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All eyes will be on Wednesday’s U.S. inflation print after a larger-than-expected increase in the unemployment rate and softening in the manufacturing sector a week ago heightened concerns that the Federal Reserve may need to respond with more aggressive interest rate cuts than previously thought.

Economic data since then have somewhat calmed concerns with the U.S. services purchasing managers index pointing to further expansion and initial jobless claims edging lower in the past week. Still, we expect further signs of easing inflation in July. We forecast headline price growth held at 3% on an annual basis but with a second straight small 0.1% monthly increase in core (excluding food and energy) prices. That should reassure the Fed that those annual rates will continue to move lower.

In June, the Fed’s “supercore” (core services ex-rent) measure posted its lowest reading on a three-month annualized basis since October 2021 at 1.3%. The breadth of inflationary pressures has narrowed in recent months and the share of products seeing inflation above 5% has returned to pre-pandemic levels. Home rents continue to account for a disproportionate share of the remaining annual price growth. But, it is slowing as the impact of earlier easing in market rent increases eventually passes through to lease agreements.

U.S. economic growth (or inflation) numbers haven’t hit a level yet that would push Fed officials to panic. But, it is becoming increasingly difficult to justify interest rates more than 200 basis points above the Fed’s own estimate of the long-run “neutral” rate. Evidence is building that broader economic conditions have already normalized and inflation is more likely to drift lower. Our base case assumption is that the Fed will cut the fed funds target range by 25 basis points in September and risks of a larger cut are contingent on further downside in economic growth or inflation surprises.

Week ahead data watch

According to StatCan’s early indicator, core wholesales sales were down 0.6% in June. Much of that weakness came from the sales decline in the motor vehicle and motor vehicle parts and accessories subsector, as well as the food, beverage, and tobacco subsector.
We expect manufacturing sales to drop by 2.6% in June, in line with StatCan’s prelim estimates, driven by lower sales in the chemical product and transportation equipment subsectors.

Canadian housing starts likely came in at 264K in July. That would be up 9.2% from June to reverse the 8.8% decline the prior month. Building permits trended higher during recent months, with the three-month rolling average value increased from 257K in March to 286K in May.

U.S. retail sales are likely little changed from last month. Higher auto sales and a price-related sales growth at gas stations were offsetting by the decline in control sales.

For the second straight month, Canadian employment was essentially unchanged (-2.8k), disappointing expectations for a modest 25k gain. Full-time positions rebounded (+62k), but were offset by sizeable part-time job losses (-64k).

The unemployment rate also remained unchanged at 6.4%, as a slight decline in the labour force (-0.1% month-on-month (m/m)) offset job losses. The decline in the labour force came despite continued growth in population (0.4% m/m), as the labour force participation rate continued to fall to 65% in July.

Although population aging has put downward pressure on the labour force participation rate, the most recent year-over-year decline in July 2024 largely reflected declines among people under the age of 65.

Looking across sectors, job gains were concentrated in the public sector (+41k). The private sector lost jobs in July (-42k). Wholesale and retail trade led the private sector in job losses (-44k), while finance, insurance and real estate (-15k) also shed jobs.

Unemployment rates for recent immigrants to Canada and youth continued to rise. The unemployment rates for immigrants who have landed in Canada within the last five years rose 3.1 percentage points to 12.6%. And it continues to be a cruel summer for students (aged 15 to 24), with the employment rate was 51.3% in July – the  lowest since 1997 (outside of the pandemic 2020).

Lastly, total hours rebounded in July (1.0% m/m), leaving them up 1.9% over the past year. Wage growth cooled modestly to 5.2% year-on-year in July.

Key Implications

July's job market report was a bit of a mixed bag on the surface, but most trends are consistent with a labour market that continues to cool. Sure, full-time jobs rose, but over the past year part-time employment (+3.4%; +122,000) has grown at a faster pace than full-time employment (+1.4%; +224,000). Recent immigrants and youth are facing a particular deterioration in job market conditions.

The labour market is giving the OK for the Bank of Canada to continue its gradual quarter-point cut per rate announcement pace. We expect the Bank to cut interest rates three more times this year (see rates forecasts).

Daily Pivots: (S1) 1.0886; (P) 1.0915; (R1) 1.0949; More.....

Intraday bias in EUR/USD remains neutral at this point. While deeper retreat cannot be ruled out, downside should be contained well above 1.0776 support. On the upside, above 1.0944 minor resistance will bring retest of 1.1007 first. Further break there will resume recent rally from 1.0665 to 100% projection of 1.0665 to 1.0947 from 1.0776 at 1.1056 next.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern that's still be in progress. Break of 1.1138 resistance will be the first signal that rise from 0.9534 (2022 low) is ready to resume through 1.1274 (2023 high). However, break of 1.0776 support will extend the correction with another falling leg back towards 1.0447 support.

Daily Pivots: (S1) 0.8593; (P) 0.8634; (R1) 0.8707; More…

Intraday bias in USD/CHF remains neutral for the moment and further decline is still expected. On the downside, below 0.8559 minor support will bring retest of 0.8431 first. Break there will resume the fall from 0.9223 to retest 0.8332 low. However, sustained break of 0.8711 will turn bias back to the upside for stronger rebound.

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) 145.96; (P) 146.76; (R1) 148.07; More...

Intraday bias in USD/JPY stays neutral at this point. While further rise cannot be ruled out, outlook will stay bearish as long as 150.88 resistance holds. On the downside, below 144.04 minor support will bring retest of 141.67 first. Break there will resume the fall from 161.94 to 140.25 support next.

In the bigger picture, the strong break of 55 W EMA (now at 149.98) argue that fall from 161.94 medium term is 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 149.83) holds. Nevertheless, firm break of 55 W EMA will suggest that the range for medium term corrective pattern is already set.

Daily Pivots: (S1) 1.2693; (P) 1.2722; (R1) 1.2780; More...

GBP/USD dips mildly after hitting 55 4H EMA but stays in range above 1.2664. Intraday bias remains neutral for the moment. Another fall is in favor as long as 1.2839 resistance holds. Below 1.2664 will target 1.2612 support. Decisive break there should confirm that rise from 1.2298 has completed, and target this support next. However, break of 1.2839 resistance will argue that the pull back from 1.3043 has completed and turn bias back to the upside.

In the bigger picture, current development suggests that corrective pattern from 1.3141 is extending with fall from 1.3043 as another leg. Break of 1.2612 support would strengthen this case. But still, downside should be contained by 1.2036/2298 support zone even in case of deep decline. Rise from 1.0351 (2022 low) remains in favor to resume at a later stage.

As we move into US session, safe-haven currencies like Yen, Swiss Franc, and Dollar are showing modest gains, driven by weaker stock futures and treasury yields. However, momentum behind these currencies remains unconvincing, with trading sluggish across the board. Most major pairs and crosses are confined within the ranges established yesterday, reflecting a cautious market tone ahead of the weekend. With no significant events scheduled for the rest of the day, traders appear to be holding off on making any major bets until next week.

Canadian Dollar softened slightly following weaker-than-expected job data, which showed a contraction in July. However, like other currencies, the movement has been minimal. Australian Dollar experienced a brief uptick earlier, bolstered partly by stronger-than-expected inflation data from China, but it has since lost momentum. Meanwhile, Euro and Sterling are experiencing a typical summer lull, with little movement.

In Europe, at the time of writing, FTSE is up 0.19%. DAX is down -0.15%. CAC is up 0.06%. UK 10-year yield is down -0.0422 at 3.939. Germany 10-year yield is down -0.0388 at 2.233. Earlier in Asia, Nikkei rose 0.56%. Hong Kong HSI rose 1.17%. China Shanghai SSE fell -0.27%. Singapore Strait Times rose 0.37%. Japan 10-year JGB yield rose 0.0251 to 0.858.

Fed's Collins: Gradual rate cuts expected as inflation moderates

Boston Fed President Susan Collins indicated in an interview with the Providence Journal that if current economic data trends continue as expected, it may soon be appropriate to start adjusting monetary policy by "easing how restrictive the policy is".

She emphasized her expectation for "continued gradual reduction" in inflation toward the 2% target, all while maintaining a healthy labor market.

Collins also noted that she anticipates interest rates to be lower in the coming years, although she refrained from providing specific details on the timing and pace of rate cuts.

She highlighted the importance of incoming data before Fed's September meeting, stating, "We'll have more data before our September meeting, and I don't want to get out ahead of that."

In her assessment, Collins remains confident in the economy's current growth pace, which she believes should help sustain a strong labor market.

Canada's jobs down -2.8k in Jul, unemployment rate unchanged at 6.4%

Canada's employment fell -2.8k in July, much worse than expectation of 26.9k growth. The 62k rise in full-time work was offset by -62k decline in part-time work. Employment rate fell -0.2% to 60.9%.

Unemployment rate was unchanged at 6.4%, below expectation of 6.5%. Labor participation rate fell -0.3% to 65.0%.

Average hourly wages among employees increased 5.2% yoy, slowed from 5.4% yoy.

China's CPI rises to 0.5% in Jul, driven by surging food prices

China's CPI rose by 0.5% yoy in July, up from June's 0.2% yoy surpassing expectations of 0.4% yoy and marking the highest increase since February. This uptick was driven in part by a significant 20.4% yoy surge in pork prices, the highest since December 2022. Core CPI, which excludes food and energy prices, saw a slower rise of 0.4% yoy, down from 0.6% yoy in June.

On a month-over-month basis, CPI rebounded with a 0.5% increase, reversing the -0.2% decline seen in June and exceeding expectation of 0.3% rise. The rise in food prices, driven by high temperatures and heavy rainfall in some regions, contributed significantly to this monthly growth, according to NBS statistician Dong Lijuan.

Meanwhile, China's PPI as unchanged at -0.8% yoy, slightly better than the expected -0.9%.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2693; (P) 1.2722; (R1) 1.2780; More...

GBP/USD dips mildly after hitting 55 4H EMA but stays in range above 1.2664. Intraday bias remains neutral for the moment. Another fall is in favor as long as 1.2839 resistance holds. Below 1.2664 will target 1.2612 support. Decisive break there should confirm that rise from 1.2298 has completed, and target this support next. However, break of 1.2839 resistance will argue that the pull back from 1.3043 has completed and turn bias back to the upside.

In the bigger picture, current development suggests that corrective pattern from 1.3141 is extending with fall from 1.3043 as another leg. Break of 1.2612 support would strengthen this case. But still, downside should be contained by 1.2036/2298 support zone even in case of deep decline. Rise from 1.0351 (2022 low) remains in favor to resume at a later stage.

Economic Indicators Update

Boston Fed President Susan Collins indicated in an interview with the Providence Journal that if current economic data trends continue as expected, it may soon be appropriate to start adjusting monetary policy by "easing how restrictive the policy is".

She emphasized her expectation for "continued gradual reduction" in inflation toward the 2% target, all while maintaining a healthy labor market.

Collins also noted that she anticipates interest rates to be lower in the coming years, although she refrained from providing specific details on the timing and pace of rate cuts.

She highlighted the importance of incoming data before Fed's September meeting, stating, "We’ll have more data before our September meeting, and I don't want to get out ahead of that."

In her assessment, Collins remains confident in the economy's current growth pace, which she believes should help sustain a strong labor market.

Canada's employment fell -2.8k in July, much worse than expectation of 26.9k growth. The 62k rise in full-time work was offset by -62k decline in part-time work. Employment rate fell -0.2% to 60.9%.

Unemployment rate was unchanged at 6.4%, below expectation of 6.5%. Labor participation rate fell -0.3% to 65.0%.

Average hourly wages among employees increased 5.2% yoy, slowed from 5.4% yoy.

Full Canada employment release here.

• Despite a stronger US Dollar yesterday, gold’s upward trend continued, bolstered by the rate cut narrative.
• The technical outlook for gold indicates further upside potential, with prices possibly reaching between 2440 and 2450 during the US session.
• The longer-term outlook is supportive of gold prices as geopolitics, ETF flows and Central Bank Buying remain in play.

Gold prices surged yesterday, hitting a daily peak of $2424/oz, driven by comments from Fed policymakers and better-than-expected jobless claims data.

Improved sentiment from the jobless claims data gave a boost to the Dollar Index and saw US Treasury yields rise. However, gold continued its upward trend, defying the stronger US Dollar.

Remarks from three Federal Reserve policymakers further bolstered the rate cut narrative, a key factor in gold’s rally this year.

Thomas Barkin from the Richmond Federal Reserve Bank was the least hawkish, highlighting a positive inflation print. Austin Goolsbee of Chicago met market expectations by stating that current high rates pose risks to the labor market. He also noted that the US elections and recent stock market rout would not influence Fed policy.

Overall, the outlook for gold remains positive. The rate cut narrative, geopolitical tensions, robust ETF flows, and central bank buying all support the precious metal.

ETF Flows Finally Turned Positive in May

Source: World Gold Council, ING Research

Given this context, any significant price drop is likely to be met with strong buying pressure, limiting the downside.

Technical Analysis Gold (XAU/USD)

From a technical perspective, gold posted a significant bullish engulfing candle yesterday, recovering losses from the previous two days. After a brief pullback during the Asian session, the upward momentum continued into the London session.

Currently, the price is challenging a key resistance level at 2432, with another resistance area at 2450. The technical outlook indicates further upside potential, and in the absence of economic data today, we could see prices reaching between 2440 and 2450 during the US session.

However, whether the bulls will push beyond this range ahead of the weekend remains uncertain.

Immediate support is located around the 2414 level, with the psychological 2400 mark also providing support. A retest of these levels could occur if buyers decide to take profits and unwind positions before the weekend.

GOLD (XAU/USD) Chart, August 9, 2024

Source: TradingView (click to enlarge)

Support

• 2414
• 2400
• 2380

Resistance

• 2432
• 2450
• 2470