Sample Category Title

Most European indices including the British big caps closed Monday’s session in the negative. The French CAC 40 underperformed its peers with a 0.63% loss in the session after an attempt to the highest level in almost a month on worries that a political gridlock in France would complicate the picture and make things slow to move. But the French 10-year bond yield eased on easing worries that Mr. Melonchon could not spend as much as he wants if he doesn’t find allies in a divided parliament, hence the yield spread between the German and French yield settled below 70bp and the EURUSD found support above 1.08 level and should gently shrug off the weight of the French election off as the French political shenanigans will likely have a decreasing impact on market valuations. We could see the EURUSD gain further positive momentum this week, especially if Federal Reserve (Fed) President Jerome Powell delivers a dovish speech before the congress between today and tomorrow, and the latest CPI update from the US comes in sufficiently soft.

The first day of the testimony is always the most important day as we will get to catch the overall tone and the key messages. Some expect Powell to sound cautious regarding the progress on inflation and tell the US politicians to be patient until the Fed gathers enough evidence that inflation is on a solid path toward their 2% target. But there is a chance that he sounds slightly more optimistic and willing to cut the interest rates sooner rather than later pointing at the slowing economic growth and loosening jobs market – which will eventually help cooling inflation. The US 2-year yield – which best captures the Fed rate expectations - sank below the important 4.70% support last week following a softer-than-expected jobs report from the US and needs a sufficiently dovish talk from Powell to consolidate and further fall. The market expects two rate cuts from the Fed this year, with a rising probability assessed to a September rate cut (nearly 80% before Powell’s testimony). The US dollar index is under pressure since the beginning of the month, and could further fall with a dovish message from Powell – now that the safe-haven flows due to the French political risks are behind. At the current levels, the US dollar index is still in the bullish trend that has been building since the start of this year. The critical support to this year’s positive trend stands at 104.20, the major 38.2% Fibonacci retracement on this year’s rebound. A fall below this level should send the US dollar index into the medium-term bearish consolidation zone and support the major peers as a result.

Something must give

The S&P500 and Nasdaq 100 hit fresh records yesterday and their journey is increasingly diverging from the economic data. The forecast for 12-month forward earnings for the S&P500 stands at an all-time high according to Bloomberg, the S&P500 companies are expected to deliver more than 9% EPS growth in Q2 and this number is expected to rise to double-digit territory later this year. Even the non-tech sectors are seen posting a positive growth. But Atlanta Fed’s GDPNow index predicts that the US economy may have grown just 1.5% in Q2, down from above 3% at the last quarter of last year and 5% the quarter before that. Something must give.

Daily Pivots: (S1) 160.28; (P) 160.84; (R1) 161.35; More...

Intraday bias in USD/JPY remains neutral for the moment, as range trading continues. Further rally is expected with 160.25 minor support intact. On the upside, break of 161.94 temporary top will resume larger up trend to 61.8% projection of 146.47 to 160.20 from 154.53 at 163.01. Nevertheless, break of 160.25 will turn bias to the downside for deeper pullback.

In the bigger picture, long term up trend is still in progress. Further rise is expected as long as 154.53 support holds. Next target is 100% projection of 127.20 (2023 low) to 151.89 (2023 high) from 140.25 at 164.94.

Dollar is recovering mildly overnight, as traders prepare for Fed Chair Jerome Powell's highly anticipated two-day Congressional testimony. Powell is scheduled to address the Senate today and the House tomorrow. Fed's latest dot plot suggests median expectation of just one rate cut this year. However, recent soft economic data from June, including non-farm payroll numbers, have led markets to bet on the possibility of two rate cuts. Market focus will be on how Powell addresses the balance between persistent inflation, economic slowdown, and weakening labor market conditions. Risk sentiment could improve if Powell hints that economic weakness is spreading through the US economy, and thus setting the stage for policy easing.

In the broader currency markets, Australian Dollar stands out as the strongest performer today at this point. Australian consumers are increasingly worried about more rate hikes from RBA, with expectations rising sharply. Meanwhile, business confidence remains solid. Together they suggested that both consumers and businesses are mentally bracing for potential rate increases. Euro follows as the second strongest currency, with Canadian dollar also showing strength.

On the flip side, Japanese Yen is the weakest performer, partly linked to strong risk-on sentiment in Japan, where Nikkei surged to new record highs. Swiss Franc and the New Zealand Dollar are also underperforming. Kiwi is particularly subdued ahead of RBNZ's rate decision tomorrow. While it is too soon for RBNZ to hint at an earlier-than-expected rate cut given that Q2 inflation data will be released next week, there remains a slight dovish risk. Meanwhile,Dollar and British Pound are mixed in their performance.

Technically, Gold's firm attempt on 2387.51 resistance ended in failure as it retreated notably since then. Outlook is unchanged that corrective pattern from 2449.83 is extending. On the downside, firm break of 55 4H EMA (now at 2349.52) will bring another down leg back towards 2277.23 key support. However, break of 2392.78 resistance will resume the near term rebound to retest 2449.83 high.

In Asia, at the time of writing, Nikkei is up 2.31%. Hong Kong HSI is down -0.30%. China Shanghai SSE is up 0.26%. Singapore Strait Times is up 0.41%. Japan 10-year JGB yield is down -0.011 at 1.080. Overnight, DOW fell -0.08%. S&P 500 rose 0.10%. NASDAQ rose 0.28%. 10-year yield fell -0.003 to 4.269.

Australia Westpac consumer sentiment falls -1.1% mom, intensifying interest rate concerns

Australia's Westpac Consumer Sentiment index dropped by -1.1% mom to 82.7 in July, reflecting increased concerns about persistent inflation and fears of interest rate hikes.

The Mortgage Rate Expectations Index, which measures consumer expectations for variable mortgage rates over the next 12 months, surged by 12.8% in July, marking the steepest monthly rise since early 2022. Over the past three months, the index has climbed by 30%, from a below-average 122.8 in April to 159.2 in July, well above historical average of 143.8. This marked increase is the sharpest observed in the past seven years, with detailed responses indicating that nearly 60% of consumers expect mortgage rates to rise over the next year.

RBA will meet on August 5–6. Westpac expects the RBA to hold interest rates steady, contingent on inflation continuing to decline as anticipated. The upcoming Q2 CPI and labor market data will be critical.

Australia's NAB business confidence rebounds to 4, highest since early 2023

Australia's NAB Business Confidence rose from -2 to 4 in June, marking its highest level since early 2023 and returning to positive territory. However, Business Conditions fell from 6 to 4, indicating some ongoing challenges. Trading conditions decreased slightly from 11 to 10, profitability conditions dropped from 3 to 2, and employment conditions fell sharply from 5 to 0.

Labor cost growth slowed to 1.8% on a quarterly basis, down from 2.3% in May, while purchase cost growth eased to 1.3% from 1.7%. Overall product price growth decreased to 0.7%, down from 1.1%. Retail price growth, however, held steady at 1.5%, and recreation and personal services prices declined to 0.7% from 1.1%.

Gareth Spence, NAB Head of Australian Economics, noted, the survey signals "another soft quarter" in Q2. Capacity utilisation remains "high with demand and supply yet to fully normalise".

"Price pressures continue to ease in a trend sense though the data certainly remains bumpy," Spence added.

USD/JPY Daily Outlook

Daily Pivots: (S1) 160.28; (P) 160.84; (R1) 161.35; More...

Intraday bias in USD/JPY remains neutral for the moment, as range trading continues. Further rally is expected with 160.25 minor support intact. On the upside, break of 161.94 temporary top will resume larger up trend to 61.8% projection of 146.47 to 160.20 from 154.53 at 163.01. Nevertheless, break of 160.25 will turn bias to the downside for deeper pullback.

In the bigger picture, long term up trend is still in progress. Further rise is expected as long as 154.53 support holds. Next target is 100% projection of 127.20 (2023 low) to 151.89 (2023 high) from 140.25 at 164.94.

Economic Indicators Update

Summary

• The first half of 2024 has seen a gradual, but clearly perceptible, improvement in U.K. economic momentum. Q1 GDP rose 0.7% quarter-over-quarter, while more recent sentiment and activity data point to ongoing growth in Q2. The outlook for the U.K. consumer continues to improve, although the outlook for U.K. businesses is perhaps not quite as robust. Overall, however, we see U.K. GDP growth firming to 0.8% in 2024 and 1.5% in 2025, from just 0.1% in 2023.
• The progress on the disinflation front arguably remains mildly frustrating. While headline inflation slowed to the Bank of England's (BoE) 2% target in May, underlying inflation measures and wage growth have slowed more gradually, and remain elevated by historical standards. Given still-elevated wage and price trends, we expect the BoE will initially proceed cautiously with its monetary easing.
• We see just two 25 bps rate cuts this year, in August and November, and forecast the BoE's policy rate to end 2024 at 4.75%. We expect a slightly faster pace of easing in 2025 as underlying inflation returns closer to the central bank's 2% inflation target. Altogether, we see a further cumulative 125 bps of BoE policy rate cuts in 2025, which would see the central bank's policy rate end next year at 3.50%.
• The Labour Party led by new Prime Minister Keir Starmer won a landslide victory in last week's election, securing 412 of the 650 seats in the House of Commons. Despite the landslide victory, we do not anticipate a significant impact on the U.K. economy or financial markets in the immediate period ahead. Should the new government be more cautious than expected on the fiscal front, it could if anything be less supportive of the growth outlook in 2025 than generally expected.

U.K. Shows More Encouraging Economic Growth Trends

The first half of 2024 has seen a gradual, but clearly perceptible, improvement in U.K. economic momentum. After a mild technical recession in the second half of last year as GDP contracted for two straight quarters, the United Kingdom returned to a positive growth path early this year as Q1 GDP jumped 0.7% quarter-over-quarter and rose by 0.3% year-over-year. Among the details, the composition of first quarter growth was also somewhat encouraging and led mainly by the private sector, as private consumption rose 0.4% quarter-over-quarter and business investment rose 0.5% quarter-over-quarter.

The outlook for the U.K. consumer in particular continues to improve. While wage growth has slowed moderately over the past several months the pace of wage growth is still elevated by historical standards. As a result, real household disposable income growth firmed further in Q1-2024 to 3.3% year-over-year, near the high for the post-pandemic upswing. The household saving rate also rose to 11.1% of disposable income, indicating that consumers have something of a buffer to support spending going forward. The main cautionary note for the consumer is the impact of the Bank of England's past monetary tightening, which has seen interest costs rise to 5.8% of disposable income by Q1-2024, up from just 1.4% of income in Q3-2021, before the Bank of England rate hike cycle began. In contrast to the consumer, the outlook for U.K. business is perhaps not quite as robust. In Q1-2024, the gross operating surplus of U.K. private non-financial corporates fell 9.2% year-over-year. That actually exceeded the largest decline seen during the pandemic and, indeed, is the largest fall in the U.K. gross operating surplus since Q4-2009, surrounding the global financial crisis. The same elevated wage growth—relative to inflation—that is supporting the consumer outlook could be weighing on corporate margins and business profitability, likely a restraining factor for business investment through the rest of 2024. That said, we believe consumer optimism will likely outweigh corporate caution as an economic driver over the next several quarters. We forecast U.K. GDP growth of 0.8% in 2024 and 1.5% in 2025, up from just 0.1% in 2023.

Certainly, economic figures from more recent months suggest a gradual U.K. economic upswing has continued. April GDP was unchanged on the month, holding steady after the large 0.4% gain seen in March. April services activity rose 0.2% month-over-month, on top of the 0.5% gain seen in March, while industrial output fell 0.9% month-over-month. The steady overall GDP result means U.K. April GDP is around 0.4% above its Q1 average, indicating the economy is on track for another quarter of positive growth. Sentiment surveys, while mixed, are also consistent with ongoing expansion. The U.K. services PMI fell for a second month in June to 52.1, but remains above the breakeven 50 level that indicates continued service sector growth. Meanwhile, the June manufacturing PMI also eased slightly to 50.9, but is also at a level consistent with expansion in the manufacturing sector. Finally, while the labor market appears to be softening with employment down by 139,000 for the February-April period compared to the November-January period, there remain some questions about the robustness of the labor market figures given the low survey response rates of late.

U.K. Inflation Concerns Still Lingering

While progress on the economic recovery front has perhaps been a bit more encouraging than expected, the progress on the disinflation front arguably remains mildly frustrating. The latest CPI reading, for May, did show a deceleration in headline inflation to 2.0% year-over-year, matching the Bank of England's (BoE) inflation target. That deceleration has however been concentrated in goods prices, which fell 1.3% year-over-year in May. Measures of underlying inflation have shown slower progress toward the central bank's target. Core inflation, which excludes food, energy, alcohol and tobacco, rose 3.5% in May, still some way above the central bank's target. And services inflation remains stubbornly persistent, rising 5.7% in May, above both the consensus and BoE forecast.

Concerns about sticky services inflation are reinforced by still-elevated wage growth. The latest wage data showed average weekly earnings holding steady at 5.9% year-over-year in the three months to April, and average weekly earnings excluding bonuses holding steady at 6.0%. Another measure closely followed by Bank of England policymakers, private sector regular average weekly earnings, eased only marginally to 5.8%. While pay growth has slowed from its peak, all of these wage growth measures remain above levels that prevailed prior to the pandemic and, for now, are also higher than generally viewed as consistent with sustainably achieving the BoE's 2% inflation target.

It is against this backdrop of gradually improving economic growth and gradually receding inflation that we believe the Bank of England will proceed cautiously in moving to a less restrictive monetary policy stance. To be sure, central bank policymakers have offered hints that it might start lowering interest rates soon. The BoE held its policy rate steady at 5.25% in June, but offered several comments that suggested an inclination to ease monetary policy:

• It said the recent strength in services inflation was due in part to prices that are index-linked or regulated, which are typically changed only annually, and volatile components.
• Key indicators of inflation persistence have continued to moderate, although they remain elevated.
• As part of the August forecast round, members of the Committee will consider all the information available and how this affects the assessment that the risks from inflation persistence are receding. On that basis, the Committee will keep under review for how long Bank Rate should be maintained at its current level.

Given those hints from policymakers, and so long as upcoming data suggest some moderation in wage and price growth, our view remains for the BoE to deliver an initial 25 bps policy rate cut to 5.00% at the August monetary policy meeting. Given still-elevated wage and price trends, we expect the BoE will initially proceed cautiously thereafter. We expect the BoE to pause in September, reduce its policy rate by 25 bps in November, and to pause again in December, for a cumulative 50 bps of rate cuts this year, which would see the policy interest rate end 2024 at 4.75%. We expect a slightly faster pace of easing in 2025 as underlying inflation returns closer to the central bank's 2% inflation target. Altogether, we see a further cumulative 125 bps of BoE policy rate cuts in 2025, which would see the central bank's policy rate end next year at 3.50%. We view the risks around our forecast for the Bank of England policy rate as broadly balanced for 2024, but tilted toward a faster pace of easing in 2025 if wage and inflation trends were to slow more convincingly. Against this backdrop we anticipate only modest gains in the pound over the medium-term even if, as we forecast, the U.S. economy slows and the Fed eases monetary policy.

U.K. Election Should Have Limited Initial Impact On Economy And Markets

Last week also saw a historic election, as the Labour Party led by new Prime Minister Keir Starmer defeated the outgoing Conservative government in a landslide. Labour secured 412 of the 650 seats in the House of Commons, with the Conservative Party securing just 121 seats, their worst ever performance. Among the other parties to secure seats in parliament were the Liberal Democrats (72 seats), Scottish National Party (9 seats) Sinn Fein (7 seats) and Reform UK party (5 seats).

Despite the landslide victory by the Labour party, we do not anticipate a significant impact on the U.K. economy or financial markets in the immediate period ahead. Labour has suggested they wish to remain outside the Single Market and Customs Union, suggesting any significant re-working of the Brexit deal is unlikely. Labour has announced policy proposals that would entail increased spending, such as reducing National Health Service wait times or recruiting new teachers, but has also announced accompanying plans on how those policies would be funded. Moreover, Labour has also pledged to stand by the fiscal rule that public debt as a share of GDP should be falling over a five-year horizon.

Should Labour honor its pledge to stick within these fiscal parameters, we see limited room for significant fiscal expansion. In addition, it could take some time for the new government to fully formulate any increases in spending or revenue plans. For these reasons, we suspect the immediate impact on financial markets will be limited. In fact, should these fiscal parameters prompt the new government to be more cautious than expected on the fiscal front, perhaps through unexpected tax increases or if it shows particular discipline with respect to any spending increases, it could if anything be less supportive of the growth outlook in 2025 than generally expected. While our view of initially cautious Bank of England monetary easing would remain unchanged, any unexpected fiscal caution on the part of the new government in 2025 could potentially reinforce the direction of risks toward a faster pace of rate cuts next year.

Australia's NAB Business Confidence rose from -2 to 4 in June, marking its highest level since early 2023 and returning to positive territory. However, Business Conditions fell from 6 to 4, indicating some ongoing challenges. Trading conditions decreased slightly from 11 to 10, profitability conditions dropped from 3 to 2, and employment conditions fell sharply from 5 to 0.

Labor cost growth slowed to 1.8% on a quarterly basis, down from 2.3% in May, while purchase cost growth eased to 1.3% from 1.7%. Overall product price growth decreased to 0.7%, down from 1.1%. Retail price growth, however, held steady at 1.5%, and recreation and personal services prices declined to 0.7% from 1.1%.

Gareth Spence, NAB Head of Australian Economics, noted, the survey signals "another soft quarter" in Q2. Capacity utilisation remains "high with demand and supply yet to fully normalise".

"Price pressures continue to ease in a trend sense though the data certainly remains bumpy," Spence added.

Full Australia NAB business confidence release here.

Key Highlights

• GBP/USD climbed higher above the 1.2780 resistance zone.
• The pair is signaling a strong bullish momentum above 1.2800 on the 4-hour chart.
• Oil prices corrected lower from the $84.65 zone.
• Bitcoin is struggling to start a recovery wave above $60,000.

GBP/USD Technical Analysis

The British Pound formed a base above the 1.2620 level against the US Dollar. GBP/USD started a steady increase above the 1.2700 resistance level.

Looking at the 4-hour chart, the pair was able to clear the 1.2780 resistance zone. There was a close above the 100 simple moving average (red, 4-hour) and the 200 simple moving average (green, 4-hour).

The pair even surpassed the 76.4% Fib retracement level of the downward move from the 1.2860 swing high to the 1.2612 low. It is showing signs of strength above the 1.2800 level. On the upside, the pair is facing resistance near the 1.2860 level.

The next resistance sits at 1.2880. The main hurdle sits at 1.2920. A clear move above the 1.2920 resistance might send it toward the 1.2965 level. Any more gains might open the doors for a test of the 1.3000 zone in the coming days.

Immediate support is near the 1.2800 level. The next major support is near the 1.2780 level. A downside break and close below the 1.2780 support zone could open the doors for more losses. In the stated case, the pair could decline toward the 1.2720 level and the 200 simple moving average (green, 4-hour).

Looking at Bitcoin, there were a couple of recovery attempts, but the bulls were unable to push the price above the $60,000 resistance zone.

Economic Releases

• Federal Reserve Chair Jerome Powell testifies before Congress.

Australia's Westpac Consumer Sentiment index dropped by -1.1% mom to 82.7 in July, reflecting increased concerns about persistent inflation and fears of interest rate hikes.

The Mortgage Rate Expectations Index, which measures consumer expectations for variable mortgage rates over the next 12 months, surged by 12.8% in July, marking the steepest monthly rise since early 2022. Over the past three months, the index has climbed by 30%, from a below-average 122.8 in April to 159.2 in July, well above historical average of 143.8. This marked increase is the sharpest observed in the past seven years, with detailed responses indicating that nearly 60% of consumers expect mortgage rates to rise over the next year.

RBA will meet on August 5–6. Westpac expects the RBA to hold interest rates steady, contingent on inflation continuing to decline as anticipated. The upcoming Q2 CPI and labor market data will be critical.

Full Australia Westpac consumer sentiment release here.

• Nasdaq 100 rising inside impulse wave 3
• Likely to test resistance level 20775.00

Nasdaq 100 index continues to rise inside the accelerated impulse wave 3, which previously broke the round resistance level 200000.00 (which stopped the previous waves (i) and i).

The active impulse wave 3 belongs to the higher order upward impulse wave (3) from the end of April.

Given the clear daily uptrend, Nasdaq 100 index can be expected to rise further to the next resistance level 20775.00 (target price for the completion of the active impulse wave 3 coinciding with the daily up channel from May).

• Gold reversed from resistance level 2400.00
• Likely to fall to support level 2325.00

Gold today reversed down with the Bearish Engulfing from the key resistance level 2400.00 (which reversed the price at the start of June).

The resistance level 2400.00 was strengthened by the upper daily Bollinger Band and by the 61.8% Fibonacci correction of the previous downward correction (4) from the middle of May.

Given the strength of the resistance level 2400.00 and the overbought daily Stochastic, Gold can be expected to fall to the support level 2325.00.