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Eurozone manufacturing PMI for June was finalized at 45.8, down from May's 47.3, signaling continued contraction in the manufacturing sector. This decline indicates ongoing challenges for manufacturers, with only Italy showing some improvement among the member countries.

Country-specific data for June showed Greece at 54.0, Spain at 52.3, the Netherlands at 50.7, and Ireland at 47.4. Italy recorded a slight improvement at 45.7, while France was at 45.4, Austria at 43.6, and Germany at 43.5. All these figures reflect either multi-month lows that are insufficient to suggest a strong recovery.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, highlighted that despite the decline in PMI indices across most Eurozone countries, the trend appears to be a "temporary blip" rather than a sign of a prolonged downturn. He pointed out that the global recovery provides a "supportive backdrop" for Eurozone manufacturers. Moreover, optimism about future production remains high, similar to levels seen in May, indicating sustained confidence among businesses for the upcoming year.

However, de la Rubia also noted a troubling trend in new orders, which are falling at an accelerated pace. This decline follows a record stretch of 25 consecutive months of falling demand. Despite a brief improvement in May, the June data suggests that any significant recovery will likely be "postponed" until at least the end of summer or early fall.

Full Eurozone PMI manufacturing final release here.

Daily Pivots: (S1) 0.9607; (P) 0.9624; (R1) 0.9644; More....

Immediate focus is now on 0.9683 as EUR/CHF extended the rebound from 0.9476. Decisive break there will argue that Fall from 0.9928 has completed, probably as a correction. Intraday bias will be back on the upside for retesting 0.9928 resistance. Nevertheless, rejection by 0.9683 will maintain near term bearishness. break of 0.9560 minor support bring retest of 0.9476.

In the bigger picture, rebound from 0.9252 should have completed at 0.9228. Medium term outlook remains bearish with 1.0095 resistance intact. Firm break of 0.9252 will resume the down trend from 1.2004 (2018 high).

Daily Pivots: (S1) 0.8460; (P) 0.8471; (R1) 0.8484; More...

EUR/GBP's break of 0.8482 support turned resistance indicates short term bottoming a 0.8396. Intraday bias is back on the upside. Break of 55 D EMA (now at 0.8505) will target 0.8529 support turned resistance. on the downside, break of 0.8493 support will bring retest of 0.8396 low instead.

In the bigger picture, down trend from 0.9267 (2022 high) is in progress. Break of 0.8396 will target 0.8201 (2022 low). For now, outlook will remain bearish as long as 0.8643 resistance holds, even in case of stronger rebound.

Daily Pivots: (S1) 1.6006; (P) 1.6077; (R1) 1.6132; More...

Intraday bias in EUR/AUD remains neutral for the moment and some more consolidations could be seen above 1.5996. But outlook stays bearish as long as 1.6211 support turned resistance holds. On the downside, break of 1.5996 will target 100% projection of 1.6679 to 1.6211 from 1.6418 at 1.5950. Firm break there will target 1.5846 key support next.

In the bigger picture, fall from 1.7062 medium term top is seen as a correction to the up trend from 1.4281 (2022 low) only. Strong support is still expected between 1.5846 and 38.2% retracement of 1.4281 to 1.7062 at 1.6000 to bring rebound. Break of 1.6148 resistance will argue that the correction has completed.

Daily Pivots: (S1) 171.74; (P) 172.10; (R1) 172.73; More...

EUR/JPY's rally continues today and intraday bias stays on the upside. Next target is 100% projection of 164.01 to 170.87 from 167.52 at 174.38. On the downside, below 171.36 minor support will turn intraday bias neutral and bring consolidations first. But outlook will remain bullish as long as 170.87 resistance turned support holds.

In the bigger picture, long term up trend is still in progress. Next target is 100% projection of 139.05 to 164.29 from 153.15 at 178.38. For now outlook will stay bullish as long as 167.52 support holds, even in case of deep pullback.

Daily Pivots: (S1) 202.84; (P) 203.22; (R1) 203.86; More...

GBP/JPY's rally continues today and intraday bias stays on the upside. Next target is 100% projection of 191.34 to 200.72 from 197.18 at 206.56 next. On the downside, below 202.55 minor support will turn intraday bias neutral and bring consolidations. But outlook will remain bullish as long as 200.72 resistance turned support holds, in case of retreat.

In the bigger picture, long term up trend is still in progress. Next target is 100% projection of 155.33 to 188.63 from 178.32 at 211.62. Outlook will stay bullish as long as 197.18 support holds, even in case of deep pullback.

Markets

Core bonds sold off into the final trading hours last Friday. We didn’t spot an obvious reason underpinning the move. Economic data (US PCE deflators, national inflation figures of certain EU member states) printed bang in line with expectations. But a looming weekend full of event risk (first round of French parliamentary elections) coinciding with the end of the quarter resulted in overall jittery markets. US Treasuries by the end of the day underperformed Bunds. Yields erased previous losses of as much as 4.5 bps to close between 4.2 (2-yr) and 13.3 (30-yr) bps higher. German yields added 2.6 to 5.5 bps across the curve. Stocks struggled in Europe. The French CAC40 underperformed (-0.7%). Wall Street turned south immediately after opening higher. The dollar and the euro balanced each other out. EUR/USD finished slightly higher north of 1.07. USD/JPY rose towards a new 34-yr high (160.88).

Yesterday’s outcome of the first round in the French parliamentary elections turned out to be in line with the polls. Le Pen’s Rassemblement National (RN) secured the most votes (33.3%) with the left-wing NFP coming in second (28.3%). Macron’s Ensemble (ENS) was third (21.3%). Some 75 MPs were already elected in the first round. Because of the exceptionally high voter turnout (67.5%) there are currently around 300 constituencies (representing 52% of the 577 seats) that potentially face a three-way run-off in the second round Sunday, July 7. Comparing this just one in 2017 and 8 in 2022 underscores the still high level of uncertainty after the first round. This number will probably go down a bit still amid suggestions from leaders of NFP and ENS for third-placed candidates to tactically withdraw in specific situations. But the local candidates do not always heed these calls. We’ll know about the final list of candidates by Tuesday evening. Both of the above parties already gave voter recommendations as well but here too a lot depends on how the public responds to them. In any case, it’s too soon to draw firm conclusions. However, based on the exit polls and this morning’s constructive market reaction, the probability of a hung parliament (where none of the extremes can push through its agenda via an absolute majority) seems to have increased. EUR/USD rises towards 1.076, European stock futures point to an opening rally of almost 2% and Bund yields are set for gapping higher. The economic calendar today features German inflation numbers ahead of tomorrow’s EMU print. ECB president Lagarde kicks off its Sintra conference with an introductory speech tonight. We have circled Wednesday in red, with “Drivers of equilibrium interest rates” as one of the hot topics.

News & Views

The Bank of International Settlements (BIS) encourages central bankers in its annual report to finish the last mile in restoring price stability. They set a high bar for policy easing, warning that premature action could reignite inflationary pressures and force a costly policy reversal. Services prices and wage growth are other upside risks. Falling export prices and waning Chinese demand are disinflationary forces. At the same time, governments have to step up by consolidating public finances and prioritizing long overdue structural reforms. Unrestrained public finances threaten macroeconomic and financial stability and make it also harder to bring inflation down.

The Bank of Japan’s Q2 Tankan survey boost the case for more gradual policy normalization (small rate hike) at its July meeting. Sentiment at large manufacturers improved from 11 to 13 (vs 11 consensus) while it marginally weakened for large non-manufacturers (33 from 34 as expected). Optimists also continue outnumbering pessimists on the outlook for the next quarter. Large firms across all industries on average want to increase their capital expenditures by 11.1% in the current fiscal year, suggesting back-to-back double digit growth (10.6% in previous fiscal year). Businesses see CPI inflation at 2.2% in 5 years’ time, up from 2.1% in the Q1 survey. More firms increased prices from the previous quarter and even more indicated that they plan to do so in the next quarter (especially non-manufacturing).

Graphs

GE 10y yield

The ECB cut its key policy rates by 25 bps at the June policy meeting. A more bumpy inflation path in H2 2024, the EMU economy gradually regaining traction and the Fed’s higher for longer US strategy make follow-up moves difficult. Markets are coming to terms with that. Meanwhile, some of the save haven bids were reversed after the first round in the French elections. The 2.34%-2.4% support zone looks a solid one.

US 10y yield

The Fed is seeking more evidence than just one slower-than-expected (May) CPI is providing. Upgraded inflation forecasts and a higher neutral rate complicate the exact timing of a first cut further. June dots suggest one move in 2024 followed by four more next year. Markets are positioned more aggressively, turning the recent low in yields into a technical support zone. A test of the downside of the 4.2/4.7% trading range was without consequences.

EUR/USD

EUR/USD is stuck in the 1.06-1.09 range. The desynchronized rate cut cycle with the ECB exceptionally taking the lead, strong US May payrolls and a swing to the right in European elections pulled the pair away from 1.09. The Fed meeting balanced the weaker than expected US CPI outcome. The increased probability of a hung French parliament after the first round offered the euro some relief.

EUR/GBP

Debate at the BOE is focused at the timing of rate cuts. May headline inflation returned to 2%, but core measures weren’t in line with inflation sustainably returning to target any time soon. Still some BoE members at the June meeting appeared moving closer to a rate cut. This might cap further sterling gains. The euro’s vulnerability to political event risk going into the French elections eased for now. EUR/GBP 0.84 is becoming solid support.

Daily Pivots: (S1) 1.3644; (P) 1.3690; (R1) 1.3724; More...

Intraday bias in USD/CAD remains neutral for the moment. Consolidation from 1.3845 could extend further. While deeper fall could be seen, downside should be contained by 1.3589 cluster support (38.2% retracement of 1.3176 to 1.3845 at 1.3589) to bring rebound. Break of 1.3790 resistance will argue that larger rise is ready to resume and target 1.3845 resistance.

In the bigger picture, price actions from 1.3976 (2022 high) are viewed as a corrective pattern. In case of another fall, strong support should emerge above 1.2947 resistance turned support to bring rebound. Firm break of 1.3976 will confirm up 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.

Daily Pivots: (S1) 0.6632; (P) 0.6658; (R1) 0.6697; More...

Intraday bias in AUD/USD remains neutral as consolidation from 0.6713 is still extending. Further rally is in favor with 0.6578 cluster support (38.2% retracement of 0.6361 to 0.6713 at 0.6579) intact. On the upside, firm break of 0.6713 will resume whole rise from 0.6361 to 0.6870 resistance next. However, sustained break of 0.6578 will dampen this bullish view, and bring deeper fall to 61.8% retracement at 0.6495.

In the bigger picture, price actions from 0.6169 (2022 low) are seen as a medium term corrective pattern to the down trend from 0.8006 (2021 high). Fall from 0.7156 (2023 high) is seen as the second leg, which could have completed at 0.6269 already. Rise from there is seen as the third leg which is now trying to resume through 0.6870 resistance.

Daily Pivots: (S1) 160.36; (P) 160.82; (R1) 161.37; More...

Intraday bias in USD/JPY remains neutral for consolidations below 161.27. Downside of retreat should be contained by 158.71 support to bring another rally. Break of 161.27 will target 61.8% projection of 146.47 to 160.20 from 154.53 at 163.01.

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.