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US stocks hit record highs on the back of improved earnings, which pushed the VIX down to a fresh record low yields higher upon improved risk sentiment.

The expectations of a dovish meeting also played a part as it is deemed good for stocks and bonds, sending yields higher in the process.

After extending its 13-month decline, the US Dollar Index stabilized and recouped all of Monday's losses ahead of tonight's Fed meeting. The single bullish outside day looks a little lonely right now, but perhaps if the Fed aren't as dovish as feared there is potential for a bounce. Yet even under this scenario a move higher is more likely to be down to profit taking or technical traders betting the downside is temporarily over-extended. If the Republicans pull of the seemingly impossible with health-care we can revisit the upside potential, as this paves the way for other inflationary policies. Until then, the trend points lower.

Yesterday closed with a bullish pinbar and now trades above the monthly S2, making 93.64-93.92 a viable support zone. As the monthly S1 is at 94.78 and coincides with the 10-day MA, this is the lower bound of a resistance zone which takes us the 95.16 high. As sentiment and trend point lower, we suspect any rally up towards this zone may be tempting for bears to fade into for a run down to 93. As momentum from the monthly pivot has been increasingly bearish we expect a shallow pullback from here, unless the Fed manage to surprise markets (unlikely) or Whitehouse tremors subside.

December remains the most probable window for the next hike, according to CME's FedWatch tool. Yet at a 49.1% probability, traders remain unconvinced of this likelihood, and even then they're spreading their bets by pricing in a 47.9% to 49.1%. from the December through to the May 2018 meeting. Between now and November, traders see rates on hold as being a 89.8% probability which is as good as saying no chance at all until December.

Traders are keeping a keen eye on Australia's inflation data and speech by the RBA governor later today. Given that inflation is showing signs of picking up and AUD is moving higher against RBA's wishes, we could see another verbal intervention by Philip Lowe. Currently in a holding pattern below 80c, the weaker USD is propping AUD up despite Debelle's best efforts to lower the currency on Friday. Although in all the time the US Dollar Index points lower and AU economic data outperforms the US, verbal interventions may have limited impact and a break above 80c is imminent.

Price rallied aggressively and erased the last day’s losses, looks motivated to take out some important resistance level, signaling that the rate will increase further in the upcoming period.

Is pressuring the median line (ml) of the minor ascending pitchfork after the impressive breakout above the upper median line (UML) of the major ascending pitchfork. Right now is trying to take out the 1.1087 resistance (previous high). Sould increase further if will stabilize above the UML, even if will stay below the median line (ml) of the minor ascending pitchfork, another drop will come only if will fail once again to stay above the UML.

Price dropped significantly today and touched the 0.7400 psychological level, the retreat is natural after the impressive rally, could come down to test and retest a static support in the upcoming days.

Could approach and reach the 0.7375 static support (resistance turned into support) after the failure to reach the third warning line (wl3) and the WL3 of the former ascending pitchfork. We may have a buying opportunity if the rate will consolidate above the mentioned static obstacle, but only if will take out the wl3 resistance.

A breakdown below the 0.7375 level will confirm a drop towards the fourth warning line (WL4), which represents a critical support.

Price moves in range on the short term and awaits for the Australian economic figures to bring some action. Technically, has shown some exhaustion signs, but is premature to say that we'll have another leg lower in the upcoming period.

Is trading near the 0.7937 level, below the 0.7940 yesterday's low, remains to see how will react after the Australian data will come out. A disappointment will send the rate tumbling on the short term, but we have to wait for a confirmation.

The Australian CPI could increase by 0.4% in Q2, less versus the 0.5% growth in the former reading period, while the Trimmed Mean CPI could increase by 0.5%.

AUD/USD moves sideways on the short term, but maintains a bullish perspective as long as is trading above the upper median line (uml) of the minor ascending pitchfork. Remains to see what will happen in the morning because the fundamental factors are expected to take the lead again and to drive the rate, remains to see the direction.

Is trapped between the 0.7989 and the 0.7874 levels, only a breakout from this range will bring a clear direction.

Looks a little exhausted after the failure to reach and retest the warning line (wl1) and the 0.7989 major static resistance, but a selling opportunity could occur only if we'll have a valid breakdown below the median line (ml).

Back today with a follow up to Monday's EUR/USD already reaches top of daily range blog.

Take this little extract:

…to now sit just 30 pips away from the daily range top.

Well, it looks like those 30 pips made all the difference in the end:

EUR/USD Hourly:

As you can see on the EUR/USD hourly chart above, price couldn't help itself and ripped that extra 30 pips to touch daily resistance TO THE PIP.

Yes, this is a daily resistance level drawn from the exact point that price rejected off two years ago.

Come on, tell me that's not pretty cool!

If you now believe that this touch and rejection is confirmation of sellers, you can really start to look for short term strength to possibly sell into.

The rising tide of global growth is lifting all boats but there are lessons in how some are recovering better than others. The Aussie is the strongest, while the JPY is the weakest as equity indices enter an obligatory corrective rally ahead of the Fed. Month-to-date, all currencies are up against the dollar, with the loonie on top and GBP at the bottom. The Premium Insights will issue a trade tomorrow ahead of the Fed decision

In the pre-crisis era there was an economic orthodoxy that virtually every country followed. That order has broken down in the past decade and led to a series of economic experiments and now we're beginning to see the results.

The big surprise of 2017 has been Canada...as it was the surprising outperformer of 2016. The IMF said on Monday Canada will lead G7 countries in growth and that's with commodity prices halved from two years ago. Economists still don't quite believe in how strongly it's grown.

A pessimist would say that unsustainable asset price rises – housing in this case – have juiced consumer spending. A more favourable judgement would be that stimulative government policies boosted growth.

The UK could have been in the same position as Canada but fiscal tightening and Brexit uncertainty undercut some of the growth potential. It's a similar story in Europe where fiscal discipline and pockets of tight bank lending have held back the recovery.

In the US, Washington is incapable of consensus and the gridlock continues but there is always the belief that politicians there will do the right thing…once all the other options have been exhausted.

The two biggest losers in Monday's IMF update were the US and UK. The commonality there is political uncertainty.

The lesson so far this year is that it's tough to pick the winners and losers because it's such a fine line. In generations past, one country would be growing 4% and another 1%. Now, the difference in forecasts between the top G7 country (Canada 2.5%) and laggard (Japan 1.3%) is small but still has big implications in FX.

We could see just how big those implications are if Japan ever turns the corner. The minutes of the June BOJ meeting showed the board has no plans of exiting policy any time soon as long as CPI does not reach 2% despite tightening labour markets.

Something in the Air

A risk on session overnight ahead of tonight s FOMC meeting as WTI bounced higher sparked by Saudi Arabia pledging to cut oil exports further while an array of encouraging earnings reports and better-than-expected economic data has lifted equity markets and bond yields overnight

And indeed headlines that the Republican Senate had enough votes to open the health care vote has rekindled some optimism for the greenback

But the waves of bond selling across fixed income which saw the US 10 Year touch 2.34% suggesting the market, or at least some, are having a look see at the reflation trade again has tongues wagging this morning

On currency markets, all eyes are on the FOMC meeting, but dealers will be occupied with the month end rebalancing act. As for the FOMC, while we can never really tell what they have up their sleeve. Latest chatter suggests the may tip their hat to September the starting date for reducing the balance sheet. However, on the inflation front, the real question is how to spin doctor four consecutive misses on CPI. The September date has been communicated already so the Greenback should not get much of a rise from that but it will be the inflation language where a possible dovish skew will emerge

While it has not set off any alarm bells yet, Yellen has voiced concerns over “ somewhat rich” asset prices. Given that overarching asset prices could harbinger a degree of financial instability into the calculus, it could also strengthen the argument to keep tightening policy. If the FOMC drives this home tonight, we could see some interesting price action.

EURO

Some unusual price action over night saw the EURO initially rallied to 1.1712 but fell after the USD sprang back to life after US bond yields took off. Some interesting battle lines getting drawn on both fixed income and USD currencies markets and we may see the eventual winner play out in the EURUSD trade.

Japanese Yen

Buoyant risk appetite and rising ten-year bond yields have us within shooting distance of the physiological 112 level. Not much to say here as the 10 Year US bond yield correlation to USDJPY holds true once again

Australian Dollar

Commodity currencies continue to trade buoyant in a weak dollar/low vol market, but some dents in the armour forming as the USD was showing some vitality overnight. With the domestic CPI and Governor Lowe taking to the airwaves via a speech at the Anika Foundation Luncheon later this morning, the market will remain on hold.But given the surging Aussie dollar complicates the post mining boom economic rebalancing act, one could only expect Governor Lowe to lean against the current market view

Dollar remains mixed against majors

Political developments in Washington have guided the US currency more than economic fundamentals of late. The US Senate voted to bring the unknown healthcare legislation up for consideration. A small victory for the Trump administration with a 50/50 split vote that was broken as Vice President Pence issued the tie breaker.

The U.S. Federal Reserve began its two-day meeting on Tuesday and will release the Federal Open Market Committee (FOMC) rate statement on Wednesday, July 26 at 2:00 pm EDT. The market is pricing in a 96.9 percent that the benchmark Fed funds rate remains unchanged with only slightly better odds in the September meeting. The US target rate sits at 100–125 basis points after the 25 basis points rate hike in June. Without a press conference after the release of the statement investors will be focusing on the exact wording to look for insights into the start of the balance sheet normalization process.

US President Donald Trump said on Tuesday that Fed Chair Janet Yellen is still in the running to extend her tenure but also mentioned that White House aide Gary Cohn was a candidate for the position. Yellen’s term as Fed Chair ends in February 3, 2018.

The EUR/USD gained 0.007 on Tuesday. The single currency is steady near two-year highs ahead of the release of the Federal Open Market Committee (FOMC) statement. The market is not expecting big changes in the July rate statement and only changes to the language of the document to signal the start of the balance sheet reduction later this year.

The end of the FOMC meeting is not expected to boost the USD as the market is still seeing the EUR as undervalued as political uncertainty still hinders the greenback. Wednesday will be full of US economic indicator releases with New home sales at 10:00 am EDT, US crude inventories at 10:30 am EDT and the FOMC rate statement at 2:00 pm EDT.

The USD has given up all the gains from the Trump trade that started with Donald Trump’s victory in November. The Fed remains the biggest supporter of USD strength, but after two rate hikes and an almost imminent start of trimming its balance sheet there is little the central bank can do. Inflation remains subdued and even the sudden change in tone from other central banks jumping in the hawks bandwagon could not be enough if the US economy does not regain momentum. US GDP data due on Friday will be more telling on the state of the US economy, followed with next week’s employment data.

Oil surged 3.054 percent on Tuesday. The price of West Texas Intermediate is trading at $47.62 as US shale producers are cutting capital spending a day after Saudi Arabia renewed a push to cut production further. Current oil prices have not been that profitable for US shale producers, although ironically their increased production has kept crude in the current range. The actions of US drilling companies has offset the pact between Organization of the Petroleum Exporting Countries (OPEC) and other producers intended to limit output. During this week’s meeting in Russia the group renewed their pledge to stabilize prices and to be more vigilant about compliance with the agreement as a coordinated effort is paramount.

Two US companies said yesterday that rig counts were slowing down as producers were not sure which direction the price of crude would take. Crude inventories have gone down around the globe as the OPEC deal but still remain above average. API inventories on Tuesday afternoon and the Energy Information Administration (EIA) weekly crude stocks to be released on Wednesday at 10:30 am EDT will guide prices after the comments from OPEC and US producers have caused prices to rise early in the week.

Market events to watch this week:

Wednesday, July 26
4:30 am GBP Prelim GDP q/q
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate

Thursday, July 27
8:30 am USD Core Durable Goods Orders m/m
8:30 am USD Unemployment Claims

Friday, July 28
8:30 am CAD GDP m/m
8:30 am USD Advance GDP q/q

CAD unchanged ahead of Fed Rate Announcement

The Canadian dollar is trading in a tight range on Tuesday. The US dollar remains mixed against majors due to political uncertainty in Washington as the Russian probe saga continues. The U.S. Federal Reserve will release the Federal Open Market Committee (FOMC) rate statement on Wednesday, July 26 at 2:00 pm EDT. The market is pricing in a 96.9 percent that the benchmark Fed funds rate remains unchanged with only slightly better odds in the September meeting. The US target rate sits at 100-125 basis points after the 25 basis points rate hike in June.

US Shale Producers Slowing Down

Oil prices surged after US producer Anadarko Petroleum revealed quarterly losses were higher than expected and will impact its capital spending in 2017. US shale producers have been caught in a market share war with Organization of the Petroleum Exporting Countries (OPEC) that allowed crude prices to free fall. Now the OPEC has tried to stabilized prices by getting members and other major producers to agree to cut output, but US producers were not part of the agreement and have continued to ramp up operations. The news from Anadarko gives some insight into how current levels are not profitable enough, which could lead to a slowdown in expanding rig counts and allow the production cut deal to soak some of the excess inventory around the world.

OPEC to Ramp up Compliance with Cut Agreement

Yesterday Saudi Arabia upped their production cut promise with an additional 300,000 barrels a day. The agreement runs until March of 2018 although there are signs that some members are struggling to meet their allotted quotas. OPEC does not seem to offer any sympathy to those nations not exempt form the agreement and if anything there is an expectations of more strenuous compliance.

US Wants to Remove NAFTA Dispute Settlement Mechanism

Canadian Prime Minster Justin Trudeau commented today on the United States plan to remove Chapter 19 from the NAFTA trade agreement as one of the objectives of the negotiation. The chapter is a dispute settlement mechanism that forces the US to avoid anti-dumping and anti-subsidy cases against Mexico and Canada. This has been the biggest point of contention ahead of the NAFTA renegotiations form Mexican and Canadian officials. The current system requires a binational panel to hear the complaints and issue a decision.

The USD/CAD lost 0.051 percent in the last 24 hours. The currency pair is trading at 1.2509 as US dollar softness and the sudden rise of oil has put the loonie flat against the greenback. Economic data in Canada has so far validated the decision from the Bank of Canada (BoC) to raise interest rates in July. The CAD remains close to 1.25 or 80 cents awaiting the statement form the Fed on interest rates on Wednesday, July 26 at 2:00 pm EDT.

The CME FedWatch tool is showing a minute probability of a rate hike in July, and its not until December that the odds move higher than 50/50. The Fed has so far hiked twice in 2017 and one more rate hike is expected, but it will depend heavily on economic indicators showing signs of improvement. The Fed is more likely to start its balance sheet reduction soon, with the September meeting looking like an obvious candidate.

Oil surged 3.054 percent on Tuesday. The price of West Texas Intermediate is trading at $47.62 as US shale producers are cutting capital spending a day after Saudi Arabia renewed a push to cut production further. Current oil prices have not been that profitable for US shale producers, although ironically their increased production has kept crude in the current range. The actions of US drilling companies has offset the pact between Organization of the Petroleum Exporting Countries (OPEC) and other producers intended to limit output. During this week’s meeting in Russia the group renewed their pledge to stabilize prices and to be more vigilant about compliance with the agreement as a coordinated effort is paramount.

Two US companies said yesterday that rig counts were slowing down as producers were not sure which direction the price of crude would take. Crude inventories have gone down around the globe as the OPEC deal but still remain above average. API inventories on Tuesday afternoon and the Energy Information Administration (EIA) weekly crude stocks to be released on Wednesday at 10:30 am EDT will guide prices after the comments from OPEC and US producers have caused prices to rise early in the week.

Market events to watch this week:

Wednesday, July 26
4:30 am GBP Prelim GDP q/q
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate

Thursday, July 27
8:30 am USD Core Durable Goods Orders m/m
8:30 am USD Unemployment Claims

Friday, July 28
8:30 am CAD GDP m/m
8:30 am USD Advance GDP q/q

After slowly retrenching over the last several months, consumer confidence took a leap of faith once again in July hitting 121.1, the second highest reading since topping 124.9 in March.

Consumers Remain Upbeat

The U.S. consumer remained upbeat in July according to the Conference Board's consumer confidence measure. The Consumer Confidence Index increased to 121.1 from a downwardly revised reading of 117.3 in June. Both the present situation as well as the expectations indices improved in July. The present situation index improved to 147.8 in July from 143.9 in June while the expectations index increased to 103.3 from 99.6. This last one, the expectations index, is the most volatile of the components of the Consumer Confidence Index and was the culprit for the decline in June. The present situation index has been improving since May of this year while the expectations index had been declining since April.

Thus, July was the first time in several months where both of the broadest components of the index increased together, which is a good sign for the U.S. economy and for the consumer. However, as we have become accustomed to the strong rebound in confidence after the presidential elections last year, we are still waiting for the consumer to put its wallet where its confidence is.

The job plentiful index minus jobs hard to get index, which tends to signal the direction of the rate of unemployment, increased to 16.1 from a 13.6 reading in June, which means that the expectation is for the unemployment rate to continue to go down.

The Consumer Confidence Index in July was the second highest reading in 16 years, second only to March's reading of 124.9. This underscores the important changes occurring in U.S. consumer confidence after several years of weak readings.

Plans to Buy Remain Mixed

The details of the index regarding the plans to buy within the next six months were not as clear cut as the overall indices. Curiously enough, one of the largest changes in plans to buy during the month was the plan to buy a home which increased to 6.7 in July from a 6.0 reading in June. This was the first increase in this index since April of this year. The plans to buy an automobile within the next six months also increased, but to 12.7 from a reading of 12.6 in June.

Meanwhile, plans to buy major appliances declined to 46.1 from 52.1 in June. The only sub-indices that increased in July compared to June were the plans to buy a vacuum cleaner and the plans to buy an air conditioning unit. These buying plans sub-indices are perhaps very telling regarding the current conditions of consumer demand. As we said above, much of the improvement in consumer confidence has yet to be translated into consumer demand, even though we are still expecting this improvement in confidence to help push consumer demand higher.