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Key Highlights

• AUD/USD is struggling to stay above the 0.6600 support zone.
• It traded below a major bullish trend line with support at 0.6740 on the 4-hour chart.
• EUR/USD is consolidating below the 1.1050 pivot level.
• The US ADP employment could change 189K in July 2023, down from 497K.

AUD/USD Technical Analysis

The Aussie Dollar started a fresh decline from the 0.6900 zone against the US Dollar. AUD/USD declined below the 0.6800 and 0.6750 support levels.

Looking at the 4-hour chart, the pair even traded below a major bullish trend line with support at 0.6740. There was a close below the 0.6650 support, the 100 simple moving average (red, 4 hours), and the 200 simple moving average (green, 4 hours).

The pair is now struggling to stay above the 0.6600 support zone. If there is a daily close below the 0.6600 support, there is a risk of a sharp decline.

The next major support is near 0.6550, below which AUD/USD could slide toward the 0.6520 zone. On the upside, the pair is facing resistance near the 0.6660 level. The first major resistance is near 0.6740 and the 100 simple moving average (red, 4 hours).

A close above the 0.6740 resistance could push the pair toward 0.6760. Any more gains could start a fresh increase toward the 0.6900 level.

Looking at EUR/USD, the pair corrected lower and is now consolidating below the 1.1050 pivot level.

Economic Releases

• US ADP Employment Change for July 2023 - Forecast 189K, versus 497K previous.

Asian stock markets took a significant plunge following Fitch Ratings' surprise decision to downgrade US sovereign rating from AAA to AA+. This move mirrors S&P Global Ratings' decision made over a decade ago, causing considerable unrest among investors.

Fitch's statement highlighted, "In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025."

US Treasury Secretary Janet Yellen fiercely contested the downgrade, calling it "arbitrary and based on outdated data." The White House has also voiced opposition to Fitch's assessment, with press secretary Karine Jean-Pierre declaring, "It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world."

Both Nikkei and HSI are down more than -2% at the time of writing.

BoJ Deputy Governor Shinichi Uchida highlighted in a speech today an emerging trend in firms' pricing strategies, noting that "firms are developing more forward-looking strategies for setting prices." According to Uchida, these changes "might be the chance to finally change Japan's economy." Hence, he emphasized BoJ will "patiently continue with monetary easing to carefully nurture these signs."

Uchida was explicit in outlining the Bank's monetary policy stances. Firstly, he ruled out near-term adjustments to short-term interest rate, currently at -0.10%, stating "there is still a long way to go before such decisions are made."

Secondly, BoJ will "maintain the current framework" until sustainable and stable achievement of 2% inflation target "come in sight".

Thirdly, Uchida affirmed the ongoing yield curve control under the present policy framework, aiming to balance its benefits and drawbacks, especially in relation to financial intermediation and the market.

Despite the high economic and price outlook uncertainty, Uchida stated the recent yield curve control modification, allowing the 10-year JGB yield to rise to up to 1%, is aimed at sustaining the ultra-loose policy. "Needless to say, we do not have an exit from monetary easing in mind," he emphasized.

New Zealand reported a better-than-expected employment growth of 1.0% in the second quarter of 2023, surpassing market expectations of a 0.6% rise. On the other hand, unemployment rate slightly increased from 3.4% to 3.6%, marginally above the anticipated 3.5%.

The data released showed that employment rate rose from 69.6% to 69.8%, and the participation rate increased from 72.0% to 72.4%. These are the highest rates recorded since the series began in 1986.

In terms of wage growth, all sector wage inflation climbed by 1.1% on a quarterly basis, resulting in an annual increase of 4.3%. "Annual wage costs continued to increase at historically high rates this quarter, equal to the 4.3 percent annual increase last quarter," said Bryan Downes, business prices delivery manager.

Downes noted that the most significant contribution to the Labour Cost Index for the June 2023 quarter came from retail trade and accommodation industry. This sector witnessed 1.5% increase in wages on a quarterly basis, following 0.7% rise in the previous quarter. The wage growth in this industry was primarily driven by rise in minimum wage, thereby pushing up overall wage growth during the quarter.

Full New Zealand employment release here.

Yesterday, Atlanta Fed President Raphael Bostic expressed guarded optimism and highlighted the "significant progress" in controlling inflation. He observed, "Inflation is well off its highs that we saw in the last year. And recent numbers have come in promising in ways that suggest that we might be seeing continued declines."

Bostic pointed to the ongoing economic evolution as in line with an "orderly slowdown," which he views as "quite promising". As such, he advocated to be cautious, patient and resolute" in policy-making.

He also voiced concerns about the risk of overtightening monetary policy. "I think we are in a phase now where there is some risk of us overtightening. And so we've just got to have that in mind," he said. By exercising appropriate caution, Bostic believes that the damage to employment can be minimized.

Looking forward, Bostic said, "My baseline outlook doesn't contemplate any cuts until the second half of next year at the earliest." He insists on being "resolute to make sure that we don't move our policy posture in a different direction until we're absolutely, absolutely certain that inflation is going to get to our target."

Chicago Fed President Austan Goolsbee has refrained from pre-committing to Fed's actions in September, insisting that every meeting is crucial when navigating the transition point. "When you're around the transition point, every meeting is a live meeting and you're trying to figure out trends, not just reflect one month's data," Goolsbee said yesterday.

Goolsbee is "guardedly optimistic" about Fed's ability to stick to what he terms the "golden path," bringing down prices without inducing a recession. He emphasized the importance of watching how core goods and housing inflation evolve in the coming months to remain on this path.

"Those are the two components that over the next three to six months, let's call it, if we are to succeed to stay on the golden path, we've got to see progress on those two parts of inflation," he said. He added that progress on services inflation isn't currently necessary.

He also shared his perspective on the link between wages and inflation, suggesting that wages are more of a lagging indicator rather than a predictor of inflation. According to Goolsbee, if Fed officials focus too much on wages when shaping their policy, they could risk overshooting interest rates.

Employment growth was strong, but with a large number of new entrants to the labour force, unemployment still rose to 3.6%. Wage growth has remained strong, but fell short of market forecasts.

• Unemployment rate: 3.6% (prev: 3.4%, Westpac f/c: 3.5%)
• Employment change: +1.0% (prev: +1.1%, f/c: +0.8%)
• Labour costs (private, ordinary time): +1.1% (prev; 0.9%, f/c: 1.3%)
• Average hourly earnings (private, ordinary time): +1.9% (prey: 2.1%)

The June quarter labour market surveys pointed to very strong employment growth, but growth that was nonetheless insufficient to absorb new entrants into the labour force. Wage growth remained elevated, reflecting past tightness in the labour market, but now appears to have peaked.

In the details:

• Employment rose by a very strong 1.0% in the June quarter, following an upward revision to the March quarter. Today’s result was stronger than our above-market forecast.
• However, labour force growth was even stronger, with migrant inflows boosting the pool of available labour. That saw the labour force participation rate rising 0.4ppts to a new record high of 72.4% (also above forecast).
• As a result, the unemployment rate edged up 0.2ppts to 3.6% in the June quarter. That outcome was 0.1ppt above our forecast, and that of both the market and RBNZ.

While the unemployment rate has been creeping higher since last year, wage growth remains elevated. 

• The Labour Cost Index (LCI) rose 1.1% for the quarter, leaving the annual rate of increase steady at its previous cyclical high of 4.3%.
• The LCI for the private sector (ordinary time) also increased 1.1%, lowering annual growth by 0.2ppts to 4.3%. That result was slightly softer than we had forecast and also a notch below the RBNZ's forecast.
• The unadjusted LCI - which better represents developments in take-home pay - increased 5.9% over the year, thus tracking broadly in line with CPI inflation.
• Average hourly earnings, as measured by the more volatile Quarterly Employment Survey, increased 6.9% over the year, while the annual rate of increase for private sector wages dropped back to 7.7% from 8.2% previously.

Take outs for the RBNZ

While employment growth was stronger than the RBNZ had expected, developments in both the unemployment rate and wages will likely leave the Bank comfortable with the broad story underpinning the projections in the May Monetary Policy Statement.

Looking ahead, the RBNZ is forecasting the unemployment rate to rise to 4.6% by the end of this year. While online job vacancies have eased in recent months, suggesting slower jobs growth ahead, the unemployment rate may yet rise slower than forecast by the RBNZ. Developments in the labour market will remain crucial to the outlook for interest rates.

• EURJPY reversed from support level 152.00
• Likely to rise to resistance level 158.00

EURJPY currency pair recently reversed up from the key support level 152.00 (former multi-month high from May, acting as support after it was broken in June).

The support level 152.00 was strengthened by the lower daily Bollinger Band and by the two intersecting Fibonacci corrections – 61.8% and 50% of the previous upward impulses from May and June.

Given the clear daily uptrend and the continued yen sales, EURJPY currency pair can be expected to rise further toward the next resistance level 158.00 (top of the previous correction b).

• USDJPY broke resistance level 141.60
• Likely to rise to resistance level 145.00

USDJPY currency pair recently broke the key resistance level 141.60 (top of the previous sharp upward impulse wave (1) from last month).

The breakout of the resistance level 141.60 coincided with the breakout of the 61.8% Fibonacci correction of the previous downward correction from June.

Given the clear daily uptrend, USDJPY currency pair can be expected to rise further toward the next resistance level 145.00 (previous monthly high from June).