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Sterling drops sharply as consumer inflation missed market expectations.

Headline CPI was unchanged at 2.4% yoy in June, below expectation of 2.6% yoy.

Core CPI slowed to 1.9% yoy, down from 2.1% and missed expectation of 2.2%.

RPI accelerated to 3.4% yoy, up from 3.3% yoy but missed expectation of 3.5% yoy.

Also from UK:

PPI input rose to 10.2% yoy, up from 9.6% yoy and above expectation of 10.2% yoy.

PPI output rose to 3.1% yoy, up from 3.0% yoy but missed expectation of 3.2% yoy.

PPI output core was unchanged at 2.1%, below expectation of 2.3%.

BoE policymaker are likely disappointed by the lack of pick up in inflation. Is an August rate hike still on the table? This is now a question to consider.

GBP/USD breaks 1.3048 low and it's now on course for 1.2874 fibonacci level.

Rates: Core bonds locked in narrow ranges

The US 2-yr yield closed above 2.6% for the first time since 2008 yesterday after Powell’s bullish testimony before US Congress. Core bonds generally remain resilient though, also withstanding a further improvement in risk sentiment. Today’s calendar is unlikely to unlock these low-volume, sideways trading conditions.

Currencies: Powell sees economic resilience. Dollar rebounds

Yesterday, fortunes turned again in favour of the dollar as Fed’s Powell sees no big obstacles for the Fed to continue gradual policy normalization. EUR/USD turned back lower in the established trading range. USD/JPY outperforms. Sterling remains in the defensive as the Brexit chaos on the UK persists even as PM May survived a key Parliamentary vote.

The Sunrise Headlines

• US stocks ended in green on Tuesday (0.2% - 0.6%), enjoying Powell’s upbeat assessment before the Senate. Following WS, Asian stock markets are currently trading in positive territory. Japan outperforms (+0.7%).
• UK PM May lives to fight another day as she narrowly survived (307-301) a pro- European Tory rebel amendment to keep the UK in a customs union with the EU.
• EC Juncker will meet US President Trump next week, seeking negotiations on reducing car tariffs under a so-called plurilateral sectoral deal in an attempt to head off a US probe into whether imports of cars threaten national security.
• Japan and the EU signed a free trade pact, removing EU tariffs on Japanese cars and car parts and scrapping Japanese duties on EU cheese and wine. They also closed a deal to allow the free flow of personal data between the two blocs.
• Under his two-year economic plan presented to the parliament yesterday, Spain’s new PM Pedro Sánchez will raise corporate taxes and slow the country’s deficit reduction to increase room for public spending.
• Fed’s George (hawk) took a more moderate stance overnight, saying the Fed should lift interest rates up far enough to prevent unwanted inflation but not too fast so as not to slow the economy, given the uncertainty over the outlook.
• The eco calendar contains US housing data and June inflation in UK and EMU (final). The Fed releases its beige book. Powell appears before the House. Morgan Stanley, Alcoa and eBay release earnings. Germany taps the market

Currencies: Powell Sees Economic Resilience. Dollar Rebounds

Powell stays optimistic. USD rebounds

Yesterday, the dollar started on a soft footing. EUR/USD tested the 1.1745 area. The greenback regained the lost territory ahead of Fed’s Powell testimony. Powell was outright positive on the US and even on the global economy. He also wasn’t too worried on the impact of the trade tensions or on the flattening of the yield curve. US yields rose marginally. The 2-yr yield set a minor cycle top. The dollar extended its intraday rebound. EUR/USD finished at 1.1661. The USD/JPY rebounded more forcefully with the pair heading to the high 112 area, supported by a revival in risk sentiment. Overnight, Powell’s positive message also supports Asian equities. The dollar extends its rebound albeit at a slower pace. The trade-weighted USD regained the 95 level. USD/JPY is testing 113. EUR/USD trades near 1.1650. For now, the strong USD has little effect on EM/Chinese markets. USD/CNY (6.71 area) is holding near the recent peak. Today, the eco calendar is thin with only US housing data and the final EMU CPI. Powell will attend the second part of his Congressional hearing before the House, but it isn’t Powell’s style to amend yesterday’s assessment. So, global risk sentiment and the ‘fall-out’ from Powell’s assessment will set the tone for global FX trading. The Fed Beige book is a wildcard. At the end of last week and early this week the dollar was losing momentum. However, yesterday’s optimtic view from Powell again supports the dollar. At the same time, the rise in US yields (and thus the interest rate support for the dollar) remains modest. EUR/USD is locked in the 1.1510/1.1850 range. It looks that the topside is blocked for now. USD/JPY is better bid. Intermatiate reistance comes in at 113.75 ahead of the 114.75/115.51 range top.

Yesterday, UK labour data were mixed with only a temporary positive impact on sterling. The focus for sterling trading was on yet another Key Brexit vote. May survived the vote as an important amendment from pro-EU rebels was narrowly rejected. Sterling was under pressure ahead of the vote, but rebounded afterward. However, EUR/GBP still closed the day at 0.8890. Today, UK June headline CPI is expected rise to 2.6%. Core inflation might decline to 2.0%. The data probably won’t change BoE rate hike expectations in a profound way. However, even after yesterday’s events, the Brexit chaos persists. The decline of sterling might slow, but we see no reason for a sustained rebound

USD (trade-weighted –DXY) returns to 95 resistance are as Powell stays optimistic on the economy

Cable holds in red and accelerated lower in in early European trading on Wednesday, extending previous day’s strong fall of nearly 1%.

Pound was initially hit by soft UK jobs data and additionally pressured by hawkish comments from Fed’s Powell which pushed the dollar significantly higher.

Tuesday’s fall broke below strong support at 1.3102 (last Friday’s spike low) and dipped to 1.3068, pressuring key support at 1.3049 (28 June low, the lowest since late Oct 2017). Bearish daily techs support further weakness for final attack at 1.3049 pivot, clear break of which would expose psychological 1.30 support and could accelerate towards next pivot at 1.2865 (Fibo 61.8% of larger 1.1930/1.4376 ascend).

Meanwhile, the pair may show stronger hesitation at key 1.3049 support and may bounce higher on better than expected UK inflation data, which are the key event for sterling today. Annualized inflation is forecasted to rise 2.6% in June vs 2.4% previous month, with release at/above the figure expected to give temporary boost to sterling.

Overall picture is bearish and bounce could be seen as positioning for fresh weakness, with upticks expected to stall under 1.3200 zone (falling 10/20SMA’s) to keep bears intact. Alternatively, stronger recovery which includes close above 1.32 handle, would sideline immediate downside threats.

Res: 1.3118, 1.3169, 1.3210, 1.3237
Sup: 1.3068, 1.3049, 1.3000, 1.2905

The Euro pressures last Friday's low at 1.1601 in early European trading on Wednesday, in extension of strong fall on Tuesday after more hawkish than expected congressional testimony of Fed Chairman Powell.

Powell favored central bank's plan for gradual rate increase as financial conditions are supportive for further growth, inflation is close to central bank's target and labor sector remains strong.

The single currency already stood at the back foot on Tuesday, following repeated failure to clearly penetrate thick daily cloud and accelerated lower after Powell's upbeat remarks.

Fresh weakness cracked bull-trendline which connects lows at 1.1527 and 1.1601 (at 1.1638) and looks for attack at 1.1601 pivot, break of which is needed to complete failure swing pattern on daily chart and signal further weakness.

Daily indicators (momentum and slow stochastic) are heading south and MA's (10/20/30) are now in bearish setup and supporting fresh bears. Rising negative sentiment is expected to add to bearish pressure.

Broken 20SMA caps today's action and marks solid resistance at 1.1665 (reinforced by the base of thick hourly cloud) which should ideally limit upside attempts, as profit-taking and hesitation at strong 1.1601 support may push the price higher.

Only sustained break above 1.17 handle (daily Tenkan-sen) would sideline immediate bears and would risk renewed attack at daily cloud base.

EU's inflation data are key event for Euro today (annualized figure is expected to stay unchanged at 2% in June, while forecast for monthly increase by 0.1% is well below previous month's 0.5% release).

Res: 1.1665, 1.1700, 1.1722, 1.1740
Sup: 1.1625, 1.1601, 1.1589, 1.1558

XAUUSD (1228.01): Gold prices were seen falling to a fresh 12-month low on Tuesday. Price action is currently consolidating after slipping to lows of 1226.14. Further declines could push the price of the precious metal down to 1219 level which is another major support level that could be tested. To the upside, any gains are likely to be limited to the 1242 handle.

USDJPY (112.93): The USDJPY currency pair was seen rebounding off the support level at 112.28 and rallied to fresh highs on Wednesday. Price action however remains doubtful near the current top with the Stochastics on the 4-hour chart posting a lower high. Another leg in the decline is expected. The sharp gains in the currency pair could see a minor correction back to 112.28. In the event that this level fails to hold the declines, we could expect to see steeper correction toward 111.13.

EURUSD (1.1654): The EURUSD currency pair was seen stalling near the resistance level of 1.1730 and turned lower on the day on Tuesday. Price action was seen giving up the gains made from Monday and the daily chart's bearish engulfing pattern is likely to suggest some downside. On the 4-hour chart, the declines could push the EURUSD currency pair lower toward 1.1600 level where support could be formed. However, with the Stochastics on the 4-hour chart turning to the oversold level, we could expect to see a reversal in the currency pair.

The U.S. dollar was seen posting strong gains on Tuesday. The rebound came amid the U.S. industrial production rising 0.6% on the month. The Fed Chair Powell started his two-day testimony to the U.S. Congress. In his testimony, the Fed Chair maintained the hawkish rhetoric that the central bank should continue tightening monetary policy.

Elsewhere, the UK's monthly jobs data showed that the unemployment rate remained at 4.2% while the average earnings increased 2.5% matching estimates but slower than a revised 2.6% from the previous three months.

The UK's Office for National Statistics will be releasing the inflation report today. Economists forecast that consumer prices accelerated at a pace of 2.6% annually in June. This marks a slight increase from 2.4% seen the month before.

Core inflation rate is expected to rise 2.1%, the same pace as the month before. Data from the Eurozone will see the final inflation figures. Headline consumer prices are expected to rise 2.0% while core inflation rate is tipped to rise at a pace of 1.0%.

The Fed Chair Jerome Powell is expected to continue with his second day of testimony to congress.

The US dollar has been rising against the basket of major currencies after the speech by the Fed's head, Jerome Powell. The official said that the US central bank would continue gradually increasing of the interest rate amid high economic growth and stable inflation. However, Powell also noted that trade disputes on the world market caused some concerns and it was still unknown how they would affect the US economy. The US dollar index (#DX) closed yesterday in the positive zone (+0.49%).

The British pound significantly weakened yesterday against the US currency. As yesterday's economic reports showed, the average earning index in the UK, taking into account bonuses, counted to 2.5% in May, which met investors' expectations. However, the number of jobless claims in June rose to 7.8K, while experts expected 2.3K. Today important economic statistics are expected from the UK, the Eurozone and the US.

The "black gold" prices are falling against the backdrop of growing crude oil stocks in the US from the American Petroleum Institute. At the moment, futures for WTI crude oil are testing the level of $66.75 per barrel. At 17:30 (GMT+3:00), a report on US crude oil inventories will be published.

Market Indicators

Yesterday the bullish sentiment prevailed in the US stock market: #SPY (+0.40%), #DIA (+0.24%), #QQQ (+0.61%).

At the moment, the yield of 10-year US government bonds is at the level of 2.85-2.86%.

The news feed on 2018.07.18:

• The consumer price index in the UK at 11:30 (GMT+3:00);
• The consumer price index in the Eurozone at 12:00 (GMT+3:00);
• Statistics on the real estate market in the US at 15:30 (GMT+3:00);
• The Fed's "Beige Book" at 21:00 (GMT+3:00).

We also recommend paying attention to the speech by the Fed's head, Mr. Powell.

As we could have seen in the previous AUD/USD analyses, the price folowed the bearish setup and at this point it is making a breakout. The bearish triangle breakout zone is 0.7390-0.7405 and this is the POC for short trades. A 4h close below 0.7350 should initiate a continuation move towards 0.7524 and 0.7298. Selling on rallies is the valid option.

W L3 - Weekly Camarilla Pivot (Weekly Interim Support)

W H3 - Weekly Camarilla Pivot (Weekly Interim Resistance)

W H4 - Weekly Camarilla Pivot (Strong Weekly Resistance)

D H4 - Daily Camarilla Pivot (Very Strong Daily Resistance)

D L3 – Daily Camarilla Pivot (Daily Support)

D L4 – Daily H4 Camarilla (Very Strong Daily Support)

POC - Point Of Confluence (The zone where we expect price to react aka entry zone)