting containment of factors causing uncertainty in export sector was currently not in sight. Ongoing trade dispute between US-China was a burden not only for Chinese economic development
• China Foreign Ministry spokesperson Geng Shuang: China could have resorted to strong stimulus policies but instead committed to high quality development. Misleading to suggest that China needs atrade deal because its economy is slowing
• South Korea Envoy Chung-Eui-Yong: Govt to sternly respond until Japan withdraws its export curbs
• North Korea said to state that if US-South Korea hold joint military drills this summer it would influence planned working level talks between US-NK

Currencies/Fixed Income

• USD: The USD was a tad firmer in the session but dealers noted it would likely to remain stymied following Fed Chair Powell's testimony last week which seemed to have cemented a 25 bp cut on July 31st. Levels to the upside look to region of 97.20 for the monthly high and an inverse head and shoulders pattern.
• EUR: As expected the Euro has been quiet this week with the lack of data. We will look to the USd to effect movement in the pair as well as any unscheduled comments.
• GBP: The cable was lower as both PM candidates stated that they would seek to remove the Irish border backstop plan from any Brexit deal with the EU. Levels to the downside are the yearly low of 1.2420 and upside in the region of 1.2760.

Economic Data

• (FI) Finland May GDP Indicator WDA Y/Y: 0.8% v 1.8% prior
• (TR) Turkey Apr Unemployment Rate: 13.0% v 14.1% prior
• (IT) Italy May Total Trade Balance: €5.4B v €2.9B prior; Trade Balance EU: €2.3B v €1.0B prior
• (TR) Turkey Jun Central Gov't Budget Balance (TRY): -12.1B v -12.1B prior
• (UK) Jun Jobless Claims Change: +38.0K v +24.5K prior; Claimant Count Rate: 3.2% v 3.1% prior
• (UK) May Average Weekly Earnings 3M/Y: 3.4% v 3.1%e; Weekly Earnings (ex-bonus) 3M/Y: 3.6% v 3.5%e
• (UK) May ILO Unemployment Rate: 3.8% v 3.8%e; Employment Change 3M/3M: +28K v +45Ke
• (EU) Euro Zone May Trade Balance (Seasonally Adj): €20.2B v €17.5Be; Trade Balance NSA (unadj): €23.0B v €15.7B prior
• (DE) Germany July ZEW S Current Situation Survey:-1.1 v+ 5.0e; Expectations Survey: # v -22.0e
• (EU) Euro Zone July ZEW Expectations Survey: -20.3 v -20.2 prior
• (IT) Italy Jun Final CPI M/M: 0.1% v 0.2% prelim; Y/oY: 0.7% v 0.8% prelim; CPI Ex-tobacco: 102.7 v 102.7 prior
• (IT) Italy Jun Final CPI EU Harmonized M/M: 0.1% v 0.1% prelim; Y/oY: 0.8% v 0.8% prelim

Fixed Income Issuance

• (GR) Greece Debt Agency (PDMA) opened its book to sell 7-year bond via syndicate; yield guidance seen 2.0%
• (ID) Indonesia sold total IDR22.05T in 3-month and 9-month Bills and 5-year, 10-year, 15-year, and 20-year Bonds
• (ES) Spain Debt Agency (Tesoro) sold total €2.14B vs. €1.5-2.5B indicated range in 3-month and 9-month Bills
• (CH) Switzerland sold CHF416.2M in 3-month bills; Avg Yield: -0.861% v -0.829% prior
• (ZA) South Africa sold total ZAR3.3B vs. ZAR3.3B indicated in 2030, 2035, and 2037 bonds

Looking Ahead

• 05:30 (UK) Weekly John Lewis LFL Sales data
• 05:30 (EU) ECB allotment in 7-Day Main Refinancing Tender (MRO)
• 05:30 (HU) Hungary Debt Agency (AKK) to sell in 3-month Bills
• 05:30 (UK) DMO to sell £2.25B in 1.75% Sept 2037 Gilts
• 06:00 (IL) Israel Q1 Final GDP Annualized (3rd reading): No est v 4.8% prelim
• 06:30 (EU) ESM to sell €2.5B in 6-month bills; Avg Yield: % v -0.5147% prior; Bid-to-cover: x v 2.9x prior (Jun 18th 2019)
• 07:00 (BR) Brazil July FGV Inflation IGP-10 M/M: 0.5%e v 0.5% prior
• 08:00 (PL) Poland Jun CPI Core M/M: +0.3%e v -0.3% prior; Y/Y: 1.9%e v 1.7% prior
• 08:00 (UK) Daily Baltic Dry Bulk Index
• 08:00 (UK) BOE Gov Carney on panel
• 08:00 (RU) Russia announces upcoming OFZ Bond issuance
• 08:15 (US) Fed's Bostic (dove, non-voter) at event
• 08:15 (US) Fed's Bowman (voter)
• 08:30 (US) Jun Import Price Index M/M: -0.6%e v -0.3% prior; Y/Y: -2.1%e v -1.5% prior; Import Price Index (ex-petroleum) M/M: -0.2%e v -0.3% prior
• 08:30 (US) Jun Export Price Index M/M: -0.3%e v -0.2% prior; Y/Y: No est v -0.7% prior
• 08:30 (US) Jun Advance Retail Sales M/M: 0.2%e v 0.5% prior; Retail Sales (Ex-auto) M/M: 0.1%e v 0.5% prior; Retail Sales (ex-auto/gas): 0.3%e v 0.5% prior; Retail Sales Control Group: 0.3%e v 0.4% prior (revised from 0.5%)
• 08:30 (CA) Canada May Int'l Securities Transactions (CAD): No est v -12.8B prior
• 08:55 (US) Weekly Redbook LFL Sales data
• 09:00 (EU) Weekly ECB Forex Reserves
• 09:15 (US) Jun Industrial Production M/M: 0.1%e v 0.4% prior; Capacity Utilization: 78.1%e v 78.1% prior; Manufacturing Production: 0.3%e v 0.2% prior
• 10:00 (US) July NAHB Housing Market Index: 64e v 64 prior
• 10:00 (US) May Business Inventories: 0.4%e v 0.5% prior
• 10:00 (MX) Mexico Weekly International Reserve data
• 11:30 (US) Treasury 52-Week Bills
• 13:00 (US) Fed Chair Powell in Paris
• 13:00 (EU) European Parliament's (EP) vote on Germany's Ursula Von Der Leyen as next EU Commission head
• 15:00 (AR) Argentina Jun National CPI M/M: 2.6%e v 3.1% prior; Y/Y: No est v 57.3% prior
• 15:30 (US) Fed's Evans (dove, voter) in Chicago
• 16:00 (US) May Net Long-term TIC Flows: No est v $46.9B prior; Total Net TIC Flows: No est v $7.8B prior
• 16:30 (US) Weekly API Oil Inventories

Cable extends weakness below 1.25 handle on Tuesday and pressures key support at 1.2439 (9 July low, the lowest since 3 Jan).

The price showed mild reaction on UK jobs data as earnings rose in May (3.4% vs 3.1% prev and 3.2% f/c) in the fastest rise in more than a decade, but jobless claims jumped to 38K in June from 24.5K previous month and also dipped well below forecast at 18.9K.

Employment also slowed (28K in three months to June vs 45K f/c and 32K prev), helping in offsetting positive signals from upbeat earnings data.

Adding to negative picture was radical stance of Boris Jonson, the frontrunner to replace Theresa May in the position of UK Prime Minister, over Brexit’s key points, Irish backstop.

Negative environment is also boosted by bearish daily studies which maintain strong negative momentum, as all indicators are in firm bearish setup and setting scope for eventual probe through 1.2439 pivot.

Sustained break here would open way towards 2019 low at 1.2397 (3 Jan spike low) and increase risk of revisiting key 1.20 support zone, tested after Brexit vote in 2016.

Former low at 1.2505 (18 June) marks initial resistance, with falling 10SMA (1.2521) expected to cap upticks and keep bears intact.

Res: 1.2505, 1.2521, 1.2559, 1.2579
Sup: 1.2437, 1.2397, 1.2353, 1.2300

On Tuesday morning, the EUR/USD was declining below the support levels at 1.1250. In general, the rate passed its technical support levels during the moments that they stood each on its own.

From a technical analysis theoretical perspective, the currency exchange rate should decline, as it has no tech support as low as the 1.1220 level where a monthly pivot point is located at.

On the other hand, the sharp decline could stop and the currency exchange rate could consolidate by trading sideways.

GBP/USD plummeted like a brick on Tuesday. The financial media blamed Brexit fears. Although, it could be spotted that the move most likely had a fundamental cause that was strengthened by the passing of the support levels and sentiment numbers indicating that the rate was already overbought by the retail sector.

Next up the pair is expected to test the support levels near 1.2450. This round levels has shown itself in the past as a significant one.

Meanwhile, note that Dukascopy Analytics will investigate the cause of the decline and publish an Expert Commentary publication on our website and send it through the newsletters.

The USD/JPY on Tuesday morning remained above the support of the round level of 107.80 and the monthly pivot point at 107.84. The rate had even made an attempt to surge and test the resistance of the 55-hour simple moving average.

In general, the mentioned simple moving average will push the rate into the support levels at 107.80. If the rate properly passes the 107.80 level, it could fall to a weekly pivot point at 107.50.

In the other case, the 55-hour SMA could fail and the rate would continue to trade sideways until the 100-hour SMA strengthens the technical resistance that the pair faces.

By the middle of Tuesday's London trading session, the yellow metal's price was located near previous day's trading levels, as the hourly simple moving averages had managed to keep the price from declining.

In general, it was expected that the consolidation will end soon and the 55, 100 and 200-hour simple moving averages push the commodity price higher. In that case the commodity price would once more test the resistance of the 1,420.00 level.

Meanwhile, watch closely the simple moving averages, as the commodity rate's passing below all of them could cause a sharp decline down to 1,400.00