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The dollar index eases from new two-week high on Monday, after strong three-day recovery rally showed initial signs of fatigue.

Repeated rejection at 101.72 barrier (50% retracement of 103.06/100.38 bear-leg / 4-hr cloud top) and overbought stochastic contributed to a partial profit-taking, though dips were so far shallow and suggesting that bulls still hold grip.

The dollar was lifted by last week’s inflation data which cooled bets for more aggressive steps by Fed, returning bets to widely expected 25 basis points rate cut.

The pause in rally also comes in days preceding key economic event this week – release of monthly report from the US labor sector, with NFP being particularly in focus.

The latest set of economic data ahead of September’s policy meeting will complete the picture and determine the magnitude of the US central bank’s action.

Expect firmer bearish signal on break and close below broken Fibo barrier at 101.40 (38.2%), with extension below 10DMA (101.07) to confirm reversal.

Conversely, sustained break above pivots at 102.72/85 (50% retracement / 20DMA) to open way for 102+ gains.

Res: 101.72; 101.85; 102.03; 102.43.
Sup: 101.40; 101.07; 100.78; 100.38.

Markets

Trading slowed down to a trickle today in absence of US investors (Labour Day holiday) and amid an empty EMU eco calendar. A lot of ink has been spilled about this week’s key US eco data and their impact on markets and Fed policy. It allows us to have a look at this week’s alternative agenda, starting with Swiss eco data tomorrow. Swiss inflation is expected to continue hovering just above the 1% Y/Y mark as it has been doing all year long now. Simultaneously, Q2 GDP growth is expected to be confirmed at a solid 0.5% Q/Q. The Swiss National Bank already in March took conform of inflation being under control, allowing for a scaling down of policy rates. They followed-up on the action in June and we expect them to do so again in September. Despite their relatively early start and pace, the SNB desperately sees the Swiss franc strengthening further. Since the mid-July global market correction, EUR/CHF dived from 0.9750 to 0.9415 currently with a temporary stay below 0.93 early August. The relatively scarce SNB maneuvering room and the global swing towards less restrictive conditions suggest that CHF might remain stronger for longer and stronger than the SNB wants to. Brazilian GDP figures are worth watching as well tomorrow. Consensus expects another strong 0.9% Q/Q on the heels of 0.8% growth in Q1. Such outcome will cement rate hike expectations by the Brazilian central bank. It’s an example of what might be next if you achieve a perfect landing from a central bank point of view. Emerging markets were first to respond to the post-lockdown inflationary pressures, leading global central bank reaction functions by at least a year. The BCB started making policy less restrictive in July of last year. The current policy rate is 10.50% compared with a peak rate of 13.75% but way above the pre-pandemic 6.5% or 2020-2021 bottom of 2%. And the next move will be up instead of down. On Wednesday, we circle central bank policy meetings in Canada and Poland. The Bank of Canada is expected to implement its third consecutive 25 bps rate cut to 4.25%. We don’t think the central bank will be tempted into pushing through a larger 50 bps rate move as it would make the gap with Fed policy and key trading partner US too large. Ahead of the August market repositioning, USD/CAD was bumping into the 1.39 resistance area (weakest CAD-levels since 2003 with exemption of brief spells in 2015 & 2020). The National Bank of Poland will keep its policy rate steady at 5.75%. Apart from 100 bps stealth easing around the time of Polish election in September 2023, they stuck with restrictive policy settings unlike for example their Czech and Hungarian counterparts. NBP governor Glapinski for a while suggested that steady rates would last until at least the end of 2025. During summer, he started making an opening for a faster regime change. Upside inflation risks are subsiding and the reaction of Poland’s trading partners should also be kept in mind. Once the NBP officially changes its forward guidance, the Polish zloty could move away from the bottom to the top of this year’s EUR/PLN 4.25-4.40 trading range. Finally, on Thursday there’s a keynote speech by Reserve Bank of Australia governor Bullock to the Anika Foundation, a charity funded by money market participants. The RBA for now stuck with its peak policy rate of 4.35%, defying global cutting pressure. RBA members indicated that this could remain the case with inflation being a bit stickier than elsewhere. The central bank even remains vigilant to upside inflation risks, not ruling out another rate hike and calling thinking about RBA cuts as being premature. In light of recent strong labour market data and higher CPI, it will be interesting to see what tone Bullock’s speech has. AUD/USD is testing the recent highs near 0.68.

News & Views

The Turkish economy unexpectedly expanded by 0.1% q/q in Q2 of the year. That’s better than the 0.5% decline consensus was braced for but came along with a material downward revision to the Q1 figure from 2.4% to 1.4%. Turkish GDP is 2.5% larger compared to the same period last year, marking a slowdown from the outsized 5.3% in Q1 and missing a 3.2% estimate. The Turkish Statistical Institute noted household consumption increased by 1.6% y/y while that from the government rose by 0.7%. Capital investments were 0.5% higher y/y and a sharp -5.7% drop in imports vs flat exports resulted in a positive contribution from net exports after all. The economy treading water after a pre-election (March local elections), consumption-fueled Q1 suggests the more restrictive monetary policy is starting to filter through. With policy rates at 50% and inflation at >60%, real rates remain deeply negative though – even in case tomorrow’s inflation numbers print the expected major drop towards but still above 50%. That means there’s little room for the central bank to take its foot off the brake for the time being. The Turkish lira eked out a tiny gain against the dollar today. USD/TRY dips just south of the all-time highs around 34.

Graphs

AUD/USD: a vigilant RBA supporting the Aussie dollar

EUR/CHF: Swiss franc stronger for longer and stronger than SNB would like to see

USD/CAD: Loonie was testing multiyear lows ahead of August USD pullback on diverging monetary policy

EUR/PLN: a change of tone at the NBP can propel the pair from the bottom to the top of this year’s trading range

Daily Pivots: (S1) 1.1029; (P) 1.1062; (R1) 1.1080; More....

Intraday bias in EUR/USD stays neutral and outlook is unchanged. While retreat from 1.1200 might extend lower, rally from 1.0665 is in favor to continue as long as 1.0947 resistance turned support holds. Above 1.1104 minor resistance will bring retest of 1.1200 first. Break there will target 1.1274 high next.

In the bigger picture, prior break of 1.1138 resistance indicates that corrective pattern from 1.1274 has completed at 1.0665 already. Decisive break of 1.1274 (2023 high) will confirm whole up trend from 0.9534 (2022 low). Next target will be 61.8% projection of 0.9534 to 1.1274 from 1.0665 at 1.1740. This will now be the favored case as long as 1.0947 resistance turned support holds.

Daily Pivots: (S1) 1.3091; (P) 1.3145; (R1) 1.3181; More...

GBP/USD is staying in consolidation below 1.3265 and intraday bias remains neutral. While deeper retreat cannot be ruled out, downside should be contained well above 1.3043 resistance turned support to bring rebound. On the upside, above 1.3265 will resume larger up trend to 100% projection of 1.2298 to 1.3043 from 1.2664 at 1.3409.

In the bigger picture, up trend from 1.0351 (2022 low) is resuming. Next target is 38.2% projection of 1.0351 to 1.3141 from 1.2298 at 1.3364. For now, outlook will stay bullish as long as 1.2664 support holds, even in case of deep pullback.

Daily Pivots: (S1) 0.8470; (P) 0.8491; (R1) 0.8520; More…

No change in USD/CHF's outlook and intraday bias stays neutral. More consolidations could be seen above 0.8399. Further decline is expected as long as 0.8540 resistance holds. Break of 0.8339 will target 61.8% projection of 0.9049 to 0.8431 from 0.8747 at 0.8365, and then 0.8332 low. However, considering bullish convergence condition in 4H MACD, firm break of 0.8540 will turn bias back to the upside for 0.8747 resistance instead.

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern, with fall from 0.9223 as the second leg. Strong support could be seen from 0.8332 to bring rebound. Yet, overall outlook will continue to stay bearish as long as 0.9243 resistance holds. Firm break of 0.8332, however, will resume larger down trend from 1.0146 (2022 high).

The Swiss franc has edged higher on Monday. USD/CHF is currently trading at 0.8514, up 0.16% on the day. With US markets closed for Labor Day, we’re unlikely to see much movement from the US dollar today.

Swiss retail sales rebounds

Switzerland’s retail sales for July surprised on the upside, with an impressive gain of 2.7% y/y. This crushed the market estimate of -0.2% and followed a revised 2.6% decline in June. It was the first increase since April and the fastest pace since February 2022. Monthly, retail sales rebounded with a 1.4% gain, up from a revised -0.3% and the market estimate of -0.2%.

The strong retail sales report failed to move the Swiss franc and investors have shifted focus to Tuesday’s inflation report. Inflation is expected to tick lower to 1.2% y/y in August, compared to 1.3% in July. Monthly, inflation is projected to rise to 0.1%, up from -0.2% in July.

The Swiss National Bank has kept inflation within its target of between zero and 2%, although it is keeping a concerned eye on the Swiss franc, which has surged 7.5% against the sagging US dollar since May 1. The Swissy sharp appreciation has kept inflation in check and the central bank has responded by trimming rates twice this year, bringing the cash rate to 1.25%.

The downside of a strong Swiss franc is that it makes Swiss exports more expensive. On Thursday, the Swiss franc dropped to 0.8400, its lowest level since Jan.2. If the Swiss franc’s continues to rise, the SNB could respond by intervening in the currency markets and blunt the upward swing.

Switzerland’s economy is expected to rise 0.5% in the second quarter, unchanged from the first quarter. The Q1 gain was the fastest expansion since the second quarter of 2022 and the service sector continues to drive the economy. Annually, the economy is expected to climb 0.9% in the second quarter, up from 0.6% in Q1.

USD/CHF Technical

• 0.8520 is a weak resistance line. Above, there is resistance at 0.8541
• 0.8491 and 0.8470 are providing support

Daily Pivots: (S1) 145.13; (P) 145.69; (R1) 146.72; More...

USD/JPY's break of 146.47 resistance suggests that pull back from 149.35 has already completed at 143.43. More importantly, rebound from 141.67 could be ready to resume. Intraday bias is back on the upside for 149.35 resistance first. Firm break there will target 100% projection of 141.67 to 149.35 from 143.43 at 151.11, as the second leg of the corrective pattern from 161.94 high. For now, risk will stay on the upside as long as 143.43 support holds, in case of retreat.

In the bigger picture, fall from 161.94 medium term top is seen as correcting whole up trend from 102.58 (2021 low). Deeper decline could be seen to 38.2% retracement of 102.58 to 161.94 at 139.26, which is close to 140.25 support. In any case, risk will stay on the downside as long as 55 W EMA (now at 149.47) holds. Nevertheless, firm break of 55 W EMA will suggest that the range for medium term corrective pattern is already set.

In relatively quiet market environment, Japanese Yen is coming under increasing pressure, with notable selloff driven by rising benchmark yields in the US and Europe. With major European stock indexes largely flat and the US and Canadian markets closed for a holiday, the Yen's decline has gained momentum. Several Yen crosses have broken near term resistance levels, signaling that the currency's weakness could extend further until markets fully reopen and liquidity improves tomorrow.

This week, while the spotlight remains on US non-farm payrolls report, significant attention will also be directed toward Switzerland's economic data, including CPI and GDP figures set to be released tomorrow. These data points are crucial as SNB is expected to cut interest rates for the third consecutive meeting on September 26. However, the magnitude of this rate cut is uncertain and will heavily depend on whether the Swiss economy can sustain its growth momentum in the second quarter.

Technically, GBP/CHF's price actions from 1.1235 are clearly corrective. It's plausible that the pullback has completed with three waves down to 1.1087 already. Break of 1.1235 will resume the whole rebound from 1.0741 to 61.8% projection of 1.0741 to 1.1235 from 1.1087 at 1.1139 in the near term.

In Europe, at the time of writing, FTSE is down -0.07%. DAX is down -0.07%. CAC is down -0.03%. UK 10-year yield is up 0.020 at 4.028. Germany 10-year yield is up 0.029 at 2.332. Earlier in Asia, Nikkei rose 0.14%. Hong Kong HSI fell -1.65%. China Shanghai SSE fell -1.10%. Singapore Strait Times rose 0.59%. Japan 10-year JGB yield is up 0.0182 at 0.912.

UK PMI manufacturing finalized at 26-month high, strong domestic demand but export challenges persist

UK PMI Manufacturing was finalized at 52.5 in August, up from July's 52.1, and 26-month high. Growth was broad-based across sectors, with strong domestic demand driving new contract wins. This domestic strength helped offset the continued decline in export orders, which have been falling steadily since early 2022.

Rob Dobson, Director at S&P Global Market Intelligence, noted that manufacturing remained a "positive contributor" to the UK economy, with solid growth in output, new orders, and the strongest job creation in over two years. The investment goods sector led the upturn.

However, the sector faces ongoing challenges in exports, with weaker demand from Europe and China, along with issues like freight delays, high shipping costs, and political uncertainty, hampering overseas sales.

These challenges are also disrupting supply chains, leading to longer delivery times and driving up input costs, which saw another sharp increase in August.

Eurozone PMI manufacturing finalized at 45.8, decline persists with rising prices adding pressure on ECB

Eurozone's manufacturing sector remains entrenched in contraction, with PMI Manufacturing index finalized at 45.8 in August, unchanged from July's reading. This marks the third consecutive month of significant decline, indicating that the sector is still mired in a prolonged downturn. Despite a continued drop in new orders, both domestic and international, goods prices have risen for the first time since April 2023, adding to the growing challenges faced by ECB.

Country-specific PMI data reveals mixed performance. Greece led the pack with a PMI of 52.9, although this marked an eight-month low. Spain and Ireland managed to stay slightly above the neutral 50.0 mark, with readings of 50.5 and 50.4, respectively, but both hit multi-month lows. On the other hand, Italy's PMI improved to 49.4, its highest in five months, although it remains in contraction. France reported a 7-month low of 43.9 while Germany recorded a PMI of 42.4, a 5-month low.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, noted the worsening conditions, stating, "Things are going downhill, and fast." The manufacturing sector has now been in recession for a grueling 26 months, with no immediate signs of recovery. The persistent decline in new orders has dashed hopes of a near-term rebound, while the recent uptick in input prices since June suggests that the deflationary phase in the goods sector may be ending.

For the first time since April 2023, selling prices in the manufacturing sector have risen, driven by increases in countries like France, the Netherlands, Greece, and Italy. This development could complicate ECB's efforts to control inflation, as the central bank has been relying on falling manufacturing prices to offset persistent inflationary pressures in the services sector.

Japan's PMI manufacturing finalized at 49.8, close to stabilization amid rising cost burdens

Japan's Manufacturing PMI for August was finalized at 49.8, showing a slight improvement from July's 49.1, but still indicating a marginal contraction. S&P Global noted that the sector is moving closer to stabilization, with a renewed rise in production. This marks the first increase in purchasing activity in two years.

According to Usamah Bhatti at S&P Global Market Intelligence, the latest figures paint a "mixed picture" as the sector hovers near stabilization. The renewed rise in production and a softer decline in new orders have encouraged firms to increase staffing levels, while the pace of destocking has slowed. Additionally, there have been signs of improved supplier performance, particularly in the availability of inputs like electrical components.

However, the data also pointed to significant cost pressures, with the strongest rise in input costs since April 2023. Despite this, companies have been reluctant to pass these higher costs onto customers fully, leading to the slowest rate of charge inflation since mid-2021.

China's Caxin PMI manufacturing rises to 50.4, modest return to expansion

China's Caixin PMI Manufacturing rose slightly in August, reaching 50.4 from July's 49.8, signaling a modest return to expansion. The improvement reflects faster output growth and stabilization in employment after an 11-month decline. Meanwhile, average selling prices and input costs continued to decline, indicating ongoing deflationary pressures within the sector.

Wang Zhe, Senior Economist at Caixin Insight Group, noted that while PMI manufacturing returned to expansionary territory, the growth remains "limited". He highlighted the significant challenges China faces in stabilizing its economic growth, particularly given the government's ambitious annual targets. Key issues include weak domestic demand, uncertainties in external demand, and low market optimism, all of which could hinder sustained growth.

In contrast, the official NBS data released over the weekend painted a more subdued picture. NBS PMI Manufacturing fell from 49.5 to 49.1 in August, indicating a deeper contraction in the sector. While PMI Non-Manufacturing ticked up slightly from 50.1 to 50.3, the PMI Composite dropped for the fifth consecutive month, landing at 50.1—the lowest since December 2022.

NBS statistician Zhao Qinghe attributed the decline in manufacturing to several factors, including extreme weather, off-season production in certain industries, insufficient demand, and fluctuations in commodity prices.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 145.13; (P) 145.69; (R1) 146.72; More...

USD/JPY's break of 146.47 resistance suggests that pull back from 149.35 has already completed at 143.43. More importantly, rebound from 141.67 could be ready to resume. Intraday bias is back on the upside for 149.35 resistance first. Firm break there will target 100% projection of 141.67 to 149.35 from 143.43 at 151.11, as the second leg of the corrective pattern from 161.94 high. For now, risk will stay on the upside as long as 143.43 support holds, in case of retreat.

In the bigger picture, fall from 161.94 medium term top is seen as correcting whole up trend from 102.58 (2021 low). Deeper decline could be seen to 38.2% retracement of 102.58 to 161.94 at 139.26, which is close to 140.25 support. In any case, risk will stay on the downside as long as 55 W EMA (now at 149.47) holds. Nevertheless, firm break of 55 W EMA will suggest that the range for medium term corrective pattern is already set.

Economic Indicators Update

• USDJPY rises above downtrend line
• MACD stands well above its trigger line
• 20- and 50-period SMAs post bullish cross

USDJPY advanced considerably in the previous 4-hour session, surpassing the 146.50 barricade.

Also, the 20- and 50-period simple moving averages (SMAs) posted a bullish crossover, and the technical oscillators are holding well above their mid-levels. The MACD oscillator currently stands above its trigger and zero lines, strengthening its positive momentum, while the RSI is flattening near the 70 level.

Immediate resistance could come from the 147.30 mark before rallying towards the 200-period SMA at 149.00. Slightly higher, the previous peak at 149.40 may halt upside actions.

On the other hand, a tumble beneath the 145.55 support could meet the bullish cross of the SMAs around 145.00 before battling with 144.20 and 143.40.

All in all, USDJPY has been in a bullish mode after the penetration of the short-term descending trend line to the upside on Friday.