Sample Category Title

EUR/JPY's break of 171.58 resistance last week confirmed up trend resumption. Initial bias stays on the upside this week. Next target is 100% projection of 164.01 to 170.87 from 167.52 at 174.38. On the downside, below 171.37 minor support will turn intraday bias neutral and bring consolidations first, before staging another rally.

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.

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). Next target is 138.2% projection of 94.11 to 149.76 from 114.42 at 191.32. This will remain the favored case as long as 153.15 support holds.

EUR/GBP's recovery from 0.8396 continued last week but upside remains capped below by 0.8482 support turned resistance. Initial bias stays neutral this week and outlook remains bearish bearish. On the downside, below 0.8430 support will turn bias back to the downside for 0.8396 support first. Firm break there will resume larger down trend to 0.8376 projection level next. However, sustained break of 0.8482 will turn bias to the upside for stronger rebound instead.

In the bigger picture, down trend from 0.9267 (2022 high) is in progress. Next target is 100% projection of 0.8764 to 0.8497 from 0.8643 at 0.8376. Sustained break there will target 161.8% projection at 0.8211 next. For now, outlook will remain bearish as long as 0.8643 resistance holds, even in case of stronger 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.

EUR/AUD edged lower to 1.5996 last week but recovered since then. Initial bias remains neutral this week first, and 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.

In the longer term picture, price actions from 1.9799 (2020 high) are seen as a long term decline at the same scale as the rise from 1.1602 (2012 low). Rebound from 1.4281 is seen as the second leg. As long as 55 M EMA (now at 1.5966) holds, this second leg could still extend higher. However, sustained trading below 55 M EMA will open up the bearish case for extending the decline through 1.4281 low.

While EUR/CHF's recovery from 0.9476 extended higher last week, outlook stays bearish with 0.9683 resistance intact. Initial bias remains neutral this week first. On the downside, below 0.9560 minor support will suggest that the rebound has completed and bring retest of 0.9476. Further break there and and sustained trading below 61.8% retracement of 0.9252 to 0.9928 at 0.9510 will extend the fall from 0.9928 to retest 0.9252 low.

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).

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.

Monday, Jul 1, 2024

Tuesday, Jul 2, 2024

Wednesday, Jul 3, 2024

Thursday, Jul 4, 2024

Friday, Jul 5, 2024

• Despite a decline in core PCE numbers, hawkish comments from Fed policymakers cast doubt on a September rate cut.
• The first half of 2024 saw a widening gap between growth and value stocks, with the former outperforming the S&P 500.
• Concerns over central bank policy divergence and a weakening Yen add to market uncertainty. The week ahead brings key data releases, including US non-farm payroll and unemployment figures.
• Chart of the week: S&P 500 RSI divergence hints at further downside.

Week in Review: PCE fails to deliver clarity, door still open for September rate cut

A big week for markets ended with somewhat of a whimper. Market participants were bracing for US PCE in the hopes of finding clarity on the Federal Reserve’s monetary policy stance. The decline in core PCE numbers bodes well for the Fed and leaves the door open to a September rate cut.

However, if rhetoric from Fed policymakers is followed, a September rate cut is likely out of the question. The back end of the week brought comments from both Rafael Bostic and Mary Daly which struck a rather hawkish tone. Atlanta Fed President Bostic said he saw one rate cut in Q4 of 2024 before a slew of cuts in 2025 as he would like to ensure that inflation is indeed on course for a sub 2% print. Mary Daly who is the San Francisco Fed President went further saying that she sees inflation continue to print above 2% through 2025.

Interest Rate Probability – US Federal Reserve, June 28, 2024

Source: LSEG

The US Presidential debate also added a new dimension for global markets. Following the debate there has been growing rumors that Joe Biden might not even secure the Democratic nomination to stand in the November election. Calls have been made in the past citing President Biden’s age as a major concern. According to data put out by the Kobeissi Letter, the chance of President Biden dropping out of the election more than doubled following the debate last night, upto 43% from around 21% prior. It will be interesting to gauge how this develops next week as despite his legal troubles, Trump still enjoys significant support on Wall Street and is seen as pro-business.

As Q2 comes to a close it is key to note the performance of global stocks in the first half of 2024. The S&P 500 hit a fresh high on Friday before a selloff saw the index trade around -0.35% at the time of writing. The Nasdaq 100 for its part failed to print a fresh high but piqued just above the 20000 mark once more. The most notable takeaway from the first half of the year is the widening gap between growth and value stocks. Growth stocks led by the FANG+ group put in gains of around 30% YTD in comparison to the broader S&P 500 which put in gains of around 15%. The question however as Q3 beckons, is this sustainable…?

The Week Ahead: Q3 starts with French, UK election

Looking ahead to next week, there is a lot happening globally which could have an impact on financial markets. This kicks off on Sunday which is the first round of Parliamentary elections in France.

Polling in France has delivered a wide range of estimates, but the one thing they all have in common is a victory for the “far-right” National Rally led by Marine Le Pen. Polling puts support for Le Pen at 34% while others believe the National Rally is on course for a majority victory.

Given the uncertainty of a new Government as well as concerns about the policies that may come into force, it’s no surprise that financial markets are spooked. A sign of the concern was reflected in the risk premium of French Government Bonds hit highs last seen during the 2012 euro area crisis.

An outright win for the National Rally could weigh on French Government Bonds and may also have a slight impact on the Euro as uncertainty around the dynamics of how the Government would work. It would be the first time a French President would have to share power with a party outside the political mainstream.

UK elections on July 4, 2024 is revealing a similar story in that it seems a foregone conclusion that a new Government will be elected. The Labor Party led by Keir Starmer are overwhelming favorites based on polling, with Prime Minister Rishi Sunak facing a tough week ahead.

Unlike the French election however, volatility around the UK election is likely to disappoint. Markets have been eerily calm despite polling and there are a host of reasons that could explain this. For starters, very little is expected to change from a fiscal standpoint regardless of who is elected. Secondly, two topics which dominated the agenda heading into the 2019 election was Brexit and a Scottish referendum. Brexit has well and truly been handled while a Scottish referendum seems a way off at present as the implosion of the Scottish National Party (SNP) continues to drag on. Lastly, despite all the hype around elections this year, monetary policy remains the key for 2024, and no matter who wins the UK election that will not change.

Elsewhere in Europe we have the ECB Forum on Central Banking in Sintra, Portugal. The Forum brings together central bank governors, policymakers, academics, and financial market representatives from around the world to discuss critical issues affecting the global economy and monetary policy. The forum serves as a platform for sharing insights, debating economic policies, and exploring challenges and opportunities facing central banks. It plays a key role in shaping future monetary policy directions and fostering international cooperation among central banks.

Given growing concern around Central Bank policy divergence in the months ahead, this may provide insights into where Central Banks stand in relation to one another and what we may expect in Q3 and Q4.

Asian Markets Outlook

Asian markets will see a barrage of PMI and inflation data in the week ahead. China is always the most important one while developments in Japan and particularly the Japanese Yen will be key in the week ahead.

Japanese officials are facing renewed pressure as the Yen weakened beyond the critical 160.00 mark against the US Dollar. Analysts and market participants viewed this level as a threshold likely to trigger FX intervention by the Bank of Japan. Various Japanese officials have issued warnings about the excessive exchange rate and indicated potential intervention.

USD/JPY Daily Chart, June 28, 2024

Source: TradingView.Com (click to enlarge)

Looking at the yen chart above, price has found acceptance above the 160.00 handle with two successive daily candle closes. The 160.00 is key support moving forward and the longer price remains above this level the more nerves we may see from market participants that intervention may materialize. Keep this in mind in the week ahead.

Back to the US and the week will end with the non-farm payroll and unemployment data from the US. Just another data point for the Fed to consider and could either add more uncertainty or validate market participants who are currently pricing in a 64% chance of a rate cut in September.

Chart of the Week

The chart of the week that I will be focusing on is the S&P 500. The reason is Friday’s rejection of the 5500 psychological level once more which coincides with RSi divergence. The RSI has printed a lower high while price action has printed a higher high, which could be a sign that a selloff may be imminent and worth keeping an eye on in the week ahead.

S&P 500 Daily Chart – June 28, 2024

Source:TradingView.Com (click to enlarge)

Key Levels to Consider:

Support:

• 5421
• 5330
• 5267
• 5200 (100-day MA)

Resistance:

• 5500
• 5600
• 5750

U.S. Highlights

• Headline PCE inflation came in flat for the month of May and core PCE inflation eased.
• Personal income posted a strong gain last month, while spending growth was more moderate, leading to an uptick in the savings rate.
• The heat in the economy still looks mainly to be in the service sector, as goods-producing industries contracted last quarter and goods prices continued to retreat in May.

Canadian Highlights

• May’s disappointing inflation report slashed the odds of a follow up rate cut by the BoC in July and is more consistent with our view that the next move down in rates will be in September.
• May’s report notwithstanding, inflation should cool moving forward, consistent with a softening jobs market. Data this week showed a dip in payrolls employment.
• Overall economic growth was firm in April. However, May’s preliminary forecast was soft. An economy currently in excess supply implies further downward pressure on inflation.

U.S. – Services Spending and Prices Starting to Settle

The past week had a relatively light data calendar for the U.S. economy, which continued on relative cruise control to gradually moderating economic growth and inflation. The current state of the economy was well summarized by Federal Reserve Board Governor Bowman in her speech earlier this week, which emphasized that we have seen only modest progress on inflation in 2024, despite moderating economic growth. The message holds true in the week’s data, which included an update on consumer prices and personal spending, as well as the revised reading on first-quarter GDP.

Inflation – as measured by the personal consumption (PCE) deflator – continued to moderate in May, with the core PCE deflator posting a ‘soft’ gain of 0.1% m/m – down sharply from the 0.3% gain registered the month prior. The deceleration in price pressures was entirely driven by another month of declines in goods prices and a further slowing in non-housing services prices. More critically, the three-month trend eased to a five-month low of 2.7% (annualized). Fed Governor Bowman repeated earlier this week that inflation has been slow to come down and more progress towards 2% is needed to support rate cuts this year. This morning’s data showed another (small) step in the right direction, though Fed officials will likely need to see at least another several ‘good’ inflation readings before having enough confidence to start dialing back the policy rate.

On the spending side, the release of May’s data showed some retrenchment in the goods and services split, with goods leading personal spending growth after having recorded declines in three of the four prior months. Overall, the softer gain in services spending implies our Q2 tracking for consumer spending is likely closer to 1.5%, which is a bit lower than what was assumed in our updated forecast published earlier this week.

The last big piece of data out this week was the third estimate of first-quarter GDP. Usually, the 3rd estimate is not very exciting – after all, the first estimate was released two months ago, and revised minimally last month, only to be revised minimally again this week. Mostly old news, in that sense, but in the 3rd estimate we do get one new piece of data: the first look at GDP by industry for the quarter. Here, two observations quickly become clear – goods-producing industries contracted in the first quarter following several quarters of high growth in 2023, and services-producing industries, which had been supporting growth for over a year now, posted moderate growth relative to the last two quarters. The moderation of services growth coinciding with the downtrend in services inflation is an encouraging combination.

Next week, we will be closely following Chairman Powell’s words at the European Central Bank’s policy extravaganza at Sintra for a better view of how the central bank is digesting the latest data. Markets and other observers will also be focused on next week’s jobs data for any signs that the cooling we have seen in spending and prices is spilling over to the labour market.

Canada – Disappointing Inflation Print Affords Patience for the BoC

Market action this week was dictated by inflation reports from both north and south of the border. A disappointing Canadian report caused markets to push back strongly on the notion of a follow-up rate cut by the Bank of Canada in July. It also supports our call that the Bank can afford to wait until September until trimming its policy rate again. Bonds sold off in the wake of the report, pushing Canadian yields higher across the curve, although they gave up some of these gains on Friday amid a soft U.S. inflation print that showed some welcome cooling in price pressures. For its part, the loonie was down slightly on the week and remains in the lower end of the $0.72 - $0.76 USD range that’s been in place for the better part of two years.

Canadian inflation had been on an improving trend for the first four months of 2024, increasing the Bank of Canada’s confidence that it was on a sustainable path back to 2% and paving the way for an early June rate cut – the first in four years. Against this promising backdrop, the May report landed with a thud, as both headline inflation and the Bank of Canada’s preferred core measures surprised to the upside. Indeed, both overall inflation and the average of the Bank’s core metrics ticked 0.2 percentage points higher to 2.9% year-on-year in May, boosted by shelter prices. However, nowhere is it written that inflation must take a straight line down to the 2% target, and there were bound to be some bumps along the way (Chart 1). An obvious example of this is in the U.S., where inflation heated up in the first quarter, before giving back some ground in recent months.

A potential concern coming out of Canada’s May CPI print is whether it’s a harbinger of some potential stickiness in inflation, raising the potential for higher for longer interest rates. While it’s too early to tell, our latest forecast anticipates a gradual easing in inflation pressures over the rest of 2024. A softening jobs market is a key reason that we expect inflation to ease further, with data this week showing that payroll employment declined in April. Meanwhile, both the job vacancy rate and the ratio of vacancies to the number of unemployed people (indicators of job market tightness) continued to decline from the highs observed a few years ago (Chart 2).Also encouraging was progress on wage growth, with average weekly earnings and the fixed-weight index of average hourly earnings both decelerating in April.

The likelihood that overall economic growth will be subdued moving forward is another good reason to expect inflation to be brought to heel. While this morning’s data showed that the economy expanded at an above-trend 0.3% month-on-month (m/m) in April, supported by monthly gains in 15 of 20 industries, May’s preliminary number was considerably weaker, showing a 0.1% m/m advance. All told, the second quarter is shaping up to be a decent one for growth. However, even with this performance the economy was likely in an “excess supply” position, meaning that the economy’s performance should be pressuring inflation lower, not higher, going forward.

Summary

United States: It May Be Hot Outside, but Inflation Is Finally Cooling

• According to the Federal Reserve's preferred gauge, core inflation cooled to its softest pace in more than three years in May against a backdrop of measured consumer spending and still-strong personal income. Elsewhere, the effect of higher rates remains evident in uninspiring data on capital investment and the housing market.
• Next week: Construction Spending (Mon.), ISM Manufacturing (Mon.), Employment (Fri.)

International: Bird Food: Some Dovish Central Bank Rate Holds Amid Lighter Global Data Week

• Although this week's central bank decision lineup was somewhat lighter than last week's, multiple institutions delivered updates to their monetary policy assessments. Sweden's Riksbank delivered a dovish policy rate hold. In Mexico, Banxico held rates steady at 11.00% and offered commentary consistent with our outlook for cautious central bank easing.
• Next week: China PMIs (Sun.), Japan Tankan Survey (Mon.), Eurozone CPI (Tue.)

Interest Rate Watch: QT Gradually Putting Upward Pressure on Money Market Rates

• The FOMC has left its main policy tool, the federal funds rate, unchanged for nearly a year as it awaits further progress on bringing inflation back down to 2%. However, the Federal Reserve continues to reduce the size of its balance sheet as part of its quantitative tightening (QT) program. Ongoing QT is gradually starting to put upward pressure on money market rates, such as the Secured Overnight Financing Rate (SOFR).

Credit Market Insights: Strong Net Worth Gains Cloud Slowing Growth in Cash

• Household net worth climbed to new highs across all wealth cohorts in Q1. Most of household wealth is tied up in relatively illiquid assets such as corporate equities and real estate. How are liquid “cash” assets holding up for households relative to pre-pandemic and over the past year?

Topic of the Week: Yen Reaches Its Weakest Level Against the Greenback since 1986

• This week, the yen reached its weakest intraday level against the greenback since 1986. The currency's dramatic slide over the past few years has spurred Japan's Ministry of Finance to intervene a couple of times. Will Japan continue to intervene, and how long can it do so?

Full report here.

Central banks in Canada and the United States will be closely watching labour market data on Friday after May inflation numbers sent some mixed signals, broadly surprising to the upside in Canada and the downside in the U.S.

The tick-up in Canadian inflation in May followed a string of downside surprises this year, and further signs of softening in labour markets would help to reassure the Bank of Canada that inflation pressures are more likely to drift lower going forward. We expect employment continued to inch higher, but alongside another increase in the unemployment rate to 6.3% in June as labour force growth outpaced hiring again because the population continued to surge. Wage growth in the labour force survey has remained persistently high, but other estimates of wages from business payrolls have been showing more signs of softening. The combination of fewer job openings – which continued to decline into June – and higher unemployment is tilting bargaining power in wage negotiations away from workers. Overall, a softer labour market report should take some of the heat away from the upside CPI surprise in May. We continue to expect inflation will drift broadly lower this year and look for another 25 basis point cut from the BoC at its next meeting in July to build on the first cut in June.

We expect U.S. labour market data will also start to show more signs of cooling in June. Payroll employment growth has remained strong, but job openings, hire and quits rates have all been showing persistent slowing in labour demand for months. The unemployment rate—albeit rising slower than in Canada—has increased by 0.6% from a recent trough in April 2023 and wage growth has also slowed. Overall, we think payroll employment growth will stay at a stronger 237,000 in June, similar to the average gain of 250,000 in the three months before but expect the unemployment rate will rise again to 4.1%. Gradually cooling labour market conditions, however, are not expected to prompt an immediate response from the Fed, who is still expected to cut rates in December, contingent on a trail of slower inflation readings from now.

Week ahead data watch

We expect Canada’s trade deficit widened to $1.4 billion in May from a $1.1 billion shortfall in April with a 7% drop in oil prices weighing on exports. Imports also likely declined with domestic demand remaining soft. Machinery and equipment import volumes have been running ~4% below year-ago levels in a sign amid sluggish business investment.

Advance estimates in the U.S. showed a 2.7 billion widening in the goods trade deficit in May that we expect will be broadly reflected in a wider overall trade balance for the month. The advance indicators report pointed to a 2.7% drop in goods exports and a 0.7% drop in imports.

• ISM manufacturing PMI to tick higher; services PMI to lose some pace
• Business outlook could stay unchanged; rate cut forecasts will remain inflation-driven
• EURUSD stays neutral after core PCE inflation; needs a strong rebound above 1.0885

What happened previously?

Dollar traders will pay close attention to the US ISM manufacturing and non-manufacturing PMI readings for June due on Monday and Wednesday respectively at 14:00 GMT.

While Friday's US nonfarm payrolls report will be the big event next week, business surveys could showcase early signs of hiring trends and changes in inflationary pressures, and therefore influence investors’ thoughts on rate cut timing.

May’s ISM PMI release came below expectations, displaying a faster moderation in manufacturing activity for the second consecutive month in the contraction area below 50. The overall reaction in the US dollar was negative as the price paid and new orders sub-indices eased significantly, but the response could have been worse if the employment index would not have returned to the expansion area.

Encouragingly, the non-manufacturing PMI survey came to overshadow the weakness in the manufacturing sector two days later, boosting the composite index back to the growth territory. The report showed services activities rising to the highest in nine-months led by real estate and health care businesses, while the details revealed progress in employment and softer increases in prices paid, although challenges regarding high interest rates and increased wages remained. Still, the US dollar could not sustain its bullish action until a stronger-than-expected nonfarm payrolls came to its aid in fully healing its wounds.

What will June's ISM business PMIs show? 

The truth is that the first quarter was not fruitful for the US economy, with GDP growth falling by half to 1.4% from 3.4% in Q4 - the lowest in almost two years. Nevertheless, the first-quarter GDP data, aside from some pandemic-related distortions, tends to be relatively lackluster following the holiday season.

Economic statistics in the second quarter haven’t been impressive so far either, but they came out better than expected, pushing rate cut projections towards the September-December 2024 period, when the US general election will also take place.

Perhaps an upbeat PMI report could raise doubts about whether a rate cut is necessary in September. Forecasts point to a slightly higher ISM manufacturing PMI of 49.0 compared to 48.7 in May and a softer services PMI of 52 from 53.8 previously, which, if correct, wouldn’t drastically change the outlook for the US economy overall.

The focus will remain on inflation

The S&P Global business PMIs could be more encouraging next week, with analysts predicting a rebound both in the manufacturing and services indices. Nevertheless, inflationary pressures may continue to play a significant role in determining monetary easing decisions. Moreover, with the manufacturing sector experiencing one of its longest periods within the contraction region and the services sector struggling to resume a positive trajectory, rate cut projections may linger.

The Fed’s favorite inflation measure, the core PCE index, met forecasts for a slowdown to 2.6% from 2.8% previously – the lowest level reached since the measure spiked from 1.9% to 3.1% in April 2021. The data increased the odds for a September rate cut above 60% despite an upside surprise in personal income.

Comments from the San Francisco Fed president, who indicated that the central bank is still uncertain about when to slash interest rates, also helped. Perhaps the Fed might wisely take its time during the summer to monitor changes in inflation ahead of the Jackson Hall symposium in August and before making any serious policy decision in September.

EURUSD levels to watch

In any case, the core PCE inflation index did not cause strong volatility in EURUSD today, leaving the pair below the nearby resistance of 1.0725. For the bulls to stay in the driver’s seat in the coming sessions, the pair must claim its simple moving averages (SMAs) within the 1.0770-1.0788 region in order to advance towards the 1.0850 barrier, which blocked buyers on June 12. Even higher, a sustainable rally above 1.0885 could shift the focus back to April’s upleg.

On the downside, sellers could take control below the 1.0660 support area, likely pressing the price towards the 1.0600 round level. If that floor cracks, the decline could worsen towards the 1.0515 area.