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Key insights from the week that was.

Following a tumultuous start to the week for global markets after a disappointing US employment print (see below), the RBA made clear their views on the risks the Australian economy faces. The RBA’s decision to leave the cash rate unchanged at 4.35% was not the focus for markets, even though the probability of such an outcome was being extensively debated not too long ago. Rather, participants quickly turned to the RBA’s updated assessment of the economy, epitomised by the judgement that “there is more excess demand in the economy and the labour market than previously thought”. Given the RBA’s forecasts for economic growth, trimmed mean inflation and the unemployment rate were only revised at the margin, the foundation of the Board’s reassessment is seemingly model-based estimates of the balance between the level of demand and supply which, in the RBA’s words, have “considerable uncertainty”.

The main takeaway from the RBA’s perspective is that this imbalance is “resulting in persistent inflation”, leading Governor Bullock in a speech the following day to assert that the Board “will not hesitate to raise rates” should there be upside risks around the inflation outlook. Regarding rate cuts, Governor Bullock’s press conference following the decision was forthright, telegraphing that the scenario of a rate-cut by year-end, as per current market pricing, “does not align with [the Board’s] thinking”.

As detailed by Chief Economist Luci Ellis following these developments, we have revised our RBA view, with the first cash rate cut now expected in February 2025 instead of November 2024 – uncertainty around the narrow path to target pointing to a higher hurdle before the Board can be confident in inflation’s deceleration. We still anticipate rate cuts to ensue at a measured pace of 25bps per quarter through to Q4 2025, albeit now to a slightly higher terminal rate of 3.35%.

In the US at the end of last week, non-farm payrolls disappointed, rising 114k (consensus 175k). The prior two months were also revised down by a cumulative 29k. Arguably more unnerving for markets, the unemployment rate rose 0.2ppts to 4.3%, triggering the ‘Sahm Rule’. This indicator states that a recession has started once the three-month moving average of the unemployment rate is 0.5ppts above the lowest three-month average of the past 12 months. This evidence of deteriorating labour market conditions kept participants on guard throughout the week.

FOMC members Goolsbee and Barkin sought to steady sentiment by emphasising that one month's data does not constitute a trend. However, Goolsbee also made it clear he believed policy was materially restrictive and the longer it remains that way, the more policymakers' focus has to turn to the employment side of the mandate. Helping the FOMC’s case by pointing to the resilience of the US economy, the ISM services PMI bounced in July to 51.4, supported by gains in all but two sub-indices in the month. Of particular note, the employment index rose 5pts, breaking a five-month run of contractionary reads. Cheered by the market late in the week, initial jobless claims fell last week and remain near historic lows, providing further support for the view that US employment might be stalling, but there is no evidence of significant aggregate job loss across the economy.

While not a focus for the market, responses to the July Senior Loan Officer Survey were cautious but benign for the growth trend, with "tighter standards and basically unchanged demand for commercial and industrial (C&I) loans" in Q2 and "tighter standards and weaker demand for all commercial real estate (CRE) loan categories". For households, banks reported "basically unchanged lending standards and weaker demand across all categories of residential real estate (RRE) loans and lending standards and demand unchanged for home-equity loans. Demand was unchanged for credit cards, but weakened for other forms of consumer credit.

As US inflation continues to come down and with downside risks growing, there is reason for the FOMC to cut decisively into year end and through early-2025. That said, we remain confident in the underlying health of the US economy and believe the FOMC will too, resulting in a more muted easing cycle than the market currently expects. We continue to expect the first cut to be 25bps in September, but now expect another 25bp cut at each of the meetings through November 2024 to March 2025. One cut per quarter from the June quarter 2025 will leave the fed funds rate at 3.375% end-2025. That is the same terminal rate as we had previously, but it will be reached six months earlier. As long as the labour market remains in good health, which we expect, lower interest rates will boost demand into 2025 and ease banks’ concerns over the outlook.

Key Highlights

• USD/JPY is attempting a fresh increase from the 141.65 support zone.
• A major bearish trend line is forming with resistance at 150.00 on the 4-hour chart.
• Oil prices might struggle to climb above the $76.60 resistance.
• EUR/USD corrected gains but the bulls seem to be active above 1.0850.

USD/JPY Technical Analysis

The US Dollar started a major decline from well above 155.00 against the Japanese Yen. USD/JPY even declined below 145.00 before the bulls appeared.

Looking at the 4-hour chart, the pair settled below the 150.00 level, the 200 simple moving average (green, 4-hour), and the 100 simple moving average (red, 4-hour). A low was formed near 141.68 before the pair started a recovery wave.

There was a move above the 145.00 level. The pair cleared the 38.2% Fib retracement of the downward move from the 155.21 swing high to the 141.68 low.

Immediate resistance sits near the 148.50 level or the 50% Fib retracement of the downward move from the 155.21 swing high to the 141.68 low. The next resistance sits at 150.00. There is also a major bearish trend line forming with resistance at 150.00 on the same chart.

A clear move above 150.00 could open the door to more gains. In the stated case, the pair could rise and test 152.00 or the 100 simple moving average (red, 4-hour).

Immediate support is near the 145.80 level. The next major support is near the 144.00 level. A downside break and close below the 144.00 support zone could open the doors for more losses. In the stated case, USD/JPY might decline toward the 142.00 level.

Looking at Oil, the price started a recovery wave above the $74.50 level but the bears might remain active near the $76.60 level.

Economic Releases

• Canada’s employment Change payrolls for July 2024 – Forecast 22.5K, versus -1.4K previous.
• Canada’s Unemployment Rate April 2024 - Forecast 6.5%, versus 6.4% previous.

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%.

Kansas City Fed President Jeff Schmid acknowledged that while inflation is nearing the Fed's 2% target, currently at around 2.5%, "we are still not quite there."

Nevertheless, "if inflation continues to come in low, my confidence will grow that we are on track to meet the price stability part of our mandate, and it will be appropriate to adjust the stance of policy," Schmid said at a bankers' event overnight.

Despite fears sparked by a weak jobs report, Schmid pushed back against the notion that Fed would need to take aggressive action to avoid a recession. He described the economy as resilient, with strong consumer demand and a labor market that, although cooling, remains "quite healthy."

Schmid noted that Fed's current policy stance "is not that restrictive" and suggested that further cooling in the labor market may be necessary to achieve additional declines in inflation.

Chicago Fed President Austan Goolsbee reiterated concerns about the current stance of monetary policy in a Fox interview, warning that maintaining high borrowing costs, even as inflation declines, could further tighten financial conditions and potentially harm the labor market. Goolsbee stressed the importance of balancing monetary policy to avoid unnecessary damage to employment.

He also made it clear that Fed's decisions are driven solely by economic considerations, not by the stock market or political factors. Goolsbee stated, "The Fed's out of the election business. The Fed is in the economic business," emphasizing that the focus remains on maximizing employment and stabilizing prices.

Richmond Fed President Tom Barkin expressed optimism about the ongoing disinflation trend during a virtual event overnight.

Barkin noted that recent data has been encouraging, both in overall levels and across various inflation components, stating that "all the elements of inflation seem to be settling down." He remains "relatively hopeful" that this trend will persist.

Barkin also highlighted that the current economic environment provides some leeway to assess whether the economy is gradually normalizing, which would allow for a steady and deliberate approach to rate adjustments. He pointed out the importance of determining if further aggressive action is necessary, depending on how the economy evolves.

• EURGBP reversed from resistance zone
• Likely to fall to support level 0.8540

EURGBP currency pair earlier reversed down from the resistance zone set between the pivotal resistance level 0.8620 (which has been reversing the price from January) and the upper daily Bollinger Band.

The downward reversal from the resistance zone created the daily candlesticks reversal pattern Evening Star Doji – which marked the end of the previous correction ii.

Given the strength of the resistance level 0.8620, overbought daily Stochastic and the bullish sterling sentiment, EURGBP currency pair can be expected to fall further toward the next support level 0.8540.

• EURJPY reversed from support zone
• Likely to rise to resistance level 162.50

EURJPY currency pair recently reversed up sharply from the support zone located between the multi-month support level 154.30 (which has been reversing the price from October) and the lower daily Bollinger Band.

The upward reversal from the support zone created the daily candlesticks reversal pattern Morning Star Doji – strong buy signal for this currency pair.

Given the strength of the support level 154.30, EURJPY currency pair can be expected to rise further toward the next resistance level 162.50.

Oil prices rose for the third consecutive session on Thursday, driven by easing demand concerns from better-than-expected U.S. job data and escalating tensions in the Middle East. Brent crude increased by 0.73% to $78.90 per barrel, while U.S. West Texas Intermediate climbed 1.16% to $76.10. The market was also influenced by a significant drop in U.S. crude inventories and concerns over potential disruptions in oil supply due to geopolitical tensions. Analysts noted the possibility of Brent prices rebounding to the low-to-mid $80s, citing tight market conditions and ongoing risks. Additionally, Libya's reduced oil production due to protests further supported prices.

XBRUSD – H2 Timeframe

XBRUSD has recently been rejected off the daily timeframe pivot, with a ‘double break of structure’ price action pattern, a possible bullish sentiment. The trendline support, Fibonacci retracement level, and the drop-base-drop demand zone all point in favor of a bullish outcome. The lower timeframes would, however, provide the basis for an entry in this regard.

Analyst’s Expectations:

• Direction: Bullish
• Target: 81.00
• Invalidation: 75.40

XTIUSD – H1 Timeframe

The 1-hour timeframe chart of the price action on XTIUSD closely mirrors the price action pattern on XBRUSD above; we have the same double-break of structure pattern, the drop-base-rally demand zone, the trendline support, and finally, the 76% of the Fibonacci retracement tool. The sentiment in this regard, is exactly the same: bullish.

Analyst’s Expectations:

• Direction: Bullish
• Target: 77.00
• Invalidation: 71.32