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• BoC seen raising rates but are markets expecting too much?
• BoE Deputy Governor casts doubt on UK rate hike;
• USDCAD could be extremely lively as Yellen testifies on monetary policy.

Wednesday promises to be quite an entertaining day for markets, with central banks once again the focus as the Bank of Canada announces its latest monetary policy decision and Federal Reserve Chair Janet Yellen begins her two day testimony, firstly before the House Financial Services Committee.

The BoC has come to the fore in recent weeks, adopting a far more hawkish stance on interest rates, so much so that markets are now almost fully pricing in a rate hike this year. This comes despite inflation in the country currently sitting well below the central bank’s target and the economy doing quite well – despite a far more upbeat assessment this week from the country’s finance minister Bill Morneau – albeit with a number of potentially destabilising headwinds.

Still, key officials at the central bank have spoken in recent weeks and markets have listened, positioning themselves for a hike and possibly more in the pipeline. Investors have actually taken it on board so much that the downside risks now come from the central bank waiting to hike, an outcome that could hit the Canadian dollar quite hard and cast doubt on just how serious policy makers really are.

The sudden desire to raise interest rates at the BoC comes at the same time as their counterparts at the Bank of England have also struck a more hawkish tone. Despite the significant economic uncertainty linked to Brexit and the weakness we’re already seeing as a result of last year’s vote, there appears to be a growing consensus at the bank to raise interest rates in order to offset the rising inflationary pressures that are largely being driven by the depreciation of the currency. Still, not everyone is convinced and Deputy Governor Ben Broadbent this morning appears to have joined Governor Mark Carney in stating that it’s not the time to raise interest rates. Broadbent was being seen as the proxy for whether the consensus has shifted and his comments today – which hit the pound in early trade – suggest there may still be some way to go, although future votes are likely to be very close.

One central bank who’s monetary policy stance has barely shifted this year, if at all, is the Fed. Markets may not yet be convinced that we’ll get a third rate hike this year but they’re not dismissing it as they have in the past, either. Yellen’s testimony on the semi-annual monetary policy report will be watched very closely today for signs that the central bank is pulling back at all from its calls for another hike, amid signs that some policy makers are becoming less convinced due to low inflation.

Yellen will likely be quizzed on a number of issues related to the Fed’s plans - among other things if past testimonies are anything to go by – including its plans for interest rates beyond the end of the year and its balance sheet, which it is expected to begin unwinding as early as September. Yellen likes to keep her cards very close to her chest though so may give little new information away today, not that this often stops markets getting carried away. With her testimony coming at the same time as the BoC’s rate decision and press conference, USDCAD will likely be extremely lively today.

The euro has steadied on Wednesday, after recording considerable gains in the Tuesday session. Currently, EUR/USD is trading at 1.1460. Earlier in the day, the pair climbed to 1.1489, its highest level since May 1. On the release front, German WPI improved to 0.0%, but fell short of the estimate of 0.2%. Later in the day, the eurozone releases Industrial Production. In the US, Federal Reserve Chair Janet Yellen will testify before the House Financial Services Committee. On Thursday, the US releases PPI and unemployment claims. As well, Janet Yellen will testify before the Senate Banking Committee.

Inflation levels remain a sore point in the eurozone, and Germany, the bloc’s largest economy, has not been immune to low inflation. The Wholesale Price Index declined 0.7% in May, its worst reading in 9 months. There was some improvement in the June report, with a flat reading of 0.0%. Still, German and eurozone inflations levels remain well below the ECB’s target of 2%, and as long as this situation continues, the ECB is unlikely to taper its aggressive stimulus package. We’ll get a look at German Final CPI on Thursday. The index has looked weak in the second quarter, and the estimate for June is 0.2%.

With Germany showing healthy growth and enjoying fiscal stability, the question of the fiscal stance of the eurozone as a whole was a key topic as eurozone finance ministers met in Brussels this week. Germany has opposed attempts to define the bloc’s fiscal stance as expansionary, and at the Monday meeting, the finance ministers agreed to aim for a”broadly neutral” stance. The European Commission wants to see France and Italy work on trimming their substantial deficits. As for Germany, which is in much better fiscal shape, the Eurogroup of finance ministers has called on the country to divert more resources to investment and public spending.

After a short hiatus, Washington is again abuzz over allegations of secret ties between Russia and the Trump administration during the US election. This week’s breaking news is the revelation that Donald Trump Jr. admitted that a Russian official contacted him and offered to provide him with evidence incriminating Hillary Clinton. Trump and the White House are trying to lower the flames and put a positive spin on the meeting, but the media and lawmakers (including Republicans) aren’t about to Trump off the hook. The crisis is just the latest miscue for the Trump administration, which hasn’t been able to pass any significant laws through Congress, even though Republicans control both the House of Representatives and the Senate. The latest dark cloud over the White House has dampened investor confidence, and the euro took advantage on Tuesday, climbing close to the 1.15 line.

Daily Pivots: (S1) 0.7613; (P) 0.7627; (R1) 0.7652; More...

The break of 0.7643 minor resistance suggests that pull back from 0.7711 has completed at 0.7570 already. Intraday bias is turned back to the upside for 0.7711. Break will extend larger rally from 0.7328 and target 0.7748 resistance and above. At this point, there is no clear sign of range breakout yet. Hence, we'd be cautious on topping again as it approaches medium term fibonacci level at 0.7849. On the downside, break of 0.7534 will indicate near term reversal and turn bias back to the downside for 0.7370 support.

In the bigger picture, we're still treating price actions from 0.6826 low as a corrective pattern. And, as long as 38.2% retracement of 0.9504 to 0.6826 at 0.7849 holds, long term down trend from 1.1079 is expected to resume sooner or later. Break of 0.6826 low will target 0.6008 key support level. However, firm break of 0.7849 will indicate that rise from 0.6826 is developing into a medium term rebound, rather than a sideway pattern. In such case, stronger rise should be seen to 55 month EMA (now at 0.8082) and above.

'The trend in housing starts for Canada reached its highest level in almost five years. So far this year, all regions are on pace to surpass construction levels from 2016 except for British Columbia.' - Bob Dugan, CMHC

Canada's housing starts increased more than expected in June, with strong construction intentions being observed in the Toronto region and downward trends in Vancouver. The Canadian Mortgage and Housing Corporation's report showed on Tuesday that the seasonally adjusted yearly rate of housing starts in Canada rose to 213K in June, following the preceding month's figure of 195K. Meanwhile, analysts anticipated an increase close to 200K in the reported month. While Canada's housing market started to cool down, the more reliable six-month moving average rose to 215K, nearing the five-year high. The stronger-than-expected figures suggested that builders were proceeding with their projects despite a significant fall in home sales. Moreover, the solid growth in housing starts is expected to keep on contributing to the country's economic growth as well as to provide one more reason for the Bank of Canada to raise interest rates. Analysts expect the Bank's policy changes to lead to slightly weaker housing sector, with the most pronounced impact on Toronto and Vancouver, where prices were the highest.

'The job openings plunge in May shows further evidence that the economy is hitting the wall of full employment. As the economy ages there's going to be fewer available jobs out there simply because companies have hired all the workers they need for now.' - Chris Rupkey, MUFG

Job openings in the United States fell sharply, while hiring was the highest since 2004 and more people left their jobs in May, suggesting that the country's labour market remained robust. The Labour Department published its Job Openings and Labour Turnover Survey, or JOLTS, on Tuesday, showing that the number of job openings fell 301K to a seasonally adjusted 5.67M in the reported month, following the downwardly revised figure of 5.97M in April. The decrease in May's job openings was mainly due to the fact that fewer positions were added in transportation, construction, utilities and warehousing services sectors. Meanwhile, the number of hires soared to 5.5M, supported by stronger figures in business, professional and educational services. The number of people voluntarily leaving their jobs rose to 3.2M, as there was enough confidence in the labour market. The report confirmed that the US economy was healthy and close to full employment with only 4.4% unemployment rate.

Daily Pivots: (S1) 1.2884; (P) 1.2914; (R1) 1.2943; More....

USD/CAD continues to lower downside momentum. But at this point, it's staying below 1.3013 resistance. Thus, deeper fall is expected for 1.2460 low. However, break of 1.3013 will indicate short term bottoming, on bullish convergence condition in 4 hour MACD. In such case, intraday bias will be turned back tot he upside for 1.3164/3346 resistance zone first.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The second leg should have finished at 1.3793. Break of 1.2460 will extend such correction to 50% retracement of 0.9406 to 1.4869 at 1.2048. At this point, we'd look for strong support from there to contain downside and bring rebound. However, firm break there will target 100% projection of 1.4689 to 1.2460 from 1.3793 at 1.1564.

Will Yellen be tellin'?

Investors appear to expect a dovish statement today from US Federal Reserve Chairwoman Janet Yellen , i.e. a ‘Goldilocks' not-too-fast, not-too-slow approach to monetary policy. So, we believe that the risk is mostly on the upside in USD: if Yellen surprises and comes out hawkish, investors will be scrambling to buy USD.

Yellen's scheduled remarks, to the US House of Representatives at 10.00 Washington time, offer a big opportunity to explain the Fed's plans on interest-rate hikes and on its upcoming balance sheet run-off. Details have so far been scarce. Many investors were disappointed by the limited information provided in the transcripts of June's meeting of the Fed's Open Market Committee.

Her remarks are also are the only significant event planned for today. Otherwise, the markets are in the doldrums of mid-summer. Volumes are low, equity indices and currencies are going nowhere. After edging slightly lower on Tuesday, European markets opened in positive in territory with the DAX and Footsie rising 0.39% and 0.67% respectively. The picture is not much brighter in the FX market with most currency pairs treading water for the past few days. The pound sterling rose 0.35% against the greenback yesterday before falling 0.85% to 1.2825 after a Band of England report showed Deputy Governor Broadbent is reluctant to support a rate hike for now.

Hardly a taper tantrum: bonds were overpriced, too

Last week's rally in bond yields was not just a reaction to central banks' effort to return to ‘normal' interest rates. It also was a reaction to expensive bond positions. Bonds have been overvalued for a significant period, with little duration-risk priced in. It seems that the shift in monetary policy woke up the market to this overvaluation.

Central banks are clearly bent on ‘normalization', and the US Federal Reserve is leading the way forward. We expect to see a gradual tightening of money by the Fed, led by balance sheet reductions and modest interest-rate hikes. Still, the Fed is not yet taking the aggressive stance it took in 2013, which pushed rates up 25 basis points across the curve. Indeed, we see the Fed taking no more than a 25 bp increase for the balance of 2017.

Although inflation still has not caught fire, Fed Chairwoman Janet Yellen says this is transitory, and she continues to push firmly for further rate hikes. We think she will ultimately have her way, and when her rate increases are followed by those of the European Central Bank – which in due course will surely happen – then we expect a significant market reaction.

Will Canada raise interest rates tomorrow?

On Thursday, the Bank of Canada will decide whether to raise rates. Will interest go up again, as it has over the past month?

On the one hand, the BoC has a decidedly hawkish view. Currency traders have been convinced enough to price in 67 basis points worth of rate hikes for the coming 12 months. On the other hand, the Canadian economy suffers from weak inflation (led by soft wage growth) and significant exposure to external risk – think oil, gas and mineral prices.

In our view, the BoC's Thursday choice will depend on its reading of the deep data. If they can, they will tighten money, but not automatically. We suspect the markets have overanticipated rate hikes, and that weak oil prices and current account deficit will take 25bp off of the table. In a nutshell: stay long USD/CAD.

EUR/USD

Current level - 1.1480

The break through 1.1445 high shows, that the consolidation pattern during the last two weeks is already over and the bias is positive, for a rise towards 1.1550, en route to 1.1610. Initial support lies at 1.1445 and crucial on the downside is 1.1380.

USD/JPY

Current level - 113.47

The peak at 114.50 has set an end of the whole rise from 108.10 and the outlook is already bearish, for a slide towards 112.80, en route to 111.75. On the senior frames current downtrend should target 108.10 and 106.80.

GBP/USD

Current level - 1.2848

The bias is still bearish, for a tight test of 1.2790 support zone. The latter is expected to provide a reliable base for an upswing towards 1.3050. Minor intraday resistance lies at 1.2860 and crucial on the upside is 1.2920 peak.

EURJPY continues gaining ground, finishing the day lower only once thus far this month. In addition, the pair recorded a seventeen-month high of 130.76 in yesterday’s trading.

Turning to technical indicators, the MACD is projecting a bullish picture. Specifically, the indicator is positive as well as above its red signal line. The RSI is in bullish territory but it is steeply heading lower from overbought levels. This points to negative market momentum in the very short-term.

Yesterday’s high of 130.76, combined with the 131 handle, could act as a barrier to the upside. Further up, the area around the upper Bollinger band at 131.94 might offer additional resistance.

On the downside, the area around the 130 mark, a potential psychological level, could provide support. Notice that the price is currently close to this point. Additional declines would shift focus to the middle Bollinger line – a 20-day moving average (MA) – at 127.09 for further support.

As regards the medium-term picture, it is bullish at the moment with both the 50- and 200-day MAs being positively sloped. Additionally, the pair has been trading above both MAs since late April.

AUDUSD is currently trying to build an uptrend to reach the previous 3-month high of 0.7711. Even though the bullish bias is still intact, the risk could be skewed to the downside as the pair has crossed above the Bollinger band.

The short-term picture is bullish as the pair has been trending above the 50-4-hour and the 200-4-hour moving averages (MA) since July 11. Furthermore, technical indicators also assert a bullish bias, with the RSI fluctuating above 50 whereas the MACD is moving in positive area. However, a risk to the downside is possible as the pair has broken the upper Bollinger band, while the RSI has changed direction from rising to falling, after touching marginally the overbought area.

Should the price head down, a support level could be first found at the 50-4-hour MA of 0.7621 – an area that was previously tested repeatedly. A second support could be met at 0.7611, which is a point on the middle line of the Bollinger bands, whilst further price decreases would target the previous bottom of 0.7571 (lower Bollinger band).

If instead the pair hits to the upside, the latest peak of 0.7663 would act as an immediate resistance. Yet, if the pair manages to climb even higher, the 3-month high of 0.7711 would resist further upward movements