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It was a highly volatile week which cannot be characterized by a single theme. Yen had a sharp and robust rally against all major currencies, continuing its rebound from the 38-year lows hit earlier this month, with market participants unwinding their long-held short positions. Alongside Yen, Swiss Franc and Dollar also emerged as winners, although they trailed significantly behind the Yen. Conversely, Australian Dollar took the bottom spot, followed by New Zealand Dollar and Canadian Dollar. These positions highlighted clear risk aversion sentiment.

The risk-off sentiment, however, was not uniformly reflected across all markets. In the US, while NASDAQ and S&P 500 had significant declines, DOW managed to post a weekly gain, with Russell 2000 also showing resilience. In Europe, FTSE and DAX ended the week higher, with the strong rebound on Friday, whereas CAC hit new lows for the year. In Asia, Japan's Nikkei extended its plunge from record highs to hit the lowest level in three months, while China's SSE resumed its downtrend .

Multiple themes are at play in the current market environment, creating a complex and even contradictory picture. Sector rotation within stocks is a notable trend. At the same time US election risk is also weighing on sentiment. Global monetary policy easing continues, with the notable exception of Japan. Meanwhile, economic slowdown in China is deepening, as evidenced by recent data and the government's panic efforts to stimulate growth through rate cuts. However, amidst these diverse factors, the de-inversion of yield curve in the US stands out as a particularly significant development from a medium-term strategy perspective.

US Stocks End Week in Turmoil, Sector Rotation or More?

This week has been marked by turbulence in the US stock markets, driven by multiple conflicting themes. Despite a late-week rally, NASDAQ closed down -2.1%, while S&P 500 fell 0.8%. Both indexes experienced consecutive weekly losses for the first time since April. In contrast, DOW outperformed, rising 0.8% for its fourth straight positive week, a milestone not seen since May.

Sector rotation was evident, with Russell 2000 gaining nearly 4% for the week. However, it failed to surpass last week's high of 2278.12, indicating that this rotation is more about minimizing losses than making significant gains. Similarly, DOW remained well below the previous week's high of 41376.00.

Political uncertainty is also influencing investor behavior. With endorsements from President Joe Biden, former President Barack Obama, and former House Speaker Nancy Pelosi, Vice President Kamala Harris seems likely to secure the Democratic nomination to challenge Donald Trump in the upcoming presidential election. The shift in the Democratic candidate appears to have narrowed Trump's lead notably, adding to the uncertainty.

On the data front, June PCE inflation data provided the Fed with further justification to consider easing monetary policy later in the year. Q2 GDP data presented a Goldilocks scenario, with stronger-than-expected growth while inflation pressures eased.

Fed funds futures indicate a fully priced-in 25bps rate cut in September. Markets also see a 68% chance of a second 25bps cut in November and a 64% chance of a third cut in December. If these cuts occur, federal funds rate would decrease to 4.50-4.75% by the end of the year, down from the current 5.25-5.50% level.

Yield Curve Steepening Signals Recession Risks

But above all, the most critical development in the background is steepening of the yield curve. Since mid-June, the spread between 10-year and 2-year Treasury yields has narrowed significantly, from -0.47 basis points to as little as -0.12 on Thursday, indicating a potential trend of normalization from inversion.

Historically, recessions in the US have often followed the normalization of an inverted yield curve:

• 1990-1991 Recession: The yield curve inverted in 1989 and normalized shortly before the recession began in July 1990.
• 2001 Recession: The yield curve inverted in 2000 and normalized just before the dot-com bubble burst, leading to a recession.
• 2008 Financial Crisis: The yield curve inverted in late 2006. Despite partial normalization in 2007, the US economy fell into a severe recession by December 2007, exacerbated by the housing market collapse and financial sector failures.
• 2020 COVID-19 Recession: The yield curve inverted in 2019 and normalized before the COVID-19 pandemic-induced recession in 2020, though this case was complicated by the pandemic's unique impact.

As a side note, former New York Fed President William Dudley warned on Wednesday that Fed should cut interest rates immediately to stave off a recession, as current economic cooling measures are visibly effective.

Dudley highlighted that the three-month average unemployment rate has risen 0.43% from its low point over the past year, nearing the 0.5% threshold identified by the Sahm Rule, which has historically signaled a US recession.

Notably, once this threshold is breached, unemployment typically rises significantly more, with the smallest increase being nearly 2% from trough to peak.

NASDAQ's Downside Risks Materialize While DOW Retains Bullish Outlook

Technically, NASDAQ's steep decline last week and break of 55 D EMA (now at 17451.72) suggests that fall from 18671.06 is at least correcting the rally from 12543.85. Risk will stay on the downside as long as 18128.38 resistance holds. Deeper fall would be seen to 38.2% retracement of 12543.85 to 18671.06 at 16330.46 before finding strong support to set the range for consolidations.

While it's still early to call, firm break of 16330.46 will raise the chance that NASDAQ is indeed correcting the whole up trend from 10088.82 (2022 low). In this more bearish case, enough support could only be found between 38.2% retracement of 10088.82 to 18671.06 at 15392.65, and 55 W EMA (now at 15555.78).

Conversely, DOW's strong bounce from 39889.05 resistance turned support is keeping near term bullishness intact. Another rise could be seen through 41376.00 to 61.8% projection of 32327.20 to 39889.05 from 38000.96 at 42674.18. However, decisive break of 39889.05 would open up deeper fall to 38000.96 support as larger scale correction.

Dollar Index's movements have been mixed as it struggled to find a clear direction, on whether the market is risk-on, or risk off. The index is also struggling around 55 W EMA (now at 104.30). Risk will stay on the downside as long as 105.20 resistance holds. Firm break of 103.65 and sustained trading below 55 W EMA will bring deeper fall to 102.35 or even further to 100.61.

However, break of 105.20 will argue that price actions from 106.51 is merely a corrective pattern that has completed with three waves to 103.65. Dollar index should then be ready to rise through 106.13/51 resistance zone to resume the rebound from 100.61.

Chinese Investor Sentiment Deteriorates Amid Panic-Driven Rate Cuts

Another development to note is the continued deterioration in investor sentiment in China, driven by what appears to be panic measures from the People's Bank of China to bolster an economy growing at its slowest pace in more than a year.

On Thursday, PBoC made a surprise, off-schedule cut to its one-year medium-term lending facility rate, lowering it from 2.5% to 2.3%. This move injected CNY 200B of liquidity into the market and marked the largest reduction since 2020. Earlier in the week, PBoC announced its first cut in nearly a year to a key short-term policy rate, reducing the seven-day reverse repo rate from 1.8% to 1.7%.

These aggressive rate cuts have underlined the authorities' urgency and contributed to a sense of panic rather than lifting market sentiment.

Shanghai SSE Composite resumed the fall from 3174.26 to close at 2890.89, lowest in February. Technically, near term focus is now on 61.8% retracement of 2635.08 to 3174.26 at 2841.04. Strong bounce from this level, followed by break of 2986.24 resistance, will suggest that fall from 3174.26 is probably just a corrective move, and has possibly completed.

However, sustained break of 2841.04 would risk deeper sell-off back to 2635.08. More importantly, This will raise the chance that SSE is indeed trying to resume whole down trend from 3731.68 (2020 high), as its rebound attempt has been repeatedly rejected by falling 55 W EMA.

AUD/JPY and NZD/JPY Plunge Amid Broad Yen Rally and Regional Risk-Off Sentiment

AUD/JPY and NZD/JPY were the biggest movers last week, both lost more than -4.5%. The strong, broad-based rally in Yen was certainly a factor. The strong, broad-based rally in the Yen played a major role in this decline, compounded by a prevailing risk-off sentiment in both China and Japan.

Technically, AUD/JPY is now pressing an important cluster support zone, including 99.32 resistance turned support and 55 W EMA (now at 99.26). Some stabilization could be seen from current level to bring rebound. Yet, risk will continue to stay heavily on the downside as long as 55 D EMA (now at 104.66) holds. Sustained break of 99.32 will argue that AUD/JPY is at least correcting the whole rise from 59.85 (2020 low), with risk of bearish reversal. Deeper fall would then be seen to 38.2% retracement of 59.85 to 109.36 at 90.44.

NZD/JPY has broken 55 W EMA already, and it's now trying to draw support from long term channel. Some stabilization could be seen from current level to bring rebound. Still, risk will stay on heavily on the downside as long as 55 D EMA (now at 95.27) holds. Sustained break of the channel support will indicate that it's at least correcting the whole up trend from 59.49 (2020 low) with risk of bearish reversal. Deeper fall would then be seen to 38.2% retracement of 59.49 to 99.01 at 82.389.

EUR/CHF Weekly Outlook

EUR/CHF's fall from 0.9772 extended to 0.9519 last week but recovered since then. Initial bias is turned neutral this week for consolidations first. Further decline is expected as long as 0.9641 support turned resistance holds. Rebound from 0.9476 should have completed as a corrective move at 0.9772. Below 0.9519 will bring retest of 0.9476. Firm break there will resume whole fall from 0.9928 to 100% projection of 0.9928 to 0.94767 from 0.9772 at 0.9320.

In the bigger picture, with 1.0095 key medium term resistance intact, price actions from 0.9252 (2023 low) are seen as a corrective pattern. Fall from 0.9928 might be the second leg and break of 0.9476 would bring deeper decline to retest 0.9252 low. But strong support should be seen there to extend the corrective pattern with another rising leg. In any case, medium term outlook will be neutral at best as long as 1.0095 structural resistance holds.

In the long term picture, fall from 1.2004 (2018 high) is part of the multi-decade down trend. Firm break of 1.0095 resistance is needed to be the first sign of long term bottoming. Otherwise, outlook will remain bearish.

EUR/USD dipped to 1.0825 last week but turned sideway since then. Initial bias remains neutral this week first and further fall is in favor as long as 1.0896 minor resistance holds. Below 1.0825 will target 55 D EMA (now at 1.0815). Sustained break there will argue that whole rebound from 1.0601 has completed with three waves up to 1.0947, and target 1.0601/0665 support zone. Nevertheless, break of 1.0896 will bring retest of 1.0947 resistance instead.

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 1.0665 support will extend the correction with another falling leg back towards 1.0447 support.

In the long term picture, a long term bottom is in place at 0.9534 (2022 low). Sustained break of 55 M EMA (now at 1.1013) will raise the chance of long term reversal. But even in this case, firm break of 1.2348 structural resistance is needed to confirm. Rejection by 55 M EMA will maintain bearishness for extend the down trend from 1.6039 (2008 high) through 0.9534 at a later stage.

USD/JPY's fall from 161.94 extended to as low as 151.93 last week, but recovered after breaching 151.98 resistance turned support briefly. Initial bias remains neutral this week for consolidations. Risk will stay on the downside as long as 155.36 support turned resistance holds. Decisive break of 151.89 resistance turned support will argue that large scale correction is underway to 148.66 fibonacci level. Nevertheless, break of 155.36 will turn bias back to the upside for stronger rebound.

In the bigger picture, considering the depth and momentum of the current decline, 161.94 should be a medium term top already. Fall from there is seen as correcting the whole rise from 127.20 (2023 low) at least. Break of 151.89 will pave the way to 38.2% retracement of 127.20 to 161.94 at 148.66. Risk will now stay on the downside as long as 55 D EMA (now at 157.17) holds, in case of rebound.

In the long term picture, as long as 140.25 support holds, up trend from 75.56 (2011 low) is still in progress. Next target is 138.2% projection of 75.56 (2011 low) to 125.85 (2015 high) from 102.58 at 172.08.

GBP/USD gyrated lower last week but failed to break through 1.2859 resistance turned support decisively. Initial bias remains neutral first. Further rally is in favor. Break of 1.3043 will resume the rise from 1.2298. However, firm break of 1.2859 will turn bias to the downside for deeper decline to 55 D EMA (now at 1.2771).

In the bigger picture, corrective pattern from 1.3141 medium term top (2023 high) could have completed with three waves to 1.2298 already. This will now remain the favored case as long as 1.2612 support holds. Firm break of 1.3141 will target 61.8% projection of 1.0351 (2022 low) to 1.3141 from 1.2298 at 1.4022.

In the long term picture, as long as 1.2298 support holds, rise from 1.0351 long term bottom is expected to continue. But still, firm break of 1.4248 structural resistance is needed to indicate bullish trend reversal. Otherwise, price actions from 1.0351 are tentatively seen as a consolidation pattern only.

USD/CHF edged lower to 0.8776 last week but recovered again. Initial bias stays neutral this week first. As long as 0.8923 resistance holds, further decline is expected. On the downside, break of 0.8776 will resume the fall from 0.9223 to 61.8% retracement of 0.8332 to 0.9223 at 0.8672 next. However, break of 0.8923 will turn bias back to the upside for stronger rebound instead.

In the bigger picture, with 0.9243 resistance intact, medium term outlook in USD/CHF is neutral at best. For now, more sideway trading is likely between 0.8332/9243. However, firm break of 0.9243 will indicate larger bullish trend reversal.

In the long term picture, price action from 0.7065 (2011 high) are seen as a corrective pattern to the multi-decade down trend from 1.8305 (2000 high). Strong rebound from 61.8% retracement of 0.7065 to 1.0342 (2016 high) at 0.8317 will start the third leg as a medium term rally. But there will be no sign of long term reversal until firm break of 38.2% retracement of 1.8305 to 0.7065 at 1.1359.

AUD/USD's fall from 0.6798 accelerated to as low as 0.6513 last week but recovered after breaching 61.8% retracement of 0.6361 to 0.6798 at 0.6528 briefly. Initial bias remains neutral this week for consolidations. Further fall is expected as long as 55 4H EMA (now at 0.6631) holds. Sustained break oft 0.6528 will pave the way back to 0.6361 support next.

In the bigger picture, overall, price actions from 0.6169 (2022 low) are seen as a medium term corrective pattern, with fall from 0.6798 as another falling leg. Deeper fall could be seen to the lower side of the range between 0.6169/6361. But strong support should be seen there to contain downside. For now, risk will stay on the downside as long as 0.6798 resistance holds, in case of rebound.

In the long term picture, the down trend from 1.1079 (2011 high) should have completed at 0.5506 (2020 low) already. It's unsure yet whether price actions from 0.5506 are developing into a corrective pattern, or trend reversal. But in either case, fall from 0.8006 is seen as the second leg of the pattern. Hence, in case of deeper decline, strong support should emerge above 0.5506 to bring reversal.

USD/CAD surged to as high as 1.3848 last week and breached 1.3845 high, but turned sideway since then. Initial bias remains neutral this week first and some more consolidations could be seen. Further rally is expected as long as 55 4H EMA (now at 1.3755) holds. Decisive break of 1.3845 will resume whole rally from 1.3176. Next target is 61.8% projection of 1.3176 to 1.3845 from 1.3588 at 1.4025.

In the bigger picture, price actions from 1.3976 (2022 high) are viewed as a corrective pattern, that might have completed at 1.3176 (2023 low) already. Firm break of 1.3976 will confirm resumption of whole up trend from 1.2005 (2021 low). Next target is 61.8% projection of 1.2401 to 1.3976 from 1.3176 at 1.4149. This will be the favored case as long as 1.3588 support holds, in case of pullback.

In the longer term picture, price actions from 1.4689 (2016 high) are seen as a consolidation pattern, which might have completed at 1.2005. That is, up trend from 0.9506 (2007 low) is expected to resume at a later stage. This will remain the favored case as long as 1.2947 resistance turned support holds.

GBP/JPY's fall from 208.09 accelerated to as low as 195.84 last week, but recovered after breaching 38.2% retracement of 178.32 to 208.09 at 196.71 briefly. Initial bias remains neutral this week for consolidations. Risk will stay on the downside as long as 202.08 resistance holds. Sustained trading below 196.71 will argue that larger scale correction is under way to 185.49 fibonacci level.

In the bigger picture, considering bearish divergence condition in W MACD, 208.09 might be a medium term top and fall from there could already be correcting whole up trend from 148.93 (2022 low). Risk will now stay on the downside as long as 55 D EMA (now at 200.78) holds. Sustained break of 196.71 will pave the way to 38.2% retracement of 148.93 to 208.09 at 185.49.

In the longer term picture, outlook will stay bullish as long as 188.63 resistance turned support holds, or until a clear reversal pattern forms. Rise from 122.75 (2016 low) is seen as the third leg of the pattern from 116.83 (2011 low). Next target is 138.2% projection of 116.83 to 195.86 from 122.75 at 231.96.

EUR/JPY's fall from 175.41 accelerated to as low as 164.81 last week, but recovered ahead of 164.29 resistance turned support. Initial bias remains neutral this week for consolidations. Risk will stay on the downside as long as 169.98 resistance holds. On the downside, decisive break of 164.29 support turned resistance will indicate that larger scale correction is underway for 155.91 fibonacci level.

In the bigger picture, immediate focus is on 164.29 resistance turned support. Strong rebound from there will retain medium term bullishness for resuming the up trend through 175.41 at a later stage. However, decisive break of 164.29 will indicate that fall from 175.41 is at least correcting the rise from 124.73, with risk of bearish trend reversal. Deeper decline would be seen to 38.2% retracement of 124.37 to 175.41 at 155.91.

In the long term picture, rise from 114.42 (2020 low) is seen as the third leg of the whole up trend from 94.11 (2012 low). As long as 164.29 resistance turned support holds, further rise should be seen to 138.2% projection of 94.11 to 149.76 from 114.42 at 191.32. However, sustained break of 164.29 would risk deeper medium term fall back towards 55 M EMA (now at 145.09) even as a correction.

EUR/GBP's recovery from 0.8382 extended higher last week but outlook will stay bearish as long as 0.8498 resistance holds. Initial bias remains neutral this week first. Firm break of 0.8382 will resume larger down trend.

In the bigger picture, down trend from 0.9267 (2022 high) is in progress. Next target is 0.8201 key support (2022 low). For now, outlook will remain bearish as long as 0.8643 resistance holds, even in case of strong rebound.

In the long term picture, price action from 0.9499 (2020 high) is seen as part of the long term range pattern from 0.9799 (2008 high). Range trading should continue between 0.8201 and 0.9499, until there is clear signal of imminent breakout.