Sample Category Title

Dollar edges mildly higher after better than expected consumer confidence reading, but stays range bound. Overall, the forex markets are in consolidation mode. Sentiment appears to be supported as US stocks open higher, which European indexes are steady. One focus for the rest of the day is US 10-year yield's reaction to 4% handle, and subsequent reactions in other markets.

Technically, USD/JPY is extending the recovery from 104.33 temporary low. There is prospect of a retest on 145.89 high, and even a break. But BoJ might come into the market again in that case, to intervene to cap USD/JPY below 1998 high at 147.68. Consolidation from 145.89 should extend with more legs.

In Europe, at the time of writing, FTSE is down -0.13%. DAX is down -0.30%. CAC is down -0.01%. Germany 10-year yield is up 0.072 at 2.195. Earlier in Asia, Nikkei rose 0.53%. Hong Kong HSI rose 0.03%. China Shanghai SSE rose 1.40%. Singapore Strait Times dropped -0.52%. Japan 10-year JGB yield rose 0.0012 to 0.254.

US consumer confidence rose to 108.0, second month of improvement

US Conference Board Consumer Confidence rose from 103.2 to 108.0 in September, above expectation of 104.5. Present Situation index rose from 145.3 to 149.6. Expectations Index also rose from 75.8 to 90.3.

"Consumer confidence improved in September for the second consecutive month supported in particular by jobs, wages, and declining gas prices," said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.

"The Present Situation Index rose again, after declining from April through July. The Expectations Index also improved from summer lows, but recession risks nonetheless persist. Concerns about inflation dissipated further in September—prompted largely by declining prices at the gas pump—and are now at their lowest level since the start of the year."

US durable goods orders dropped -0.2% mom in Aug, ex-transport orders up 0.2% mom

US durable goods orders dropped -0.2% mom to USD 272.7B in August, slightly worse than expectation of -0.1% mom. Ex-transport orders rose 0.2% mom, below expectation of 0.3% mom. Ex-defend orders dropped sharply by-0.9% mom. Transportation equipment dropped -1.1% mom to USD 92.0B.

Fed Evans agrees to get to the peak funds rate by March

Chicago Federal Reserve President Charles Evans told CNBC, "There are lags in monetary policy and we have moved expeditiously. We have done three 75 basis point increases in a row and there is a talk of more to get to that 4.25% to 4.5% by the end of the year, you're not leaving much time to sort of look at each monthly release. "

"I still believe that our consensus, the median forecasts, are to get to the peak funds rate by March — assuming there are no further adverse shocks. And if things get better, we could perhaps do less, but I think we are headed for that peak funds rate," Evans said.

"That offers a path for employment, you know, stabilizing at something that still is not a recession, but there could be shocks, there could be other difficulties," he added.

"Goodness knows every time I thought the supply chains were going to improve, that we were going to get auto production up and used car prices down and housing and all of that something has happened. So, cautiously optimistic."

BoE Pill: Recent significant fiscal news require a significant monetary policy response

BoE chief economist Huw Pill said at a conference, "We have all seen recent significant fiscal news in the past few days. That has had significant market consequences as well as significant implications for the macro outlook…

"It's hard not to draw the conclusion that all this will require a significant monetary policy response," he added.

RBNZ Orr said tightening cycle very mature, AUD/NZD topping soon?

RBNZ Governor Adrian Orr today, "We believe we still have some work to do, but the good news is because we've done so much already, the tightening cycle is very mature, it's well advanced."

There's "a little bit more to do before we can drop to our normal happy place, which is to watch, worry and wait for signs of inflation up or down," he said.

World Bank cut China growth forecasts to 2.8% in 2022

For 2022, the World Bank downgraded China's growth forecasts sharply from 5.0% (April's) to just 2.8%. On the other hand, ASEAN-5 growth forecasts was upgraded from 4.9% to 5.4%. East Asia & Pacific (excluding China) growth was upgraded from 4.8% to 5.3%. However, East Asia & Pacific as a whole was down graded from 5.0% to 3.2%,

The World Bank said in the release: "Growth in much of East Asia and the Pacific has been driven by recovery in domestic demand, enabled by a relaxation of COVID-related restrictions, and growth in exports. China, which constitutes around 86% of the region's output, uses targeted public health measures to contain outbreaks of the virus, inhibiting economic activity."

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 0.9538; (P) 0.9624; (R1) 0.9694; More...

Intraday bias in EUR/USD is turned neutral with a temporary low formed at 0.9551. Some consolidations could be seen, but upside should be limited by 0.9863 support turned resistance. Break of 0.9551 will resume larger down trend to 161.8% projection of 1.0368 to 0.9863 from 1.0197 at 0.9380 next.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, break of 1.0197 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish even with strong rebound.

Economic Indicators Update

US Conference Board Consumer Confidence rose from 103.2 to 108.0 in September, above expectation of 104.5. Present Situation index rose from 145.3 to 149.6. Expectations Index also rose from 75.8 to 90.3.

"Consumer confidence improved in September for the second consecutive month supported in particular by jobs, wages, and declining gas prices," said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.

"The Present Situation Index rose again, after declining from April through July. The Expectations Index also improved from summer lows, but recession risks nonetheless persist. Concerns about inflation dissipated further in September—prompted largely by declining prices at the gas pump—and are now at their lowest level since the start of the year."

Full release here.

Daily Pivots: (S1) 0.9538; (P) 0.9624; (R1) 0.9694; More...

Intraday bias in EUR/USD is turned neutral with a temporary low formed at 0.9551. Some consolidations could be seen, but upside should be limited by 0.9863 support turned resistance. Break of 0.9551 will resume larger down trend to 161.8% projection of 1.0368 to 0.9863 from 1.0197 at 0.9380 next.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, break of 1.0197 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish even with strong rebound.

Daily Pivots: (S1) 1.0381; (P) 1.0655; (R1) 1.0962; More...

GBP/USD is staying in consolidation above 1.0351 temporary low. Intraday bias stays neutral first. While stronger recovery cannot be ruled out, risk will stay on the downside as long as 1.1404 support turned resistance holds. Break of 1.0351 will resume larger down trend towards parity next.

In the bigger picture, fall from 1.4248 (2018 high) is resuming long term down trend from 2.1161 (2007 high). Next target is 100% projection of 2.1161 to 1.3503 from 1.7190 at 0.9532. There is no scope of a medium term rebound as long as 1.1759 support turned resistance holds.

Daily Pivots: (S1) 0.9832; (P) 0.9899; (R1) 1.0006; More

Intraday bias in USD/CHF is turned neutral with a temporary top formed at 0.9964. Some consolidations could be seen. But downside should be contained by 4 hour 55 EMA (now at 0.9755). Break of 0.9964 will target 1.0063 high. Decisive break there will confirm resumption of larger up trend.

In the bigger picture, current development suggests that up trend from 0.8756 (2021 low) is still in progress. Sustained break of 1.0063 will target 100% projection of 0.9149 to 1.0063 from 0.9369 at 1.0283, and then 1.0342 (2016 high). For now, this will remain the favored case as long as 0.9369 support holds, even in case of deep pull back.

Daily Pivots: (S1) 143.71; (P) 144.25; (R1) 145.27; More...

Outlook in USD/JPY remains unchanged as range trading continues. Intraday bias stays neutral at this point. Further rally is expected as long as 139.37 resistance turned support holds. Break of 145.89 will target 147.68 long term resistance. On the downside, however, decisive break of 139.37 will confirm short term topping. Deeper decline would be seen back towards 130.38 support.

In the bigger picture, up trend from 101.18 is still in progress, as part of the whole up trend from 75.56 (2011 low). Further rise should be seen to 147.68 (1998 high). For now, break of 130.38 support is needed to be the first indication of medium term topping. Otherwise, outlook will stay bullish even in case of deep pull back.

BoE chief economist Huw Pill said at a conference, "We have all seen recent significant fiscal news in the past few days. That has had significant market consequences as well as significant implications for the macro outlook…

"It's hard not to draw the conclusion that all this will require a significant monetary policy response," he added.

US durable goods orders dropped -0.2% mom to USD 272.7B in August, slightly worse than expectation of -0.1% mom. Ex-transport orders rose 0.2% mom, below expectation of 0.3% mom. Ex-defend orders dropped sharply by-0.9% mom. Transportation equipment dropped -1.1% mom to USD 92.0B.

Full release here.

The US dollar is under some pressure on Tuesday morning, which can be attributed to the dollar’s local profit-taking after substantial gains on previous days. European equities and US index futures are also getting some relief, pulling back from lows.

However, until we see a change in the fundamentals, bounces like today’s are likely to be nothing more than local retracements of established trends – bullish for the dollar and bearish for equities.

There is little doubt in the markets now that the main driving force behind the markets is the continuing tightening of current and, most notably, expected conditions. The dollar has been in increasing demand in recent months, as comments from the Fed are methodically pushing higher the expected interest rate ceiling and for longer.

Not all major central banks have the ability or the courage to maintain the same pace, which is taking the dollar’s main competitors out of the game. But these same conditions require regulators to act more aggressively.

Last week, Japan began its interventions to defend the yen exchange rate. The Swiss National Bank has repeatedly warned that it is ready to intervene. Observers have also demanded action from the Bank of England. But the latter has yet to budge, taking a week to assess the situation.

In the words of the ECB officials, there is more and more evident dissatisfaction with the ongoing weakening of the euro.

Because a sharp rise in interest rates in over-leveraged economies may come as a shock, the central bank may intervene to stop the unilateral weakening of national currencies.

Right now, it seems unlikely that the major central banks would be willing to press on the dollar in a coordinated way as they did in 1985 with the secretly prepared so-called Plaza Accord. It hardly fits with US priorities to lower inflation and weaker commodity prices.

At the same time, there are increasing risks that the major central banks, one by one and acting on the situation, may use this almost forgotten instrument to stop unilateral speculation against their currencies.

In our view, since last week and for the foreseeable future, Japan has already included interventions in its active policy, potentially limiting the USDJPY from rising above 145. It is unlikely to be an easy ride for Japan’s Ministry of Finance, but it has the strength to fight back.

Among the other majors, the GBP has the highest currency intervention risks right now, with EUR and CHF slightly less so. In Canada and China, the monetary authorities are not concerned about the exchange rate, as inflation is slowing down there. Hence, it is unlikely that we will see interventions in the CAD and the CNY. Although the Australian dollar has lost 6% since the beginning of the month, it is now 18% above the 2020 ‘bottom’, so in our view, monetary authorities can use traditional rate hikes and quantitative tightening for now.

The ECB has only two more meetings for the rest of the year. Which means that the space to get inflation under control by the end of December is getting tight. The common bank is behind other major central banks in raising policy, which has kept the shared currency relatively weak. Therefore, there is a lot of expectation on what will happen with inflation.

Though, it should be noted that the next ECB meeting isn't until late October, meaning that there is still another round of CPI data coming out before they meet. So, that is likely to have a much bigger impact on what the bank actually decides to do. On the other hand, the series of CPI figures expected later in the week are expected to shape interest rate expectations. And that, in the end, is the main driver of the currency.

Restoring credibility

A series of ECB officials have come out to talk in a way that suggests potentially stronger action. Rumors of a 75bps hike in October are starting to grow. This is because of the going theory among central bankers that inflation is shaped by the "credibility" of the central bank. That is, it's how confident the market is that it will raise rates as needed to get inflation down.

Both Nagel and de Cos made comments to that effect yesterday. But they need to be contextualized within the ECB's Chief Economist Lane's views expressed also yesterday. That is, expecting a significant decrease in inflation through the course of next year. In other words, the ECB might be coalescing around the idea of a sharp rate hiking through the next couple of months to force CPI figures to turn around.

It's out of their hands

The thing is, while the ECB did expand the monetary base by around 10% during the pandemic, a larger chunk of the inflationary effects come from external factors. Higher energy costs, and increased cost of imported goods from China due to lockdowns, are the two main ones. That isn't something monetary policy can fix.

On the other hand, China is seen relaxing some of the covid restrictions, and energy prices have been falling (although over fears of a pending global recession). That could contribute to lower inflation next year regardless of what the ECB does. So, it might come down to a matter of whether the ECB thinks it can control prices.

What to look out for

On Thursday, Germany reports Inflation figures, which are expected to set the tone for the rest of the shared economy. German September monthly inflation is expected to accelerate to 1.1% from 0.3% prior. That would contribute to annual inflation jumping to 9.5% compared to 7.9% prior.

Then on Friday we get EuroZone headline inflation rate expected to move up to 9.6% from 9.1% in August. Of course what the ECB pays the most attention to is the core rate, which is also expected to accelerate, though not as sharply. Core September inflation is forecast at 4.7% compared to 4.3% prior.