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• EURJPY broke the key resistance level 174.30
• Likely to rise to the resistance level 176.00

EURJPY currency pair recently broke above the key resistance level 174.30, which stopped the previous impulse wave I at the start of July.

The breakout of the resistance level 174.30 accelerated the active impulse wave iii of the higher upward impulse wave 5 from the middle of June.

Given the clear daily uptrend and widespread yen sales, EURJPY currency pair can be expected to rise further to the next resistance level 176.00.

On Wednesday, the EURUSD pair remained steady around 1.0820, confined within a narrow range as the US Dollar continued its subdued trend. Federal Reserve Chairman Jerome Powell's testimony before Congress did little to provide clear market direction, despite his return to a hawkish stance on monetary policy. Market participants remain uncertain, as US economic indicators—growth, employment, and inflation—are progressing steadily without necessitating Fed intervention. Focus now shifts to Thursday's US Consumer Price Index (CPI) release, with annual inflation expected to rise by 3.1% in June and core CPI to remain unchanged at 3.4%. Additionally, speeches from Fed policymakers, including another testimony from Powell, will be closely watched for further insights.

EURUSD – D1 Timeframe

On the Daily timeframe chart as attached, we see the resistance trendline, as well as the SBR (Sweep-Break-Retest) pattern that seems to be the intent of the current price action. The supply zone is also pretty obvious, as it falls within the 76%-88% region of the Fibonacci retracement tool. To further confirm the bearish sentiment, let’s take a look at the lower timeframe price action.

EURUSD – H4 Timeframe

Viewing the lower timeframe (the 4-hour chart) of EURUSD, we see price currently trading within an ascending channel as it heads for the resistance trendline that cuts across the 88% Fibonacci retracement level. On this basis, an aggressive initial entry can be taken from the area of confluence of the 3 lines, while a more conservative approach would be to wait for the break below the trendline support of the ascending channel before taking a shot at it.

Analyst’s Expectations:

• Direction: Bearish
• Target: 1.07060
• Invalidation: 1.09195

• Monthly GDP and production figures for June on tap
• Strong data might hurt August rate cut expectations
• Pound flirts with $1.28 ahead of Thursday’s release (06:00 GMT)

Uptick in GDP expected

The UK economy got off to a solid start this year, emerging strongly from a technical recession in the second half of 2023. GDP grew by an impressive 0.7% quarter-on-quarter in the January-March period. But growth came to a halt in April and investors will be watching the May data to see whether that was a blip or if the economy hit another soft patch in the second quarter.

Analysts are forecasting GDP to have risen by 0.2% month-on-month in May, pushing the annual rate up to 1.2%. The services sector and industrial production are also expected to have expanded by 0.2% m/m.

UK still a G7 laggard

Despite the turnaround, however, GDP growth has yet to return to its pre-Covid trend and Britain fares only better than Germany among the big, advanced economies when it comes to the post-pandemic recovery.

Hence, the UK economy is far from being in danger of overheating and unless there’s a notable upside surprise, the May figures are unlikely to pose a significant obstacle to the Bank of England starting its easing cycle soon. Investors have priced in around a 60% probability of a 25-basis-point rate cut at the August 1 meeting, with one additional cut expected before the year-end.

A brighter outlook?

The likelihood of the BoE cutting rates before the Fed hasn’t been too damaging to the pound. The British currency is the second-best performer of 2024 so far, behind only the US dollar. This is partly attributed to the brightening economic outlook, which may improve further now that the UK has a new government.

Prime Minister Keir Starmer and his Labour government have set boosting economic growth as one of their top priorities, while the political stability that their large parliamentary majority is expected to provide is also positive for sterling.

The pound is currently attempting to secure a foothold above the $1.2800 level after several sessions of testing the level. An upbeat set of data on Thursday could help its cause, bringing the March peak of $1.2893 back into scope.

However, if the growth numbers disappoint, bolstering expectations of an August rate cut, the pound could dip all the way towards its 50-day moving average, currently at $1.2689.

On the whole, the GDP readings are not anticipated to be hugely consequential for BoE rate cut bets, especially as the CPI numbers for June are due a week later on July 17. If the CPI report shows headline inflation remaining close to 2.0% and the core rate declining further, that could seal the deal for an August move by the Bank of England.

• GBPAUD consolidates above key support zone
• RSI and MACD detect negative momentum
• But a break below 1.8900 is needed to darken the outlook
• A rebound above 1.9350 may invite more bulls

GBPAUD has been trading in a consolidative manner lately staying above the key support area of 1.8900, which prevented the bears from drifting south on several occasions during the last 12 months. However, the pair is also trading below a downward sloping trendline, suggesting that it may be a matter of time before we see a dip below 1.8900.

The RSI is lying below 50, but it is pointing up, while the MACD, although negative, has bottomed and crossed above its trigger line. Both indicators detect negative momentum, but they corroborate the notion that it is too early to start examining the case of further declines.

A break below 1.8900 could be the move that will give the green light to the bears, perhaps allowing extensions towards the low of December 27, at around 1.8580. A break lower could aim for the 1.8395 zone, marked by the low of April 18.

For the picture to start looking positive, a move above 1.9350 may be needed. GBPAUD would already be above the aforementioned downtrend line, and the bulls may feel confident to climb towards the key resistance zone of 1.9515.

Summarizing, GBPAUD is hovering above the key support zone of 1.8900, the break of which may invite more bears into the action.

China’s consumer inflation slowed from 0.3% y/y to 0.2% instead of the expected acceleration to 0.4%, bringing investors’ attention back to weak demand. Meanwhile, manufacturing price deflation slowed from -1.4% y/y to -0.8% y/y, staying in negative territory for the past 20 months since October 2022.

China is once again spreading deflation around the world, as it did before 2018. However, the global effect is radically reduced by a slew of import duties that are raising domestic prices in developed countries to support alternative producers. Growing de-globalisation is the new pro-inflationary factor after waves of supply problems and energy price hikes in 2022.

When applied to the FX market, weak inflation is negative for the currency, suggesting monetary policy easing is a likely reaction from the Central Bank or acting as a manifestation of a weak economy. Prices in China also have an impact on a global level, so a fresh batch of rather soft figures suggests a further slowdown in price growth in the US and Europe, which is positive for global demand for risk assets.

Markets

In today’s extremely dull trading session, some volatility in the New Zealand dollar, Norwegian krone and Czech koruna are keeping us somewhat entertained. You’ll find the latter two in the section down below. NZD is under pressure (NZD/USD 0.6078) following this morning’s central bank meeting. Its remarkable dovish pivot from a hawkish stance in May didn’t go unnoticed. Swap yields tumbled almost 20 bps at the front end of the curve and markets are now taking a first rate cut already in August into serious consideration (>50%). The sharp repricing followed after the RBNZ suddenly (i.e. without new actual data) sees inflation entering the target range already in the second half of the year, high domestically generated price pressures aren’t as much of a persistent problem as they thought less than two months ago and the economy is weakening according to unspecified “high frequency indicators”. This culminated in an addition to the policy statement saying that “The extent of this [monetary] restraint will be tempered over time consistent with the expected decline in inflation pressures.”, a clear hint for (near-term?) rate cuts.

There’s not much happening in core markets, not for obvious reasons anyways. Bunds underperform US Treasuring in a reversal of yesterday’s dynamics. German yields decline between 2.7 and 5.1 bps across the curve. US rates drop less than 2 bps ahead of Powell appearing before the House. If his Senate performance yesterday was already a non-event, then we don’t know how exactly to describe today’s do-over. Tonight’s $39 bn 10-yr bond auction is worth mentioning, to be followed by the $22 bn 30-yr one tomorrow, along with the June CPI release. Currencies other than the ones above trade listless.

News & Views

Inflation in the Czech Republic in June decelerated much faster than both markets and the Czech national bank (CNB) expected. Prices declined 0.3 M/M In June. Y/Y headline inflation dropped back from 2.6% to 2.0%, exactly returning to the CNB target. Monthly price decline occurred in several subcategories but with major contributions from transport (-1.2% M/M) and food and beverages (-0.6% M/M). Recreation and culture (+0.4%) and restaurants and hotels (0.5%) still recorded higher prices in a monthly perspective. In its spring forecast published early May, the CNB forecasted June inflation at 2.4% Y/Y. KBC expects headline inflation to decline further below the target in coming months taking into account announced summer and autumn energy price cuts. The CNB at its June meeting surprised at least part of the market as it maintained a 50 bps cutting pace (to 4.75%). However at that time, the bank indicated that from now it intended to slow the pace of further rate cuts or even make a pause if necessary. Given the June inflation data, the latter probably won’t be necessary anytime soon. Markets now discount additional 25 bps cuts at each of the remaining meetings this year. The expected loss of interest rate support continues to weigh on the Czech koruna. At EUR/CZK 25.38, the Czech currency is again with striking distance of the weakest levels of 2024 touched early February (EUR/CZK 25.52).

Inflation in Norway also slowed more than expected in June. Headline inflation printed at 0.2% M/M and 2.6% Y/Y from 3.0% in May. CPI-ATE inflation (adjusted for tax changes and excluding energy) eased to 0.2% M/M and 3.4% Y/Y (from 4.1% and 3.6% expected). Prices decreased in recreation and culture (-0.8% M/M), furnishings and household equipment (-0.4%) and clothing and footwear (-0.3%). Prices for restaurants & hotels (0.6%) and food and non-alcoholic beverages (1.9%) still rose. The slowdown in inflation should give some comfort to the Norges bank. At the June meeting it still was worried that wages could keep inflation higher than hoped for, potentially requiring tight policy for longer than it previously anticipated. NB indicated that the policy rate might be kept at 4.5% for the remainder of the year. The NB probably won’t be in a hurry to aggressively change guidance, but markets now see a growing chance (<50%) for an inaugural rate cut in December. The krone after the CPI release weakened sharply from EUR/NOK 11.47 to 11.59.

Graphs

EUR/NOK: Norwegian krone slips after CPI eases more than expected, questioning the central bank’s hawkish guidance

EUR/CZK closing in on the 2024 highs as unexpected monthly price drop brings Y/Y measure to CNB target

NZD/USD: kiwi dollar takes a hit from RBNZ’s remarkable dovish pivot

German 10-yr yield reverses yesterday’s rise, on track for a test of first support

In a speech today, BoE Chief Economist Huw Pill highlighted that while it is "welcome news" that the UK's headline CPI returned to 2% in May, it is crucial for the inflation target to be achieved on a "lasting and sustainable basis."

He emphasized three key indicators of inflation persistence: labor market tightness, pay growth, and services price inflation. Pill noted that recent developments in these areas suggest "some upside risk to my assessment of inflation persistence."

Pill pointed out that annual rates of services price inflation and wage growth, which remain close to 6%, indicate an "uncomfortable strength" in the underlying inflation dynamics.

He also cautioned that the MPC should remain cautious about interpreting any "single data" point as either a "necessary or sufficient trigger" for reassessing their stance.

Full speech of BoE's Pill here.

The Reserve Bank of New Zealand kept its benchmark interest rate at 5.5% for the eighth consecutive meeting, which was in line with analyst expectations. However, the central bank’s comments were softer than expected, dragging down NZDUSD by around 1% to 0.6070, a low for the week.

The RBNZ expects inflation to return to the 1-3% target range in the second half of the year and hinted at the possibility of reducing the degree of monetary tightening. At its last meeting in May, the regulator was leaning towards the need for another hike. However, it has now moved into line with the major global central banks, where markets have seen or expect 1-2 rate cuts before the end of the year.

By modern standards, this is a sharp policy reversal that has clipped the Kiwi’s vestigial wings.

The NZDUSD reversed to the downside last Friday from a local high of 0.6150, having broken the upper boundary of the long-term descending channel in place since January 2023. This fits into a broader trend of lower highs since 2014. The recent complete reversal in RBNZ policy is a major fundamental factor keeping the global Kiwi trend in place.

Locally, NZDUSD is testing support in the form of the 200-day moving average after breaking above the 50-day moving average (now at 0.6100) intraday. With fundamentals driving the pair, we expect further declines towards 0.5900 – a key support level over the past 12 months—over the summer months.

The pair’s dips have become increasingly shallow over the past two years, which has increased interest in the New Zealand currency’s momentum, especially near the local extremes of 0.6150 and 0.5900.

• The Kiwi is the worst intraday performer among the major currencies as it slumped to a 4-week low against the US dollar.
• A dovish tilt in the latest RBNZ monetary policy statement has triggered a narrowing of the yield discount between the 2-year Australian and New Zealand government bonds.
• AUD/NZD has staged a medium-term bullish breakout above 1.1000 key support.

Since our last publication, the price actions of the AUD/NZD have inched lower to break below its 200-day moving average on 4 June and traded lower in the next three days to print an intraday low of 1.0731 on 7 June.

After that, the AUD/NZD staged a bullish reversal of +274 pips/+2.56% in the next four weeks to close at 1.1006 on Tuesday, 9 July which has almost recoupled the prior loss from its 7 May high of 1.1024.

Since the start of today’s Asian session, 10 July, the AUD/NZD has further extended its intraday gains by +96 pips/+0.87% to hit a 52-week high of 1.1103 due to a surprise dovish monetary policy statement released by New Zealand central bank, RBNZ after the conclusion on the outcome of its monetary policy decision.

A 180-degree turn from RBNZ from hawkish to dovish

The RBNZ has kept its key short-term official cash rate unchanged at 5.50% for the eighth consecutive meeting which is not a surprise to market participants. The big shock came from the tonality of its monetary policy statement where it offered a dovish tilt that implied that the current high interest rate environment in New Zealand has fed through to domestic demand more strongly than expected and a range of business and consumer-based surveys, and high-frequency data have pointed to a decline in economic activities.

That’s a 180-degree change from its prior May monetary policy statement where RBNZ’s stance was mildly hawkish as its officials had discussed the case to consider another interest rate hike and signalled that the first cut on its policy rate to only take place after Q2 2025.

A bad day for the Kiwi as it is the worst performer among the major currencies

Fig 1: 5-day rolling performance of US dollar pairs with 2-year yield spread of AU/NZ government bonds as of 10 Jul 2024 (Source: TradingView, click to enlarge chart)

Today’s “abrupt” change in RBNZ’s monetary policy statement tonality from hawkish to dovish has triggered a significant intraday sell-off of -0.86% in the Kiwi against the US dollar where it slumped the most in almost four weeks, and it is the weakest currency by a far stretch against the US dollar at this time of the writing based on a 5-day rolling performance basis (see Fig 1).

Also, the short-term interest rate swaps market has now priced in two interest rate cuts by RBNZ before 2024 ends which led to the monetary policy-sensitive yield of the 2-year New Zealand government bond to drop by 15 basis points (bps) to 4.65%, its biggest single-day drop since 28 February (see Fig 1).

The current dramatic slide seen in the 2-year New Zealand government bond yield has triggered a further narrowing of yield discount between 2-year Australian and New Zealand government bonds from -0.58% to -0.48% which in turn supports a potential outperformance of the Aussie dollar against the Kiwi.

Potential bullish acceleration in AUD/NZD towards a long-term secular range resistance

Fig 2: AUD/NZD major and medium-term trends as of 10 Jul 2024 (Source: TradingView, click to enlarge chart)

In the lens of technical analysis, the AUD/NZD cross pair has staged a bullish breakout above its former medium-term range resistance that has capped prior rallies since 20 December 2023.

In addition, the MACD trend indicator has continued to trend upwards steadily above its zero centreline since 27 June which supports a medium-term uptrend phase that is likely to have kickstarted (see Fig 2).

If the 1.1000 key medium-term pivotal support holds, the AUD/NZD may see a further potential upmove within a long-term secular range configuration in place since July 2015 with the next medium-term resistances coming in at 1.1165/1190 and 1.1430/1460 (also the upper limit of the long-term secular range configuration).

On the flipside, failure to hold at 1.1000 suggests a failure bullish breakout and the AUD/NZD may resume its choppy corrective downward drift to expose the next medium-term supports at 1.0890 (also the 50-day moving average) and below it sees 1.0735 next.