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• USDJPY drifts back below 147.00 area; tests support trendline
• Technical picture signals bearish trend continuation

USDJPY was unable to maintain its strength on Tuesday despite briefly surpassing the 147.00 level, as the 20-day exponential moving average (EMA) caused a retreat towards the support trendline from July 2023 at 144.75.

The technical indicators cannot guarantee an immediate bullish rotation as the RSI has changed direction to the downside before reaching its 50 neutral mark and the stochastic oscillator has posted a negative cross near its 80 overbought level.

Trend signals are discouraging as well, with the 50- and 200-day EMAs sloping downwards after registering a death cross and the 20-day EMA declining well below them.

Should it dip below 144.80, the price might temporarily stall near 143.40 before encountering the broken resistance trendline at 142.20 and the August trough of 141.67. Then a clear close below the December 2023 bar of 140.80 could cause a rapid downfall towards the 136.60-137.80 zone, where the descending constraining line from November 2023 and the 161.8% Fibonacci extension of the previous upturn are positioned.

If the bulls make a comeback and manage to push the pair above its 20-day EMA at 146.45, a resistance zone could come into play between 148.75 and 149.40. This area is significant as it includes the broken ascending trendline from 2023 and the 38.2% Fibonacci retracement level of the July-August freefall. Note that the 50-day EMA is converging to that zone too. Hence, the bulls may need to knock down that wall to access the 200-day EMA at 150.90 and the 50% Fibonacci mark of 151.80.

In a nutshell, USDJPY appears bearish in the short-term picture, with new selling forces anticipated below 144.75. 

The USD/JPY pair has slightly increased, rising to 145.95 on Wednesday morning. This movement marks a rebound from two-week lows, though it is still early to suggest a significant reversal in the trend due to the ongoing economic climate.

Market participants are cautious as they await crucial US employment market data for August, which is due later this week. These figures will likely substantially impact the Federal Reserve's forthcoming decisions.

On the Japanese front, the Bank of Japan (BoJ) has maintained its current policy stance but has signalled potential adjustments should economic projections align with actual outcomes. This cautious but responsive approach, including the possibility of a December interest rate hike, reflects the BoJ's commitment to stability in the face of economic indicators.

Recent Japanese economic data has shown a slight improvement, with the manufacturing PMI inching up to 49.8 from 49.5, nearly reaching the critical threshold of 50.0 that differentiates contraction from expansion. This positive development suggests a potential stabilisation in the manufacturing sector.

USD/JPY technical analysis

The H4 chart indicates a recent corrective move up to 147.20, followed by a downward wave targeting 144.11. Should this level be reached, a corrective movement to 145.66 could occur, testing it from below. A further decline to 144.11 is conceivable, with a potential continuation to 141.80 and down to 137.77. This bearish outlook is supported by the MACD indicator, with the signal line positioned above zero but trending downward sharply.

On the H1 chart, USD/JPY executed a downward impulse to 145.66 and has since been consolidating around this level. A break below the consolidation range could initiate the continuation of the downward trend towards 144.11. After reaching this target, a retest of 145.66 may be anticipated. This bearish scenario aligns with the Stochastic oscillator's readings, where the signal line is just above 50 but indicates a downward movement.

Eurozone's services sector showed improved growth in August, with PMI Services index rising to 52.9 from July’s 51.9, while the PMI Composite increased to 51.0 from 50.2. Both readings marked three-month highs, signaling a strengthening in overall economic activity. According to HCOB, input cost inflation eased to its lowest point in 2024, though the rate of increase in output charges ticked up slightly.

Country-specific data revealed a mixed picture, with Spain leading the pack with a Composite PMI of 53.5, a two-month high, followed by France at 53.1, a 27-month high. Ireland's Composite PMI hit 52.6, its highest in five months, while Italy recorded a two-month high at 50.8. On the other hand, Germany saw its Composite PMI fall to 48.4, a five-month low.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, pointed to the "Olympic effect" as a key factor ensuring GDP growth in Eurozone for Q3. While services sector is performing well across all major Eurozone economies, the manufacturing sector remains in recession, with worsening conditions in key countries like Germany and France.

On the inflation front, service providers slightly increased their prices in August, but cost pressures, particularly those driven by wages, have eased. This will likely be a positive signal for ECB, which may "breathe a small sigh of relief" as it weighs its policy decisions. Combined with favorable inflation data from Eurostat, these factors could provide the ECB with further justification to cut interest rates at its upcoming meeting on September 12.

Full Eurozone PMI services final release here.

• Gold eases beneath near-term SMAs
• Stochastics post positive divergence
• MACD strengthens bearish momentum

Gold prices have been developing within a trading range of 2,470 to 2,528 since August 16 with mid-level the 2,507 resistance, which overlaps with the 50-period simple moving average (SMA) in the 4-hour chart.

Technically, the stochastic is moving higher, creating a positive divergence as long as the price creates lower lows and the oscillator posts higher highs. This is a sign of a potential upside retracement in the market. However, beneath its trigger and zero lines, the MACD is extending its decline to the downside.

In case of more decreases, it could open the door for a retest of the previous trough of 2,470, while a break beneath the consolidation area may drive the bears until the 200-period SMA at 2,452. A slip below this area may switch the short-term outlook to bearish.

On the flip side, a rally above the 20- and 50-period SMAs, as well as a climb beyond 2,507, may take traders to the previous peaks of 2,528 and 2,531.66.

In summary, the precious metal remains neutral in the near term, with only a rise above 2,531.66 or a fall below the 200-day SMA indicating the next direction in the market.

Markets

US equities went into a tailspin yesterday. The tech-heavy Nasdaq underperformed, racking up losses of 3.26%. Europe’s EuroStoxx50 (-1.22%) painted the perfect bearish engulfer. Volatility spiked with the Vix index jumping to the highest level since the early August market tremors. Stock markets staged an impressive comeback since that meltdown with some indices on Wall Street even eyeballing the previous record highs. Lofty valuations based on a soft landing scenario in the US made them vulnerable for profit-taking. Against that backdrop, yesterday’s unconvincing US manufacturing ISM put markets on edge in the run-up to the remaining, more important publications that include the services ISM and the payrolls report. We also note the further steep decline in commodities (iron, oil …) which markets in current circumstances take as a sign of weak global demand. Risk-off spilled over to core bond markets with yields tumbling between 5.1 and 8 bps in the US and 4.1-7.3 bps in Germany. The 10-yr in the latter more than reversed Monday’s leap higher. Moves in currency markets were as you would expect with the Japanese yen (USD/JPY 145.48), the Swiss franc (EUR/CHF 0.939) and the US dollar (EUR/USD 1.104) securing the top three. Commodity-related currencies such as the AUD, NOK and NZD continue to trade in the defensive.

Yesterday’s price action tells a lot about markets’ state of mind. The balance of risks (in terms of market reaction) has shifted and we think that data releases in line or below market expectations are likely to trigger the largest moves. With about 35 bps of rate cuts priced in for September, there’s additional room towards a 50 bps cut to discount. Today’s JOLTS report could further add to those bets. The downside in core/US yields looks vulnerable with both the US 2-yr and 10-yr near or actually testing the previous August (ex. Aug 5) lows. A break lower would substantially deteriorate the technical picture and with it alter Fed easing expectations, not only for next week but also further out. We stick to the idea that it’s going to be up to Friday’s payrolls to settle the debate though. The dollar would pay a heavy price if the aforementioned unfolds. From a daily perspective we hold a neutral dollar view.

News & Views

Growth in Australia for the third straight quarter printed at a mediocre 0.2% Q/Q and 1.0% Y/Y in Q2. GDP rose 1.5% in the financial year 2023-24. “Excluding the Covid-19 pandemic period, annual financial economic growth was the lowest since 1991-92, the year that included the gradual recovery from the 1991 recession” the Australian Bureau of Statistics assessed. Household spending fell 0.2%, detracting 0.1 ppt from the overall growth. Government spending rose 1.4% Q/Q on continued strength in social benefits programs for health services. Investment (-0.1% Q/Q) fell for the third consecutive quarter. Changes in inventories detracted 0.3 ppts from growth. Net exports contributed 0.2 ppts to growth as exports grew (0.5%) and imports declined (-0.2%). The combination of subdued growth and at the same time ongoing high domestic prices increases and low productivity are a difficult mix for the RBA which until now signaled no room for a rate cut anytime soon. The Aussie dollar loses some further ground this morning after yesterday’s sharp risk-off repositioning (AUD/USD 0.67).

Economic growth in Brazil surprised to the upside in the second quarter, accelerating to 1.4% Q/Q from 0.8% in Q1. Activity was 3.3% higher compared to the same quarter last year. Activity in industry rose 1.8% Q/Q (despite a decline in mining activity) and services grew 1.0%. On the demand side, domestic demand components contributed positively to overall growth but net exports again were a drag (household consumption 1.3% Q/Q, government consumption +1.3%, investment +2.1% exports of goods and services +1.4% and imports +7.6%). In a comment after the release the Brazil Finance Ministry indicated that it might raise the annual growth forecast beyond 2.7% or 2.8% (was 2.5% in July). Strong activity data support the case for the central bank to raise the policy rate at the September meeting.

Graphs

GE 10y yield

The ECB cut policy rates by 25 bps in June and will likely do so again in September. Stubborn inflation (core, services) warrants a cautious approach on follow-up moves. Markets price in two to three more cuts for 2024 as disappointing US and unconvincing EMU activity data rolled in, dragging the long end of the curve down. Yields meanwhile bottomed in the wake of the August market meltdown, preluding a technical correction higher.

US 10y yield

The Fed in its July meeting paved the way for a first cut in September. It turned attentive to risks to the both sides of its dual mandate as the economy is moving to a better in to balance. Markets juggle between 25 and a 50 bps lift-off. The pivot weakened the technical picture in US yields with another batch of weak eco data pushing the 10-yr sub 4%. Powell at Jackson Hole didn’t challenge markets’ positioning.

EUR/USD

EUR/USD moved above the 1.09 resistance area as the dollar lost interest rate support at stealth pace. US recession risks and bets on fast and large (50 bps) rate cuts trumped traditional safe haven flows into USD. EUR/USD 1.12 was tested but survived. A (technical) dollar comeback then kicked in.

EUR/GBP

The BoE delivered a hawkish cut in August. Policy restrictiveness will be further unwound gradually on a pace determined by a broad range of data. The strategy similar to the ECB’s balances out EUR/GBP in a monetary perspective. Recent better UK activity data and a cautious assessment of BoE’s Bailey at Jackson Hole are pushing EUR/GBP lower in the 0.84/0.086 range.

• Economic growth is slowing mostly in line with our expectations, but we think recession risks remain low. We make only marginal adjustments to our forecast profile and see 2024 GDP growth at 2.5% (from 2.3%) and 2025 at 1.5% (unchanged).
• Potential output continues to grow at a brisk pace, supported by increases in labour supply, solid productivity growth and fiscal policy driven demand for manufacturing investments.
• Risks to the outlook remain somewhat skewed to the downside. The current low savings rate indicates that consumers’ buffers remain weak. Slow monetary policy pass-through and high share of fixed rate mortgages suggest that rate cuts will not provide a rapid boost to economic growth, if the outlook deteriorates faster than we expect.
• Inflation forecasts have been adjusted modestly lower. We see headline inflation averaging 2.9% in 2024 (from 3.2%) and 2.2% in 2025 (from 2.5%) and core inflation at 3.3% in 2024 (from 3.4%) and 2.4% in 2025 (from 2.6%). We now expect the Fed to cut interest rates by 25bp at every meeting from September until June 2025 (prev. only every other meeting from September), followed by two final cuts in H2 2025 (terminal rate 3.00-3.25%; prev. 3.75-4.00%).

Economic growth slowed down during the first half of 2024, partly due to negative contribution from net exports but also slowing private consumption and investment growth. Labour market conditions have also cooled faster than expected, but mostly as a result of rapidly growing labour force, as number of layoffs is still low. Overall, we think the US economy remains on a solid footing and the soft landing is still in sight.

In contrast to some European economies, US consumers’ savings rates have remained low throughout the post-pandemic period. Solid labour markets and relatively upbeat consumer sentiment have supported continuous growth in real spending volumes. However, if wage growth cools and concerns around rising unemployment start to set in, consumers’ savings buffers remain weak. Latest retail sales and sentiment indicators suggest that for now, nominal spending growth has remained brisk and optimism about future outlook has risen, but also that consumers are getting increasingly worried about their current economic situation.

Investment growth has also slowed down as tight monetary policy bites into businesses’ expansion plans. Uncertainty about the fiscal policy outlook and especially the future of IRA subsidies might have delayed some investment plans as well. However, we expect overall fiscal policy stance to remain expansionary over the coming years, irrespective of the election outcome. Kamala Harris would likely follow on Biden administration’s footsteps, preserving the IRA as intended while opting for corporate tax hikes to fund the growing deficits. On the other hand, while Donald Trump’s plans for scrapping the IRA and sharply increasing tariffs on imports would have disrupting effects on growth in the near-term, he would also provide support via extending the TCJA income tax cuts from his first term while further reducing corporate taxes. We do not foresee either candidate sharply reducing public budget deficits in the near-term but see higher risk of unsustainable debt dynamics in the case of Trump’s victory.

Inflation has slowed down over the summer, and since our June edition, especially the broader services price pressures have eased noticeably. In addition to easing labour shortages, strong labour productivity growth has continued to alleviate firms’ cost pressures. Rising productivity and labour supply mean that US economy’s potential growth remains elevated. We think that the risk of an outright recession remains low, but still see growth slowing below potential over the coming quarters.

As labour markets are now longer overheated and both realized and expected inflation are cooling, we now expect the Fed to cut rates by 25bp in every meeting from September to June 2025, followed by two final 25bp cuts in H2 2025. As such, we see the nominal terminal policy rate at 3.00-3.25% (prev. 3.75- 4.00%) by the end of 2025.

Expectation of rapid rate cuts has already contributed to easing financial conditions in the markets. On the other hand, slow monetary policy pass-through means that the boost to growth will come with a lengthy delay. 95% of US mortgages are locked into fixed interest rates, and even though mortgage rates have already started to decline, demand for new loans remains low. As recession risks remain low in our view and as FOMC participants have communicated preference for a gradual easing cycle, we do not agree with markets’ speculation about 50bp cuts. But even so, we now think the Fed will cut rates noticeably faster than the ECB, which reflects expectation of continuous growth in the US economy’s productive capacity. The lack of similar slack in the euro area will not, in our view, allow the ECB to cut rates as quickly as the Fed.

September began on an ugly note, to say the least. The US equities tumbled after the latest ISM data showed a fifth month of contraction in the US manufacturing, and at accelerated pace. The latter revived the recession worries ahead of this week’s critical US jobs data, and sent the S&P500 more than 2% down. This was the worst selloff since August 5, when a weak jobs data from the US had boosted the recession worries, the expectation of a 50bp cut from the Federal Reserve (Fed) and resulted in an almost 10% selloff of the S&P500. The technology stocks led losses, yesterday. Nasdaq 100 dived more than 3%, as Nvidia tumbled nearly 10% as part of the broader macroeconomic worries and suspected AI fatigue, and another 2.42% in the afterhours trading on news that the DoJ sent subpoenas to the company because it suspects that Nvidia violated antitrust laws, made switching harder to other chipmakers and penalized companies that didn’t use Nvidia’s AI chips exclusively. In Asia, TSM tumbled 5%, and SK Hynix fell more than 8%.

Now we know that the antitrust allegations are part of the daily life of all Big Tech companies. They come and go without doing too much harm to these Big Tech’s growth potentials as many of them are natural monopolies and others naturally benefit from their dominant market positions. But the news come at a time when Nvidia is vulnerable. Just a week ago, the company released blowout results. They exceeded their own sales forecast by $2bn for the fifth consecutive quarter, gave a strong – and a stronger-than-expected – forecast for the current quarter, announced a big stock buyback and addressed issues regarding the delay of the Blackwell chip saying that there is nothing to be worried about. But yet, the stock price fell as investors focused on potential problems – like what if the Big Tech cut their AI spending. But hey, the Big AI spenders like Meta and Google said that they will continue to spend big – and overspend if necessary – to make their AI investments worth. What I am trying to say here is that, except the DoJ news, recent news from Nvidia could’ve been interpreted in a positive way, but they have not. To me, this is a sign of fatigue.

And it’s in the middle of this bad mood that Broadcom is preparing to announce good results this week thanks to a rebound in networking equipment sales like Cisco and conversion from perpetual licenses to subscription model for VMware, acquired last year. Unfortunately, good results may not lead to a positive market reaction... The stock already tanked more than 6% yesterday, and no one can guarantee that good looking results would reverse the selloff...

... because the broad macroeconomic environment is not necessarily supportive of risk appetite right now.

Bad news is bad news for everyone

The slowing US growth and soft data boost the recession worries and rate cut expectations. The rate cut expectations favour a sector rotation from highly valued Big Tech toward the non-tech pockets of the market. BUT the expectation of jumbo rate cut is bad for all stocks, regardless of their technology exposure. Yesterday, Nasdaq certainly recorded the biggest loss but the Dow Jones fell 1.5% from an ATH and the Russell 2000 dropped 3%. Bad news is bad news for everyone.

In bonds, the US 2-year yield fell to 3.85% as expectations of a jumbo cut rose on yesterday’s data, the probability of a 50bp cut from the Fed in September rose above 40%, the 10-year yield retreated to 3.82% and the 30-year yield fell to 4.10%. All eyes are on the US jobs data – which has the potential to either make things worse or throw a floor under the recent risk selloff. Today, the job openings data is expected to show fewer job openings. On Thursday and Friday, the ADP and the official jobs data are expected to show a rebound in hiring and wages. And good news will be good news when the US reveals its latest jobs figures this week.

FX and Energy

Crude oil tumbled more than 5% yesterday and is testing the $70pb support to the downside. Rising recession worries, the expectation of waning global demand, prospects of fewer production restrictions from OPEC, combined with the falling tensions in Libya that could allow half a million barrels return to the market, are weighing on oil prices this morning. I believe that sufficiently strong jobs data between now and Friday could bring the dipbuyers to the market, yet if the jobs data looks ugly, we could see US crude settle below the $70pb for a while.

In the FX, the falling US yields didn’t pull the dollar index lower yesterday, as the greenback benefited from risk-off inflows. As such, the EURUSD extended losses to 1.1026 as Cable tipped a toe below 1.31. Both are better bid this morning. A soft set of economic data from the US could bring the USD bears back to the market, but if the market shifts to the panic mode, the dollar selloff could remain limited.

In focus today

In the US, markets will pay close attention to the JOLTs labour market data for July. The Fed has highlighted the number of job vacancies as a key measure of labour market tightness, with the latest data signalling cooling labour demand but still low levels of actual layoffs.

In Sweden, the Prospera inflation survey will be published at 8:00 CET followed by the services PMI at 8:30. We expect the survey result will show expectations roughly in line with the 2% target for the CPIF index, with risk skewed to the downside, increasing the pressure on Riksbank to cut more aggressively. For the PMI, we project an almost unchanged level compared to 53.8 in July.

The Polish central bank will kick off the slew of September central bank meetings. We and markets project an unchanged rate decision at 5.75%.

Overseas, Bank of Canada will also announce their key policy rate, where we expect a rate cut of 25bp, bringing its policy rate to 4.25% - in line with markets.

Overnight, we get Japanese July wage data, which will reflect the strength of the spring pay increases. The details in the wage data will be key for the inflation outlook and important for the Bank of Japan's decision making in H2.

Economic and market news

What happened yesterday

In the US, the ISM manufacturing PMI for August printed slightly weaker than expected at 47.2 (cons: 47.5). The details were even less optimistic, with the order-inventory balance plunging into contraction (in line with PMIs released earlier) which tends to be a negative leading signal for manufacturing production. Price and employment indices climbed higher, but it should be noted that the realized employment growth in the manufacturing sector has remained weak, and goods prices have continued to record deflation over the past few months.

In Switzerland, a batch of data was released. Headline inflation for August was lower than expected at 1.1% (cons: 1.2%) while core remained steady at 1.1% (cons: 1.1%), implying that Q3 inflation is set to print markedly lower than the SNB's latest forecast at 1.5%. Additionally, monthly momentum crept lower in both headline and core. GDP for Q2 came in at 0.5% q/q (adjusted for sporting events), aligning with expectations.

On the commodities front, oil prices tumbled some 4%, nearing their lowest level since early 2024. Several factors contributed to the downtick, including souring global risk sentiment, a stronger USD and concerns regarding the planned OPEC+ output raises next month. Additionally, Bloomberg reported that a deal is close to resolving the dispute halting Libyan oil activities, with exports and production being curtailed early this week amid an ongoing rift between rival political factions over control of the central bank and oil revenue.

Equities: Global equities declined by 1.5% yesterday in a full-blown, classic risk-off session, marked by significant cyclical underperformance driven by sectors such as tech, growth, and momentum. In contrast, minimum volatility stocks experienced one of their best days this year in relative terms, with true defensive industries ending higher in the US. Yields were lower across the curve, predominantly driven by the long end. The VIX saw a 5-point jump as equities consistently drifted lower throughout the session, closing near day lows. We term this classic risk-off due to the correlations observed across various asset classes, including the negative bond/equity correlation, driven by concerns over growth and demand rather than inflation. Yesterday market action revealed more about investors' positioning and sentiment than the impact of a soft ISM number. In the US yesterday, Dow -1.5%, S&P 500 -2.1%, Nasdaq -3.3%, Russell 2000 -3.1%. Asian markets were sharply lower this morning, with cyclical leaders Japan, Taiwan, and South Korea all down more than 3%.

FI: Declining oil prices, affecting both the linkers and the nominal bonds, sent yields markedly lower from the early afternoon, with 10y German bunds ending 7bp lower at 2.27%. Markets added 5bp to ECB pricing by end 2025. Yesterday, ECB's Simkus said that an October rate cut was quite unlikely. Markets are pricing 8bp for that meeting. The 2086 Austrian bond auction resulted in an outperformance relative to European peers in the long end. Today focus turns to the US JOLTS report as well as Villeroy is set to be on the wires (13:00 CET).

FX: Risk-off sentiment pushed the USD, JPY and CHF higher during yesterday's session with a lower-than-expected Swiss CPI failing to prove a substantial headwind for the CHF. NOK and SEK were among the worst performers with EUR/NOK breaching the 11.80 mark. Oil prices plunged yesterday with risk sentiment, a stronger dollar and concerns over whether OPEC+ will proceed with planned output hike next month caused headwinds.

Daily Pivots: (S1) 189.61; (P) 191.49; (R1) 192.66; More...

Intraday bias in GBP/JPY is turned neutral first with current retreat. On the upside, above 193.45 will resume the rebound from 180.00 to 61.8% retracement of 208.09 to 180.00 at 197.35. However, firm break of 188.23 support will argue that rebound from 180.00 has completed, and turn bias back to the downside for retesting 180.00 instead.

In the bigger picture, price actions from 208.09 are seen as a correction to whole rally from 123.94 (2020 low). Current development suggests that the first leg has completed and the range of medium term consolidation should be set between 38.2% retracement of 123.94 to 208.09 at 175.94 and 208.09.

Daily Pivots: (S1) 159.83; (P) 161.31; (R1) 162.13; More....

EUR/JPY is still bounded in range of 159.80/163.86 and intraday bias remains neutral. On the upside, break of 163.86 will target 61.8% retracement of 175.41 to 154.40 at 167.38, as the second leg of the corrective pattern from 175.41. On the downside, however, firm break of 159.80 support will suggest that the rebound from 154.40 has completed, and turn bias back to the downside for 154.40 instead.

In the bigger picture, price actions from 175.41 are seen as correction to rally from 114.42 (2020 low). Current development suggests that the first leg has completed. The range of consolidation should be seen between 38.2% retracement of 114.42 to 175.41 at 152.11 and 175.41 high.