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Dollar suffered brief set back overnight as Euro attempted for a rally. But the greenback quickly found its footing and it's trading as the strongest one in Asian session today. In particular USD/CHF took out 0.9651 resistance, which is taken as a signal of near term reversal. It remains to be proven if the greenback is ready for reversal, or it's just broad based weakness in the Franc. For now, Swiss Franc is the weakest one, followed by Australian Dollar.

In other markets, DOW ended down -0.68% yesterday, digesting recent strong record run. S&P 500 also lost -0.35% but NASDAQ was steady and gained 0.08%. US treasury yields closed slightly higher with 10 year yield up 0.010 at 3.078 and 30-year yield added 0.005 to 3.210. Both are yet to find sustainable momentum through key resistance level at 3.115 and 3.225 respectively. In Asia, Japanese Nikkei is up 0.16% at the time of writing. Singapore Strait Times is up 0.39%. China Shanghai SSE is down -0.76%.

Technically, first thing to note is that despite spiking higher to 1.1814, EUR/USD is back below 1.1779 key fibonacci resistance. Focus remains on whether it will reverse from current level as we anticipate. As mentioned above, USD/CHF's break of 0.9651 is already a sign of bullish reversal. EUR/CHF also broke 1.1342 minor resistance. More downside is now in expected for Swiss Franc in general. The levels to watch include 0.7228 support in AUD/USD, 1.3042 support in GBP/USD, 1.2975 resistance in USD/CAD. Break of these levels will solidify the case of Dollar comeback.

BoJ July minutes: Sentiments could worsen if US-China trade friction intensifies

The minutes of July 30-31 BoJ meeting showed that the board members expected Japan's economy to grow above potential in fiscal 2018. For 2019 and 2020, growth would likely continue "partly supported by external demand". However, the pace would decelerate "due to a slowdown in domestic demand. On prices, most members agreed that CPI would likely increase increase gradually towards 2% as "firms' stance gradually would shift toward further raising wages and prices". But these members agreed that "it would take more time than expected to achieve 2 percent inflation". Thus, the inflation projection in the July Outlook Report was lowered from April's.

The minutes also noted that the global financial markets had temporarily become unstable through early July, "mainly against the background of uncertainties over trade policy, especially between the United States and China". And, many members warned that "risk sentiment could worsen again if trade friction between the United States and China intensified." Also, one member added that " if the Chinese yuan depreciated further, due mainly to concerns over the possible negative impact on the Chinese economy, there was a risk of this having a negative impact on investors' sentiment regarding emerging markets in Asia."

Also from Japan, corporate service price index rose 1.3% yoy in August, above expectation of 1.1% yoy.

US and South Korea signed trade agreement, Japan trade talk postponed

South Korean President Moon Jae-in and Trump formally signed a new bilateral trade agreement yesterday, as sideline of a UN summit in New York. Under the agreement, South Korea will exempt up to 50,000 US cars from safety requirements, doubling the current amount. It also agreed on improvements in customs procedures and amendments in drug pricing policies. The 25% US tariffs against South Korean Trucks are extended from 2021 to 2041. On the other hand, the US exempt a certain amount of South Korean steel from the tariffs announced back in Mach, equivalent to 70% of the country's import.

On the other hand, the meeting between Japanese Economy Minister Toshimitsu Motegi  and US Trade Representative Robert Lighthizer was postponed from Monday to Tuesday due to scheduling issue. Japanese Chief Cabinet Secretary Yoshihide Suga said the talks "will focus on further expanding trade and investment between Japan and the U.S. to bring benefits to both nations".

Japanese Prime Minister Shinzo Abe had a dinner with Trump on Sunday and he said they had a "very constructive discussion on trade and investment". Before the dinner Trump continued with his bullying tactic and tweeted "We have done much to help Japan, would like to see more of a reciprocal relationship. It will all work out!"

Euro surged briefly as ECB Draghi said domestic price pressures are strengthening and broadening

Overnight, Euro surged briefly as ECB President Mario Draghi sounded rather upbeat in his European Parliament ECON committee hearing. On growth he noted "an ongoing broad-based expansion of the euro area economy", with "high levels of capacity utilisation". Also, "labour markets are tightening with signs of labour shortages in some countries and sectors" And "higher income supports private consumption".

More importantly, Draghi noted "domestic price pressures are strengthening and broadening". And, "underlying inflation is expected to increase further over the coming months as the tightening labour market is pushing up wage growth."

Overall guidance on monetary policy is unchanged though. That is, subject today, ECB will end the asset purchase program after December. And interest rates will stay at current level "through the summer of 2019". Draghi said the guidance firstly incorporated a "calendar-based element" which tells the market when the first hike could come. Secondly, there is a "state-dependent component" indicating that rate could still stay unchanged if necessary, and for as long as needed.

Looking ahead

The economic calendar is rather light today. Main features are US house price indices and consumer confidence.

USD/CHF Daily Outlook

Daily Pivots: (S1) 0.9602; (P) 0.9627; (R1) 0.9674; More...

USD/CHF's strong rise today and break of 0.9651 support turned resistance indicates short term bottoming at 0.9541, on bullish convergence condition in 4 hour MACD. Intraday bias is back on the upside for 0.9757 resistance first. Firm break there will target 0.9866 key resistance level, 61.8% retracement of 1.0067 to 0.9541 at 0.9866. On the downside, below 0.9604 will turn bias back to the downside for 0.9541 low instead.

In the bigger picture, rise from 0.9186 low has completed at 1.0067, after failing to sustain above 1.0037 resistance. Fall from 1.0067 could extend to 61.8% retracement of 0.9816 to 1.0067 at 0.9523 and possibly below. But for now, we don't expect a break of 0.9186 low. On the upside, firm break of 0.9866 support turned resistance will suggest that fall from 1.0067 has completed and rise from 0.9186 is resuming.

Economic Indicators Update

STOCKS

Dow and Dax have dipped a bit. Shanghai and Nikkei looks bullish just now with Nikkei expected to move above 24000 for a short while. Nifty is down sharply but may test support near 10800.

Dow (26562.05, -0.68%) came off sharply instead of moving up higher, pushed by the daily resistance on the daily candles mentioned yesterday. Although the longer term charts suggests a rise towards 27000 or higher, the current dip is short lived and could be limited to 26250. Thereafter the index could resume its up move.

Dax (12350.82, -0.64%) has also dipped to levels below 12400 but looks bullish in the longer run towards 12700-12900 levels. The index could again bounce back from 12300 in the near term.

Nikkei (23903.32, +0.14%) is stable and has inched up a bit. It is likely to test the previous high above 24000 on the 3-day candles and if that holds, could face some interim rejection towards 23500 again. But overall while above 23000, index is bullish in the longer run.

Shanghai (2782.96, -0.52%) was closed yesterday. We repeat a possibility of testing 2900 on the upside in the medium term if the index moves above 2750-2800 in the near term.

Nifty (10967.40, -1.58%) has important support on the weekly candles near 10800 which if holds could produce a bounce in the near term. A break below 10800, if seen would make the index vulnerable to a sharper fall and we will have to re-visit the downside targets. For now support at 10800 is likely to hold.

COMMODITIES

Signal from OPEC that they won’t boost output and a tightening oil market took the crude prices higher yesterday. There could be some concerns of undersupply as US sanctions on Iran pose a threat to reduce supply by 1mln barrel/day.

Brent (81.37) and WTI (72.22) are trading higher. Brent could move up towards 85 while it sustains above 81. WTI also has enough room on the upside towards 74-75 and both look bullish in the near term.

Gold (1202.50) is in a sideways mode and is likely to continue trade below 1220 in the near term. The narrow 1190-1220 zone remains intact for Gold trade at least for this week unless we see a break on either side to trigger some volatility.

The 21-week MA at 2.8575 produced a rejection in Copper (2.7935) as mentioned yesterday. The dip could test 2.75-2.72 on the downside before again moving up higher in the medium term. The rise from long term support at 2.60 is likely to keep the prices in the uptrend for the medium term with short corrective dips such as the one seen just now.

FOREX

Currency markets are quiet as everyone awaits the FOMC policy decision tomorrow - meanwhile the Indian Rupee could weaken towards 73+ while above 72.

Dollar Index (94.33) looks bearish after having broken below the 21 weeks MA on weekly line chart. As mentioned yesterday, it could move down to test horizontal support on daily candles near 93.20 by next week. However it might all depend on the FOMC tomorrow – a hawkish view could reverse Dollar weakness. 94.5 is a crucial resistance level - whose breach might negate near term bearishness.

Euro (1.1736) came off from resistance in the 1.180-1.185 zone yesterday. While it stays above support near 1.17, a decisive rise past 1.185 could still happen towards higher resistance near 1.190-1.1925 (daily candles). Alternatively, if the Fed's policy tone is very hawkish tomorrow, we might see Euro break below 1.17.

Dollar Yen (112.83), as expected, is continuing to rise. Its first target could be the July ’18 high of 113.18 - after that, there could be some resistance in the 113.18-113.75 zone - which if breached, could lead to 115 in the medium term.

Euro Yen (132.43) again came off after testing a high near 133 yesterday. Looking at the 3 day and weekly line charts, it looks quite bullish (maybe towards 135) in the weeks ahead - we currently give preference to that.

Pound (1.3104) : As mentioned yesterday, on a break below 1.305, we could again start looking at the downside for Pound. However, while it stays above 1.305, chances of bullishness towards 1.34 still remain. The 21 weeks MA (1.313) continues to be crucial - a week close above that would be bullish.

Aussie (0.7243) has support near 0.722-0.723. While above this support, it could still break above the resistance at 0.73 to target higher resistance near 0.74.

Dollar Rupee (72.635) A rise towards 73.50 is possible while above 72.00. There could be an interim dip towards 72.30 before resumption of the rise. Also while Brent has broken above resistance at 81 and continues to rise higher, pressure on the Rupee could persist. We will have to see if this allows for a dip towards 72.30 or directly takes the currency pair towards 73 and higher.

INTEREST RATES

The Japanese 30 Year yield ( 0.89%) seems to be sustaining its breach of resistance near 0.85% on long term chart. This could prove to be quite bullish for yields globally.

Repeating yesterday's comment: the FOMC on Wednesday is set to hike the federal funds rate by 25 bps - this hike has already been factored in by traders. The attention now shifts to the FOMC's indications for future rate hike decisions in Dec '18 and in 2019. Any dovishness or hawkishness on that front would be crucial for whether the 10 year yield stays below its 2018 high of 3.100%-3.125% or breaches it.

US 10 Year yield (3.09%) has risen closer to 3.10%. As mentioned on Friday, the important upside levels to watch out for are: 3.10%, 3.125% and 3.16%. Our current preference is for the yield to not breach 3.16% (800 weeks MA).

The 10 Year German-US spread (-2.58%) has risen slightly after testing support on medium term chart near -2.6%. There is resistance near -2.55% which could keep the upside capped.

Meanwhile, the German 10 year yield (0.51%) could target 0.6% in the near term, now that it has risen past 0.5%. On the long term chart, there is room for a rise till 0.75% in the coming months.

Combining the views above, if the German-US 10 year spread stays below -2.55% and the German 10 year continues its rise towards 0.60% in the near term – it could ensure that a dip back below 3% on the US 10 Year doesn't happen.

The minutes of July 30-31 BoJ meeting showed that the board members expected Japan's economy to grow above potential in fiscal 2018. For 2019 and 2020, growth would likely continue "partly supported by external demand". However, the pace would decelerate "due to a slowdown in domestic demand. On prices, most members agreed that CPI would likely increase increase gradually towards 2% as "firms' stance gradually would shift toward further raising wages and prices". But these members agreed that "it would take more time than expected to achieve 2 percent inflation". Thus, the inflation projection in the July Outlook Report was lowered from April's.

The minutes also noted that the global financial markets had temporarily become unstable through early July, "mainly against the background of uncertainties over trade policy, especially between the United States and China". And, many members warned that "risk sentiment could worsen again if trade friction between the United States and China intensified." Also, one member added that " if the Chinese yuan depreciated further, due mainly to concerns over the possible negative impact on the Chinese economy, there was a risk of this having a negative impact on investors' sentiment regarding emerging markets in Asia."

Full minutes here.

South Korean President Moon Jae-in and Trump formally signed a new bilateral trade agreement yesterday, as sideline of a UN summit in New York. Under the agreement, South Korea will exempt up to 50,000 US cars from safety requirements, doubling the current amount. It also agreed on improvements in customs procedures and amendments in drug pricing policies. The 25% US tariffs against South Korean Trucks are extended from 2021 to 2041. On the other hand, the US exempt a certain amount of South Korean steel from the tariffs announced back in Mach, equivalent to 70% of the country's import.

On the other hand, the meeting between Japanese Economy Minister Toshimitsu Motegi and US Trade Representative Robert Lighthizer was postponed from Monday to Tuesday due to scheduling issue. Japanese Chief Cabinet Secretary Yoshihide Suga said the talks "will focus on further expanding trade and investment between Japan and the U.S. to bring benefits to both nations".

Japanese Prime Minister Shinzo Abe had a dinner with Trump on Sunday and he said they had a "very constructive discussion on trade and investment". Before the dinner Trump continued with his bullying tactic and tweeted "We have done much to help Japan, would like to see more of a reciprocal relationship. It will all work out!"

Key Highlights

• The British Pound corrected lower and found support near 1.3060 against the US Dollar.
• During the correction, there was a break below a bullish trend line at 1.3170 on the 4-hours chart of GBP/USD.
• The Chicago Fed National Activity Index (CFNAI) in August remained at 0.18.
• Today, the US Housing Price Index for July 2018 will be released, which is forecasted to rise 0.2% (MoM).

GBPUSD Technical Analysis

After a decent upward move above the 1.3250 level, the British Pound faced resistance near 1.3290-95 against the US Dollar. The GBP/USD pair corrected lower and tested the 1.3060-80 support.

Looking at the 4-hours chart, the pair declined sharply from the 1.3298 swing high and traded below the 1.3200 support. Moreover, there was a break below a bullish trend line at 1.3170, opening the doors for more losses.

The pair traded as low as 1.3054 and later started a fresh upward move. It climbed above the 38.2% Fib retracement level of the last decline from the 1.3298 high to 1.3054 low.

However, there are many resistances on the upside near the 1.3170 and 1.3200 levels. Moreover, the 61.8% Fib retracement level of the last decline from the 1.3298 high to 1.3054 low is near 1.3205.

Therefore, it won’t be easy for buyers to clear the 1.3200 resistance zone. On the downside, the 1.3060-80 region is a crucial support. Below 1.3060, there is a risk of more losses towards 1.2980 and 1.2940.

Fundamentally, the Chicago Fed National Activity Index (CFNAI) for August was released yesterday. The market was looking for a decline from the last reading of 0.13 to 0.02.

However, the result was better than the forecast as there was no decline and the Chicago Fed National Activity Index remained at 0.18 from the previous revised reading of 0.18.

Overall, the GBP/USD pair could correct higher, but a break and close above the 1.3200 level is needed for a push towards the 1.3300 level in the near term.

Economic Releases to Watch Today

• S&P/Case-Shiller Home Price Indices for July 2018 (YoY) – Forecast +6.2%, versus +6.3% previous.
• US Housing Price Index for July 2018 (MoM) – Forecast +0.2%, versus +0.2% previous.

AUDUSD - The With the pair backing off higher prices to close lower on Tuesday, more downside pressure is likely in the days ahead. Support resides at the 0.7200 level where a breach will aim at the 0.7150 level. Below that level will set the stage for a run at the 0.7100 level with a cut through here targeting further downside pressure towards the 0.7050 level. Its daily RSI is turning lower suggesting further weakness. On the upside, resistance lies at the 1.7300 level. A cut through here will turn attention to the 0.7350 level and then the 0.7400 level where a violation will set the stage for a retarget of the 0.7450 level. On the whole, AUDUSD faces further downside threats.

US Markets

Another case of headline overload overnight.

US markets closed lower overnight due to some factors including, trade war phase 2, more political turmoil ahead of US midterm after reports surface ahead Attorney General Rod Rosenstein was resigning from his post and of course equity investors taking bets off the table ahead of any potential FOMC bullish tail risk. But given the short half-life that political turmoil has on the overall market sentiment, profit taking is more to do with trade war escalation fears and a possible hawkish Fed.

FOMC bullish tail risk

Yesterday we looked at the dovish tail risks but now a look at the opposite side of the coin.

With a rate hike baked into this FOMC meeting will be all about the future path of interest rates.

Don't toss your dollar out the window just yet, by any standard all the US economic surprise index still favour the USD by a long shot. Of course, all data should be gleaned but its the surprises are what move asset currency markets and since most if not all Macroeconomics data are generally priced in over the long term, therefore adding up the sum of the data surprises can shed significant into monetary policy vies , and a very basic understanding of anticipated moves in currency markets. And by all current standards, the US surprise index is leading the charge and Fed will be looking at this metric.

Surprise = Realized Change – Expected Change in Economic

To that end, the markets still have a relatively pessimistic view on the US rates curve into 2019 and beyond as there has been too much focus and external issues and if trade wars etc. were really a concern for the Feds, they wouldn't be raising interest rates this week nor guiding the market to another rate hike in December.

But a hawkish case can be made after several Fed members have been turning the dial up but none more so significant that Lael Brainard.

It's challenging not to be dollar bullish from a pragmatic US interest rate storyline. But of course, price action needs to be respected especially with the EUR veering towards 1.1800 again. The strong US economy suggests USD yields have further room to run. And when former doves like Fed Governor Lael Brainard, who I dare say, is starting to roost with the Hawks and provides the clearest of signals hat this sitting Fed is more hawkish than the markets 2019 overly pessimistic lean.

Oil Markets

Oil continues to hold on to astonishing gains as the latest move was helped along by headlines from OPEC's weekend meeting as the organisation agreed to no immediate supply boosts here and last weeks reports that Saudi Arabia was now comfortable with Brent at $80.

But with the 72nd session of the United Nations General Assembly kicking off, and President Trump set to hold court. Indeed, Iran is sure to be a fashionable topic so prepare for some headline risk, and I would expect some of Trumps OPEC barbs to surface. So it will be interesting to see how Oil markets absorb headlines with Brent trading near four years highs.

Headline risk notwithstanding, price action suggests that oil investors hopes are skyrocketing that US sanctions on Iranian crude oil exports will cause a significant shortfall in global supply. With that in mind, it's possible we could see further advances in the weeks ahead. With OPEC showing little inclination to add amounts anytime before the December 3 summit, it's very likely, in the absence of any about-face from OPEC, that Brent could trade to $85 + and WTI $75 + ahead of Nov 4 Iran sanction date as bullish expectations should continue to boil. But when taken in combination with the fact US commercial crude oil inventories are at their lowest since early 2015, it makes for a convincing bullish argument.

Gold Markets

It's interesting to see Gold glued to the $1200 see-saw level this morning as frankly, I was expecting the yellow metal to be trading a tad weaker ahead of the FOMC. But with the markets in the very much oversold territory, some short bets are ceding just in case the Feds do unexpected give some notion of a pause for cause in the current 2019 Fed rate hike cycle. As a dovish inference for the Feds could send Gold prices above the critical $1210 level. There's a lot of cross action inference on this week's Fed forward guidance.

Currency Markets

No idea why dollar bulls are so scared of their shadow these days, but It does tell me a significant number are long at not so comfortable levels.

Euro

Hawkish comments from Draghi has a significant impact on EUR volumes overnight as I continue to view the EURUSD the primary battlefield for USD positioning. Anytime the Uber dove Draghi underline the pick up on inflation, the market listens. Which triggered a rally in Bund yields, with a close above 0.50% but the EUR was rebuffed above 1.1800.

EU zone data remains uneven and at least currently in the USD cycle dollar bulls feel comfortable to sell EURO at 1.1800.

1.1720 remains the key for downside after it was such an obstacle to push through last week

JPY

Starting to see a nascent recovery in USD strength the back of this week's Fed meeting, my views for a stronger JPY are a way to far in the horizon as the market is testing some significant near-term levels with a break into 113's will open test of 114.25 on follow through. Interesting from my seta was yesterday absolute zero reaction in JPY to the glint of risk off, suggesting the dollar bulls are targeting USDJPY higher.

EM Asia

The Malaysian Ringgit

Brent above 80 has improved, but one look at global yields ratcheting higher in the wake of Draghi's hawkish inflation comments and the true inflationary impact of surging oil prices are having on the US yields, will make local EM traders think twice about diving in headfirst.

Support comes in at 4.12 resistance 4.15

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As planned in our weekly report, we entered GBP/USD short today at 1.3150, as the pair recovered to 1.3166. Stop is placed at 1.3300, slightly above 1.3297 resistance.

Our view is unchanged that corrective rise from 1.2661 has completed with three waves up to 1.3297, just ahead of 38.2% retracement of 1.4376 to 1.2661 at 1.3316. Another fall is expected through 1.3042 support to retest 1.2661 low.

There is prospect of resuming whole decline from 1.4376. Hence, if the trade turns out as expected, we'll monitor downside momentum to decide whether to exit at around 1.2661, or hold through it.

EURAUD recorded a stunning rally today, advancing above the 20-day simple moving average (SMA). The RSI is currently increasing positive momentum as it stands above its threshold of 50, hinting that the next move in prices could be on the upside rather than on the downside. The bullish signals are even stronger from the stochastic oscillator as the blue % K line has finally formed a bullish cross with the red %D line and both are heading higher.

If the pair continues the bullish rally, immediate resistance could be met at the 1.6350 three-year high. Above this level, the next barrier for investors to have in mind is 1.6590, identified by the top on August 2015.

Should prices decline, immediate support could be found around the 1.6050 support level, identified by the latest lows. A close below this level could change the current scenario to negative and the price could challenge the 40-SMA at 1.5930 in the daily chart. If there is a drop below this level, the next stop could be at the 23.6% Fibonacci retracement level of the upleg from 1.3625 to 1.6350, near 1.5710.

In the long term, the bullish outlook remains intact since February 2017 with the moving averages all pointing upwards.