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Daily Pivots: (S1) 1.1043; (P) 1.1091; (R1) 1.1127; More....

While EUR/USD's retreat from 1.1200 extended lower, downside is contained above 1.1007 resistance turned support. Intraday bias remains neutral and larger rally is still expected to continue. On the upside, break of 1.1200 will resume recent rally to 161.8% projection of 1.0665 to 1.0947 from 1.0776 at 1.1232, and then 1.1274 high.

In the bigger picture, 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) 1.3133; (P) 1.3180; (R1) 1.3215; More...

Intraday bias in GBP/USD remains neutral as consolidation from 1.3265 is still expected. Downside of retreat 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) 144.28; (P) 144.92; (R1) 145.61; More...

Intraday bias in USD/JPY stays neutral but further fall is in favor with 146.47 minor resistance intact. Break of 143.43 will bring retest of 141.67 low. Firm break there will resume the whole fall from 161.94 to 140.25 support next. On the upside, above 146.47 will turn intraday bias back to the upside for 149.35 resistance instead.

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 149.38) holds. Nevertheless, firm break of 55 W EMA will suggest that the range for medium term corrective pattern is already set.

Daily Pivots: (S1) 0.8418; (P) 0.8456; (R1) 0.8512; More…..

Intraday bias in USD/CHF remains neutral as consolidation continues above 0.8399. Outlook will remain bearish as long as 0.8747 resistance holds. Break of 0.8339 will resume the decline from 0.9223 and target 61.8% projection of 0.9049 to 0.8431 from 0.8747 at 0.8365, and then 0.8332 low.

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).

Daily Pivots: (S1) 0.6776; (P) 0.6800; (R1) 0.6822; More...

AUD//USD continues to lose upside moment as seen in 4H MACD, but there is no clear sign of topping yet. Further rally is expected as long as 06696 support holds. Current rally should target 0.6870 resistance. Firm break there will target 100% projection of 0.6269 to 0.6870 from 0.6348 at 0.6949. However, break of 0.6696 will indicate short term topping, and turn bias back to the downside for deeper pullback.

In the bigger picture, overall, price actions from 0.6169 (2022 low) are seen as a medium term corrective pattern, with rise from 0.6269 as the third leg. Firm break of 0.6798/6870 resistance zone will target 0.7156 resistance. In case of another fall, strong support should be seen from 0.6169/6361 to bring rebound.

Daily Pivots: (S1) 1.3459; (P) 1.3475; (R1) 1.3500; More...

USD/CAD continues to consolidate above 1.3439 temporary low and intraday bias remains neutral. Upside of recovery should be limited below 1.3617 resistance to bring another fall. On the downside, below 1.3439 will resume the decline from 1.3946 and target 1.3176 support next.

In the bigger picture, current development suggests that corrective pattern from 1.3976 (2022 high) is extending with another falling leg. While deeper decline could be seen, strong support should emerge above 1.2947 resistance turned support to bring rebound. Rise from 1.2005 (2021 low) is still in favor to resume at a later stage.

Markets

Fixed income and FX markets yesterday had to cope with a divergent message from EMU and US data. German and Spanish August headline inflation slowed more than expected (German HICP -0.2% M/M and 2.0% from 2.6% vs 2.2% expected, Spain 0.0% M/M and 2.4% Y/Y from 2.9%). This provides some comfort for the ECB as it intends to further reduce policy tightening next month. However, the slowdown mainly came from lower energy prices. The progress in measures of underlying inflation was far less impressive (Spain core 2.7% from 2.8, Germany 2.8% from 2.9%, with still rather robust services inflation 0.4% M/M). Still, the data initially pushed EMU yields lower in a steepening move. However, global bond market momentum changed after the publication of US data. US Q2 GDP growth was upwardly revised from 2.8% Q/Qa to 3.0% due to strong personal consumption (2.9% from 2.3%). Weekly jobless claims also held a relatively low 231k. The Q2 GDP revision is old news but was enough for yields to close 2-3 bps higher across the curve. German yields reversed part of the initial decline though the 2-y yield still lost -2.8 bps. The 30-y added 2.1 bps. After recent dollar weakness, softer EMU CPI data this timed triggered a correction of the euro. EUR/USD dropped from the 1.1140 area to close at 1.1077. DXY rebounded from 101.00 to 101.34, but gains in the likes of USD/JPY (close 145) were modest. Equities initially also enjoyed some reflationary dynamics (EuroStoxx 50 +1.08%). US indices also opened with a constructive momentum, but mostly couldn’t hold on to initial gains (Nasdaq -0.23%). The Dow (+0.58%) finished at a new record. Markets for now apparently embrace a favourable (US) soft landing scenario.

This morning, Asian equities show broad-based gains with China outperforming. The yuan extends its comeback from earlier this month with USD/CNY testing the end-December low. The yen trades little changed after higher than expected Tokyo CPI data (USD/JPY 144.9). Later today, EMU August flash CPI probably will confirm yesterday trends from Germany and Spain (headline expected at 0.2%M/M and 2.2% Y/Y, core 2.8% from 2.9%, risks for downside ‘surprise’). With 3 additional 25 bps ECB rate cuts at each of the remaining meetings this year still not fully discounted, there is still room for some further decline in yields at the short end of the EMU yield curve. This also might trigger some further euro correction ST. In the US, the July income and spending data and the PCE deflators will be published. For the latter, a 0.2% M/M price dynamics is expected. Even in case of a mild soft surprise, we don’t expect a big market reaction with already 100 bps of cumulative Fed rate cuts discounted for this year. US markets are heading for a long weekend (Labour day). The focus will turn to next week’s key ISM’s and US labour market data. In this respect, we don’t change our call yet for the dollar to stay rather weak in the run-up the September Fed meeting.

News & Views

Tokyo inflation, the closely watched frontrunner of national inflation (September 20 release) put an October rate hike (updated GDP/CPI forecasts contrary to September meeting) by the Bank of Japan on the table. The central bank’s preferred gauge, CPI ex. fresh food, rose by 0.5% M/M with the Y/Y-figure unexpectedly accelerating from 2.2% to 2.4%. Headline inflation increased by 0.6% M/M and 2.6% Y/Y, matching the highest level YTD. Details showed goods inflation increasing by 0.8% M/M and services inflation rising by 0.3% M/M with sharper increases in costs of eating out, household services and entertainment driving the latter. While some of the inflation pick-up was the result of one-offs and base effects, it does not change the picture of a broad upswing in (service) prices. This bolsters the case for a further, be it gradual policy normalization by the Bank of Japan. The BoJ’s July hike came partially unexpected and helped cause the early August market riot, prompting some soothing comments from the central bank afterwards. Money markets therefore don’t expect much from the September 20 meeting and expect the next rate hike by December at the very earliest. Japanese bond yields trade little changed today as does the yen. USD/JPY oscillates around opening levels just south of 145.

Graphs

GE 10y yield

The ECB cut policy rates by 25 bps in June. Stubborn inflation (core, services) make follow-up moves less evident. Markets nevertheless 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. The move accelerated during the early August market meltdown.

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 tend to err in favour of 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 1.1276 (2023 top) serves as next technical reference.

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.

Yesterday was could’ve been worse. A more than 6% drop in Nvidia somehow limited the S&P500 gains, but many stocks in the S&P500 gained yesterday after the latest GDP update came in better than expected and pointed that the US economy has grown 3% in the Q2 versus 2.8% printed earlier. The consumer spending almost doubled, as well, to 2.9% from 1.5% printed a quarter earlier. The cool down in the GDP prices was less, but core prices eased more than expected. All in all, the US economy rebounded in the Q2 but the rebound didn’t increase price pressures. In plain English, the data tasted exactly how investors love it – with the additional sweet topping – for the Fed rate cut expectations – that it has slowed in the Q3 but slowed from a higher mark.

So there was reason to cheer the latest growth update yesterday. The US 2-year yield rebounded a little, but settled around the 3.90% mark, the 10-year yield is at 3.86% - the gap between the two has almost closed : a positive sign for those who expect a soft landing, and the US dollar rebounded. The US dollar index recovered on the thinking that the Federal Reserve (Fed) will start cutting rates in September, yes, but a 50bp cut is probably not needed straight away.

But note that activity on Fed funds futures still gives two thirds chance for a 50bp rate cut from the Fed in the September meeting and the Fed is seen cutting rates by 100bp from now to the end of the year – a scenario that implies that we will see a sharp slowdown from the current quarter. Happily, the data is not *that* alarming. Therefore, I believe that there is room for trimming the Fed cut expectations to between 50-75bp cut this year, and that should justify a further positive correction in the US dollar and a further rotation in the S&P500 toward the growth-friendly, cyclical stocks – including energy and financials.

Europe vs US

Rotation from tech to other sectors, which is also called the reflation trade, is believed to be positive for the European stocks. And indeed, capital inflows into the European stocks outpaced inflows into the US markets in the Q2 – precisely boosted by the expectation that the global rate cuts would be better for the reflation-friendly European stocks than their technology-heavy American peers (and also because the European Central Bank (ECB) started cutting rates before the Fed). And the Stoxx 600 has been greatly benefiting from it. Yesterday, the index almost matched a record high that was printed back in June and remains attractive for investors who look for interesting valuations to get away from highly valued American stock markets. And despite this year’s rally, the European stocks remain significantly cheaper than the ones across the Atlantic. In numbers, the Stoxx 600 offers a PE ratio of around 14 well below the S&P500’s average 21.

The problem is that the rate cut expectations alone cannot infinitely attract investors to the old continent. Europe is slowing, its airline and luxury businesses are not doing well – the Chinese woes have a significant negative impact on the most influential luxury brands – so much that the British Burberry and EasyJet risk dropping out of the FTSE 100 index shortly. And Bloomberg Intelligence revised its consensus EPS for the Stoxx 600 down by 1.4% this year, and 1.6% for next year. Over in the US, the technology stock investors are preparing for challenging times yet the S&P500’s non-Magnificent 493 stocks saw their growth expectations more than double and should see the benefits of the upcoming rate cuts. And if the Fed can offer the US economy a soft landing, there will be nothing to stop the US indices from outperforming its European peers.

PCE watch

Today, the US will release the latest core PCE index, the Fed’s favourite gauge of inflation. The data is expected to hint at a tiny rebound in July. A stronger-than-expected read could lead to a further USD recovery. But even in that case, the Fed doves are more interested in jobs data than inflation figures. What would really change the game is… a strong jobs data from the US next week.
Currencies

The US dollar’s latest rebound pulled the EURUSD lower yesterday. Softer-than-expected German and Spanish inflation updates helped bringing the ECB doves back to the market. Inflation in Germany even fell below the ECB’s 2% target! The combination of less dovish Fed expectations and more dovish ECB expectations sent the EURUSD all the way down to 1.1070. The pair is consolidating near the 1.1075 this morning. The aggregate CPI data from the Eurozone will likely confirm the slowing price pressures in the Eurozone in a way to let the ECB consider a clearer path for easing its policy. The EURUSD could find a good reason to return below the 1.10 mark – especially if we welcome a strong jobs data from the US next week.

Elsewhere, the USDJPY consolidates a touch below the 145 mark amid a mixed bag of data released in Tokyo earlier this morning. The data showed a slower rebound in industrial production, a bigger-than-expected slowdown in retail sales, a larger-than-expected rise in unemployment rate and a stronger-than-expected inflation during late summer. We believe that ongoing price pressures will likely keep the Bank of Japan inclined toward normalization. However, if economic fundamentals deteriorate further, the BoJ could quickly reverse course and extend support to the economy. This would hinder the Japanese yen's recovery and potentially enhance carry trades.

In focus today

We expect the euro area inflation data today to show that headline inflation eased to 2.2% y/y in August from 2.6% in July, driven by base effects on energy prices. We see underlying inflation remaining persistent due to sticky service inflation and a normalization of core goods inflation from the very low levels seen in the first half of the year. The most important part of the print will be the monthly increase in services inflation, which we expect to come in at around 0.3% m/m s.a. for the third consecutive month. This will still be high but at least lower than what we saw at the beginning of the year.

The Fed's preferred measure of inflation, the PCE, is due for release this afternoon. CPI data released earlier suggested that on a monthly level, underlying inflation pace has remained fairly steady from June.

Economic and market news

What happened overnight

In Japan, we got mixed signals as core inflation rose to 2.4% in Tokyo in August, which was higher than expected (cons.: 2.2%). As a leading indicator of the national CPI, the print is a signal in the hawkish direction. Retail sales rose less than expected at 2.6% (cons.: 2.9%), while unemployment also picked up. As of this morning the Nikkei is up, and the JPY has gained. Asian markets in general were also up, driven in part by yesterday's strong US macro data (see below).

What happened yesterday

Both German and Spanish inflation declined by more than expected in July to 2.0% and 2.4% y/y, respectively. The decline was mainly due to base effects on energy prices but shows that the disinflationary process is going in the right direction, which supports the case of gradual easing from the ECB.

In Sweden, Swedish Q2 GDP declined less than initially reported at -0.3% q/q as we had expected. EURSEK trended down slightly during the day but otherwise market impact was muted.

From the US, Q2 GDP growth was revised up to 3.0% y/y at an annualized rate from 2.8% previously reported, while initial jobless claims gave mixed signals as new claims fell while continuing claims increased. Both US yields and the dollar rose slightly on the news, as did equities though the gains were pared by the end of the session.

Equities: Global equities ended higher yesterday with Europe leading the advances. Equity investors essentially received what they desired in the form of Goldilocks/soft-landing data, which normally would have led to cyclical outperformance. This trend was observed in Europe; however, one major company in the US, Nvidia, disrupted the typical pattern there. Consequently, we experienced an atypical day with consumer staples and tech underperforming together. It is important to note that we should not read too much into this but rather focus on the fact that the soft-landing narrative was reinforced. The ECB gained more confidence in implementing a rate cut at their next meeting in less than two weeks. The combination of improved odds for a soft-landing and continued looser monetary policy should benefit small caps the most, which was indeed the case yesterday despite a marginal increase in US yields. In the US yesterday, Dow +0.6%, S&P 500 0.00%, Nasdaq -0.2%, and Russell 2000 +0.7%. Asian markets are broadly higher this morning, with Chinese markets leading the advances. European futures are mixed, while US futures are higher.

FI: The upward revision of the Q2 US GDP figures was the dominating theme in yesterday's session, while markets reacted very modestly to the soft German and Spanish inflation data out for August. 10Y UST yields ended the day 4bp higher, while long-end EGB yields were close to unchanged across the board. Markets continue to discount 160bp worth of rate cuts from the ECB until end-2025. The Bund ASW-spread reached a new 2.5 month low of 28.52bp, and thus the widening seen following the French elections has now been almost fully reversed.

FX: Yesterday marked the fourth consecutive day with limited FX volatility with the most notable price action being EUR/USD continuing the last sessions' move lower and the CNH extending its rebound. The EUR generally did poorly which saw EUR/SEK and EUR/NOK edge marginally lower. EUR/GBP was little changed with the cross finding support around the 0.84 level

The Australian dollar continues to have a quiet week. AUD/USD is trading at 0.6804 in the European session, up 0.09% today at the time of writing.

Australian retail sales stagnate

Consumer spending in Australia has been weak, which has chilled economic activity. Retail sales for July didn’t provide any relief with a reading of zero, shy of the market estimate of 0.3% and well off the June gain of 0.5%. Consumers continue to feel squeezed by elevated interest rates and the high cost of living. The weak economy and a cooling labor market are making consumers even more cautious about discretionary spending.

Will today’s soft data prod the Reserve Bank of Australia to consider a rate cut? The RBA is frustrated with the slow decline in inflation – Governor Bullock has said that the central bank is unlikely to cut for six months and RBA members have been discussing a possible rate hike at recent meetings. The markets are marching to a different tune and have priced in a rate cut in November with more cuts early next year.

The remaining tier-1 events ahead of the Sept. 24 policy meeting are GDP and the employment report and both releases will be important factors in the rate decision. If these numbers are weaker than supported, it would support the case for a rate cut before year’s end.

The week wraps up with the US Core PCE Price index, considered the Federal Reserve’s preferred inflation indicator. The markets are expecting a small increase in July – from 2.5% to 2.6% y/y and 0.1% to 0.2% m/m. A small move is unlikely to concern the Fed, which has shifted its focus to the weakening labor market now that the battle with inflation is largely over.

AUD/USD Technical

• AUD/USD is testing resistance at 0.6808. Above, there is resistance at 0.6822
• 0.6776 and 0.6754 are providing support