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GBP/USD climbed close to the symbolic 1.30 level on Thursday, but has retracted. In North American trade, the pair is trading at 1.2940. On the release front, US employment numbers were softer than expected. ADP Nonfarm Payrolls plunged to 154 thousand, well below the estimate of 184 thousand. Unemployment claims rose to 248 thousand, above the estimate of 243 thousand. On Friday, there are three key employment events – Average Hourly Earnings, Non-Farm Employment Change and the unemployment rate. As well, the Federal Reserve will release its semi-annual Monetary Policy Report.

British PMIs in June continued to point to expansion, but there are concerns, as all three PMIs pointed to slower growth in June. The PMIs, which gauge the strength in the manufacturing, construction and services sectors, were all down compared to the May readings. The double whammy of the British election and the start of Brexit talks with Europe have increased uncertainty and resulted in a decrease in new orders across the economy, as underscored by the softer PMI readings. Weaker economic conditions and fears of a bite from Brexit have put the BoE in a difficult position regarding interest rate policy – the economy may not be ready for a rate hike, but inflation is at 3%, well above the BoE's inflation target of 2%. A rate hike would likely push inflation to lower levels.

BoE policymakers have not hesitated to publicly air their differences over rate policy, which clearly will not add to investor confidence. BoE Governor Mark Carney is at odds with MPC member Ande Haldane and other members regarding raising rates. Just a few weeks ago, Carney went on record, adamantly opposed to a rate hike. However, he has since softened his approach, and his comments at the ECB forum last week triggered a strong pound rally, as the currency punched above the 1.30 level for the first time since late May.

The Federal Reserve minutes were released on Wednesday, but the markets reacted with little more than a shrug. The minutes revealed divisions in the Fed over inflation and the bloated balance sheet, but failed to provide any clarity about future monetary policy. Some FOMC members expressed unease at the Fed's current forecast of rate hikes, given the persistently low levels of inflation. According to the current "dot plot", the Fed expects to raise rates in December, and three times in 2018. There was also dissension over the timing of reducing the $4.2 trillion balance sheet – some policymakers were in favor of starting in September, while others preferred later in the year. At the June meeting, the Fed stated that it would begin reducing the balance sheet this year, but provided no details. Analysts expect the Fed to start winding down the balance sheet in September, prior to a rate hike in December. The markets are lukewarm about a rate hike in December, with the odds at just 50%, according to the CME Group.

USD/JPY has inched lower in Thursday trading. In the North American session, the pair slightly above the 113 level. On the release front, US job data was a disappointment. ADP Nonfarm Payrolls plunged to 154 thousand, well below the estimate of 184 thousand. Unemployment claims rose to 248 thousand, above the estimate of 243 thousand. On Friday, there are three key employment events – Average Hourly Earnings, Non-Farm Employment Change and the unemployment rate. As well, the Federal Reserve will release its semi-annual Monetary Policy Report.

A rebound in global economic growth has been a godsend for the Japanese economy, which has enjoyed a strong 2017. The export and manufacturing sectors are strong, consumers and businesses are spending more, and GDP expanded at an annualized rate of 1.0% in the first quarter. However, despite years of radical accommodative policy, the Bank of Japan has failed to raise inflation levels, which remain well below the bank's target of 2 percent. BoJ Governor Haruhiko Kuroda is on record in declaring that the bank would not lower its inflation forecast, but this stance apparently has changed. The BoJ appears ready to raise a white flag (of sorts) and lower its inflation target when policymakers gather for a rate meeting on July 20. However, traders should not expect the move to shake up the markets – any downgrade in the inflation target will likely be of a minor nature.

The Federal Reserve minutes were released on Wednesday, but the markets reacted with little more than a shrug. The minutes revealed divisions in the Fed over inflation and the bloated balance sheet, but failed to provide any clarity about future monetary policy. Some FOMC members expressed unease at the Fed's current forecast of rate hikes, given the persistently low levels of inflation. According to the current "dot plot", the Fed expects to raise rates in December, and three times in 2018. There was also dissension over the timing of reducing the $4.2 trillion balance sheet – some policymakers were in favor of starting in September, while others preferred later in the year. At the June meeting, the Fed stated that it would begin reducing the balance sheet this year, but provided no details. Analysts expect the Fed to start winding down the balance sheet in September, prior to a rate hike in December. The markets are lukewarm about a rate hike in December, with the odds at just 50%, according to the CME Group.

The minutes for the June ECB meeting turned out more hawkish than expected, sending EURUSD to a 3-day high of 1.1397 and Europe's Stoxx 600 stock index to a 11-week low 378.45. The minutes unveiled that policymakers had discussed removing the guidance on the bond asset purchase program (QE), if necessary. Policymakers just shrugged off recent weakness in headline inflation as core inflation continued to climb higher. This came in line with President Mario Draghi's comments last week that "deflationary forces have been replaced by reflationary ones", pointing to a "strengthening and broadening recovery" in the Eurozone. German 2-year yield breached the March high after the comments and has rallied to a level not seen since January 2016 since then.

The minutes contained several flavors that were surprising to the market. It suggested that, as the tail risks to the recovery outlook have been vanishing, policymakers had considered dropping the "easing bias" in the forward guidance. The refrained from doing so as the region's economic recovery has not yet achieved higher inflation. The minutes also revealed, while the Council reiterated the promise to in the "size and/or duration" of the QE program, it believed that, "as the economic expansion proceeded and if confidence in the inflation outlook improved further, the case for retaining this bias could be reviewed".

Meanwhile, policymakers stressed that "continued caution in communication" is critical. It is particularly important to avoid sending signals that "could trigger a premature tightening of financial conditions, which in turn could put the progress made towards a sustained convergence towards the Governing Council's inflation aim at risk, thereby prolonging the need for extraordinarily accommodative monetary policy".

Recall that the ECB staff upgraded it GDP forecasts but downgraded the inflation outlook. The staff projected  that GDP would expand +1.9% this year, up +0.1 percentage point +1.8% projected in March, before easing to +1.8% and then to +1.7% in 2018 and 2019, respectively. Note that growth forecasts for 2018 and 2019 were also revised higher +0.1 percentage point from previously. On inflation, the staff revised lower the forecasts to +1.5% for 2017, +1.3% for 2018 and +1.6% for 2019. The corresponding estimates in March were +1.7%, +1.6% and +1.7%. The Council members noted that they found it "puzzling" as the core inflation was revised lower despite stronger economic growth and falling unemployment rate.

EUR/GBP - 0.8804

 
Recent wave: Major double three (A)-(B)-(C)-(X)-(A)-(B)-(C) is unfolding and 2nd (A) has possibly ended at 0.6936.

Trend: Near term up

New strategy  :

Sell at 0.8845, Target: 0.8745, Stop: 0.8885

Position : -

Target :  -

Stop : -

 
Although the single currency recovered after finding support at 0.8756 and initial upside risk is for recovery to 0.8845-50, as long as indicated resistance at 0.8882 (last week’s high) holds, further consolidation would be seen and prospect of another retreat remains, below said support at 0.8756 would add credence to our view that a temporary top is possibly formed at 0.8882, bring retracement of recent upmove to 0.8730-35, however, still reckon downside would be limited to 0.8719 support.

In view of this, would be prudent to sell euro on recovery as 0.8845-50 should limit upside. Above 0.8882 would revive bullishness and extend recent upmove from 0.8304 low to 0.8900-10, having said that, as broad outlook remains consolidative, reckon current c leg of larger degree wave b should be limited to 0.8950 and price should falter well below 0.9000 psychological level.

Our preferred count is that, after forming a major top at 0.9805 (wave V), (A)-(B)-(C) correction is unfolding with (A) leg ended at 0.8400 (A: 0.8637, B: 0.9491 and 5-waver C ended at 0.8400. Wave (B) has ended at 0.9413 and impulsive wave (C) has either ended at 0.8067 or may extend one more fall to 0.8000 before prospect of another rally. Current breach of indicated resistance at 0.9043 confirms our view that the (C) leg has ended and bring stronger rebound towards 0.9150/54, then towards 0.9240/50.

• German bunds broke through the 0.5% yield resistance level in the morning and jumped (temporarily) on the ECB minutes. Sentiment spilled over to US Treasuries yields too, be it more modestly. The nervous mood is also apparent in equity markets, with losses in European stocks running around -0.90% and spilling over into the American S&P which moves around losses of -0.50%. EUR/USD is up around 0.35%.
• The ECB minutes revealed the Council considered removing the pledge to increase the bond-buying program if needed in their last meeting. It also thought "it was necessary to avoid signals that could trigger a premature tightening of financial conditions" that might undo the progress on inflation (mission failed).
• Private US employers added 158K jobs in June, according to the ADP payroll report. The consensus expected 188K and the figure is also lower than the 230K in May. A separate report showed that initial jobless claims edged slightly higher by 4K, while markets expected it to drop.
• Trump affirmed the American commitment to Nato's mutual defence clause and called on European nations to invest more in defence, in a hotly-anticipated speech on the transatlantic relationship in Warsaw. Trump also called Poland an exemplary ally against Russian "destabilising" behaviour.
• The EU and Japan have backed US calls for new UN sanctions on North Korea, after the country's test of an intercontinental ballistic missile earlier this week stoked diplomatic tensions in the region.
• European and Japanese leaders confirmed that they have reached a political agreement on a free-trade deal to liberalise markets from dairy products to car parts. Japanese PM Abe states the deal "is the birth of the world's largest, free industrialised economic zone".
• France plans to end the sale of petrol and diesel cars in the country by 2040, according to the new French environment minister's climate plan.

Rates

Law of gravity pulls Bund through major support

In past sessions, the Bund reached the key 161.68/58 support (neckline double top/38% retracement), but couldn't rebound sustainably. Every attempt to move away was aborted, suggesting buyers' fatigue. Today, that was no longer the case. In a morning session devoid of key economic releases, the Bund future dropped below the key support, immediately attracting more selling. There is no obvious trigger available to explain the break. News agencies attribute it to a "weak" French (and Spanish) auction of long papers. However, we saw no sign of that in the bidding (good bids/covers) nor in the pricing. ECB Villeroy said that "ECB's non-standard monetary stimulus will not last indefinitely" and added that "nominal interest rates, which are still particularly low today, have started to rise since autumn 2016 and are set to increase further, in line with the pace of economic recovery and inflation growth". However, these remarks were in the market well ahead of the break at 11h. We think that the Draghi's speech last week and the BIS warning on too accommodative monetary policy fertilized the soil for today's move. As the market goes our direction, we applaud the price action, but are fully aware that the break needs to be confirmed after tomorrow's payrolls release and in the weekly close. Peripheral yield spreads were barely affected with Ireland, Portugal and Greece even showing some (very) modest narrowing.

US Treasuries (and gilts) followed Bunds lower. The ADP report was weaker than expected and the initial claims marginally higher than expected, but it couldn't give US Treasuries the power to fight back. The trade deficit was in line with expectations. Just after the release of our report, the US non-manufacturing ISM will still be published.

At the time of writing, German yields increase by 1.5 (2-yr) to 8.1 bps (10-yr), the belly underperforming the wings. The key 0.50% yield resistance for the 10-year Bund was also broken and similarly, the 5-yr Bund yield confirmed the break of the -0.26% and is now closing in (helped by benchmark change) on the psycho 0% yield resistance. The US yield curve bear steepened with yields up between 0.8 bp and 5.7 bps (30-yr)

Currencies

Jump in European yields propels euro rebound

This morning, it was 'logical' to assume US data would drive USD trading. However, it turned out different. The German 10-year yields cleared the important 0.50% mark and interest rate differentials narrowed in favour of the euro. US data were softer than expected, but only of second tier importance. EUR/USD rebounded to the high 1.13 area. USD/JPY showed no clear trend as the rise in core yields was counterbalanced by a setback in global equities. USD/JPY hovers just north of 113.

Overnight, most Asian equity indices showed modest losses. Signs of division within the Fed, yesterday's setback of the oil price and ongoing geopolitical uncertainty on North-Korea caused some investor caution. USD/JPY drifted back to the 113 area. EUR/USD also ceded a few ticks and traded at around the 1.1340 area going into the European open.

There were no important eco data in Europe. Still, there was an interesting move in the European bond market and this move spilled over into the currency market. The Bund future contracts dropped below an important technical support pushing the 10-year German yield north of 0.50%. US yields lagged the rise in Europe, narrowing the interest rate differential in favour of the euro. EUR/USD extended its intraday rebound in the 1.13 big figure. Interestingly, the rise in core bond yields this time hardly supported USD/JPY, probably as equities suffered too. ECB's Praet tried to convince markets that the ECB had every reason to remain cautious but this didn't help to soften the rise of EMU yields and the euro.

In the US, ADP job growth was reported at 158 000, missing the consensus estimate of 188 000. The May figure was also revised downward. The claims and the trade balance were marginally worse than expected. The dollar recorded some additional losses. EUR/USD filled offers just below 1.14. USD/JPY lost a few ticks but is holding north of 113. Lower equities and weaker US data are keeping each other in balance for now. A good non-manufacturing ISM might help to prevent further USD losses. More than ever, we assume that the dollar.

Euro price action dominates

There were no eco data in the UK today. So, sterling trading was driven by the overall rebound of the euro. That said the intraday gains of EUR/GBP remained rather modest. The pair trades currently in the 0.8800 area. Cable showed no clear trend today. The pair still hovers in the mid 1.29 area. One shouldn't draw firm conclusions from today's EUR/GBP price action. If anything, the modest rise of EUR/GBP suggests that underlying sentiment on sterling remains constructive short-term.

USD/CAD - 1.2948

 
Recent wave: Only wave v of c has ended at 0.9407 and wave C of major A-B-C correction is underway with wave iii ended at 1.4690, wave v of C may bring one more marginal rise probably in 2018

Trend:  Near term down

 
Original strategy       :

Sell at 1.3115, Target: 1.2915, Stop: 1.3175

Position: -

Target:  -

Stop: -

 
New strategy             :

Sell at 1.3115, Target: 1.2915, Stop: 1.3175

Position: -

Target:  -

Stop:-

As the greenback has remained under pressure, suggesting recent selloff from 1.3794 top would resume after consolidation and although recovery to 1.3000, then 1.3015 cannot be ruled out, reckon upside would be limited to 1.3075-80 and 1.3115-20 should attract renewed selling interest, bring another decline later, below support at 1.2912 would extend the fall from 1.3794 top (wave c of larger degree wave b top) to 1.2895-00 but loss of momentum should limit downside to 1.2870 and reckon 1.2850 would hold from here.

In view of this, would not chase this fall here and would be prudent to sell the pair again on recovery as 1.3115-20 should limit upside. Above 1.3160-70 would defer and suggest low is formed, bring a stronger rebound to 1.3215-20 and possibly towards 1.3260-65 but only break there would abort and signal a temporary low is formed instead, then test of resistance at 1.3308 would follow.

To recap, wave B from 1.3066 is unfolding as an a-b-c and is sub-divided as a: 1.2192, b: 1.2716 and wave c is a 5-waver with i: 1.1983, ii: 1.2506, extended wave iii with minor iii at 1.0206, wave iv ended at 1.0781 and wave v as well as wave iii has ended at 0.9931, hence the subsequent choppy trading is the wave iv which is unfolding as (a)-(b)-(c) with (a) leg of iv ended at 1.0854, followed by (b) leg at 1.0108 and (c) leg as well as the wave iv ended at 1.0674. The wave v is sub-divided by minor wave (i): 0.9980, (ii): 1.0374, (iii): 0.9446, (iv): 0.9913 and (v) as well as v has possibly ended at 0.9407, therefore, consolidation with upside bias is seen for major correction, indicated target at 1.3700 and 1.4000 had been met and further gain to 1.4700 would be seen later.

Daily Pivots: (S1) 112.85; (P) 113.14; (R1) 113.57; More...

Intraday bias in USD/JPY remains neutral for consolidation below 113.68 temporary low. Downside of retreat should be contained by 111.72 support to bring another rally. Above 113.68 will target 114.36 resistance next. Decisive break there will confirm our bullish view that corrective pull back from 118.65 has completed at 108.12. In that case, further rally would be seen to retest 118.65.

In the bigger picture, the corrective structure of the fall from 118.65 suggests that rise from 98.97 is not completed yet. Break of 118.65 will target a test on 125.85 high. At this point, it's uncertain whether rise from 98.97 is resuming the long term up trend from 75.56, or it's a leg in the consolidation from 125.85. Hence, we'll be cautious on topping as it approaches 125.85.

Daily Pivots: (S1) 0.9617; (P) 0.9652; (R1) 0.9675; More......

USD/CHF is still bounded in consolidation pattern from 0.9551 and intraday bias remains neutral for the moment. Outlook also stays bearish as long as 0.9777 resistance holds. Below 0.9620 minor support will turn bias back to the downside first. Further break of 0.9551 will extend the decline from 1.0342 to 0.94443 key support level. At this point, we'd expect strong support from there to bring rebound. Meanwhile, break of 0.9777 will now indicate short term reversal, on bullish convergence condition in 4 hour MACD.

In the bigger picture, USD/CHF is still bounded in medium term range of 0.9443/1.0342 for the moment. Consolidative trading would likely continue and medium term outlook remains neutral. Break of 1.0342 key resistance is needed to confirm underlying bullish momentum in the pair. Meanwhile, downside attempts should be contained by 0.9443 key support level. However, sustained break of 0.9443 will carry larger bearish implication and target 0.9 handle.

Daily Pivots: (S1) 1.2900; (P) 1.2924; (R1) 1.2955; More...

GBP/USD is still bounded in consolidation from 1.3029 and intraday bias stays neutral. Another fall cannot be ruled out. But downside should be contained above 1.2849 support to bring rise resumption. Break of 1.3029 should then send GBP/USD through 1.3047 to 61.8% projection of 1.2108 to 1.3047 from 1.2588 at 1.3168 next.

In the bigger picture, overall, price actions from 1.1946 medium term low are seen as a corrective pattern that is still in progress. While further upside is now in favor, overall outlook remains bearish as long as 1.3444 key resistance holds. Larger down trend from 1.7190 is expected to resume later after the correction completes. And break of 1.2588 will indicate that such down trend is resuming.

The U.S. international trade deficit narrowed in May by $1.1 billion (bn) to $46.5 bn from the April figure of $47.6 bn (revisions to April were negligible). Consensus expectation was for the trade balance to narrow a bit more to -$46.2 billion.

Goods exports rose 0.2% m/m in May, driven higher by a surge in consumer goods (+5.6%) and automotive vehicles and parts (+4.9%). Although there were large declines recorded in foods, feed and beverage exports (-6%), and smaller declines in capital goods and industrial supplies, they were not material enough to offset strong gains in consumer and automotive exports. Exports of services rose 1.0% m/m in the month, the fastest pace yet for 2017.

Imports declined 0.1%m/m in May, driven down by declines in consumer goods (-2.9%) and automotive vehicles and parts (-2.4%). These declines were largely offset by gains in capital goods (+2.4%) and industrial supplies (+0.2%).

Adjusting for price changes, merchandise exports rose 1.0% m/m in May, ending the streak of consecutive monthly declines at three. Import volumes rose 0.1% m/m, similar in magnitude but the opposite direction of the nominal change.

As the headline figure suggests, the U.S. trade balance with its major trading partners narrowed on net in May. The trade deficit with the European Union widened a touch in May, as did deficits with China and Mexico. However, given the monthly volatility of trade data, more telling is the year-to-date balance relative to last year. This metric suggests that trade deficits with NAFTA members Canada and Mexico have widened considerably thus far in 2017; the trade deficit with Canada has widened by $7.7 bn, and by $3.8 bn with Mexico. Similarly the trade deficit with Europe widened by $2.9 bn, and with China by $6.9 bn. Lastly, the trade deficit with OPEC nations widened by $15.3 bn YTD compared with last year, consistent with much stronger oil imports.

Key Implications

The gain in export volumes was a welcome surprise after months of decline, but net-trade is unlikely to be a major source of growth for the U.S. economy. The weaker trade-weighted dollar and improved foreign demand environment should act to support U.S. exporters for the remainder of this year, but strong domestic demand should boost imports further, resulting in net trade exerting a small drag on 2017 economic activity.

Looking ahead, the uncertain global environment could still exert a material headwind to U.S. exporters. From domestic and global policy uncertainty to geopolitical events, risks to net trade will remain skewed toward the downside for some time.