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Sterling finds support as Liz Truss is set to be Britain's next prime minister. As the pair came to July’s high at 0.8680, a bearish RSI divergence suggests a deceleration in the rally. Strong pressure has been building up following the indicator’s repeated overbought signals. 0.8570 is a key support to assess the underlying strength. Its breach would trigger a liquidation towards the origin of a previous breakout at 0.8500. However, a bounce could clear this year’s high at 0.8720, paving the way for a potential bullish run.

The Swiss franc struggles as the Q2 GDP reading disappoints. The greenback has recouped all losses from its July sell-off and is testing the daily resistance at 0.9880. A combination of profit-taking and fresh selling may limit the upward extension. As the RSI returns to the neutrality area, 0.9740 is the first support and 0.9660 the bulls’ second line of defence. A bullish MA cross on the daily chart shows improved sentiment and may attract more buying in case of a pullback. A bullish breakout would lead to the double top at 1.0050.

The European natural gas futures jumped 30% yesterday, the euro fell further against a broadly stronger US dollar, and crude oil limbed above the $100pb mark, as OPEC decided to cut production by 100’000 barrels per day, to the August levels, as they wanted to ‘stabilize’ oil prices after the longest price decline since the beginning of the pandemic.

In reality, OPEC is not happy to see oil prices ease with the recession talk, and cutting supply suddenly dwarfs the demand side of the problem and should, in theory, reverse the trend back to bullish. If, of course, we forget about the Iran leg of the equation. Because if the US reaches a nuclear deal with the US, and bring around 4 mio extra barrels per day, the 100’000 cut from OPEC will look ridiculous. The problem is, the Iranians are now selling drones to Russians, and that could complicate the already complex talks between the US and Iran, and delay, or even block the deal.

For now, the barrel of US crude couldn’t clear the $90 resistance, as no one really knows what could happen in the complex politics of the oil market, and the recession worries weigh on the demand outlook. The price remains comfortably in the down trending channel building since the June peak, near $123 per barrel. Offers are placed above the $90 level, while buyers wait in ambush into the $85 per barrel, the short-term direction is blurry.

What is clear, however, is that the OPEC decision to cut oil output in the middle of a deepening energy crisis has been very much unwelcomed by the West and set the stage up for windfall taxes for energy companies. Macron is the latest European leader to back a EU-wide windfall tax on energy companies to finance the help that the government will, and should provide to the economy to weather the impact of the extended damage caused by soaring prices.

Would that shoot the European energy companies dead? Certainly not! The oil and gas companies will continue making decent profit and are still a good hedge against the actual macroeconomic meltdown, which is mostly caused by the soaring energy prices. TotalEnergies for example jumped more than 3% in Paris yesterday, while the CAC40 slid 1.20%.

The British FTSE index could even eke out a small gain yesterday, as BP gained more than 2%, while Glencore rallied more than 4% as the 30% spike in the European natural gas prices boosted the demand outlook for coal this winter.

Truss’ little convincing victory

Liz Truss won the PM race, but she won a difficult mandate, as she will have to reunite a country faced with skyrocketing inflation, a deepening energy crisis, diving living standards, industrial unrest, deteriorating public services, and higher interest rates.

She wants to slash taxes and she wants the Bank of England (BoE) to stop focusing on inflation, and focus on growth instead, to conduct the monetary policy. The problem with that is, if you try to boost growth when inflation, and debt are on such a steep rise, you can only overheat the economy and cause more damage.

Anyway, the pound’s reaction to Liz Truss victory has been reasonable. Cable fell to a fresh low, on the back of a broadly stronger US dollar, but the pair rebounded, as many traders took profit on the Liz Truss bet and walked away. Liz Truss also reserved up to £130 billion to limit households’ annual energy bill to below £2000, compared to around £3600 projected for this winter. That is giving a certain boost to the pound this morning. But, of course, the risks remain tilted to the downside for the pound sterling, as investors are worried about the policies that Liz Truss will put in place, and their economic implications. Parity is still in radar for the pound bears.

Elsewhere

The Reserve Bank of Australia (RBA) raised its policy rate by 50bp as expected today. It was the fourth consecutive rate hike that brought the Australian policy rate to the highest levels since 2015. The RBA also said that if the data required, they would follow with further rate hikes in the coming months. The AUDUSD was slightly better bid after the rate hike. News that China will speed up infrastructure spending to stimulate growth helped.

Daily Pivots: (S1) 140.25; (P) 140.45; (R1) 140.79; More...

Intraday bias in USD/JPY stays on the upside at this point. Current up trend should target 100% projection of 126.35 to 139.37 from 130.38 at 143.40. Sustained break there could bring upside acceleration of 147.68 long term resistance. On the downside, below 139.90 minor support will turn intraday bias neutral and bring consolidations first, before staging another rally.

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.

Daily Pivots: (S1) 0.9781; (P) 0.9809; (R1) 0.9824; More...

Intraday bias in USD/CHF stays neutral first and further rally is expected with 0.9691 support intact. On the upside, break of 0.9884 resistance will argue that larger up trend is ready to resume through 1.0063 high. On the downside, however, break of 0.9691 minor support will dampen this view and turn bias back to the downside for 0.9469 support instead.

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) 1.1469; (P) 1.1495; (R1) 1.1547; More...

A temporary low was formed at 1.1442 and intraday bias is turned neutral first. Some consolidations would be see but upside should be limited by 1.1899 resistance to bring another decline. On the downside, break of 1.1442 will resume larger down trend for 1.1409 long term support. Firm break there will pave the way to 61.8% projection of 1.3748 to 1.1759 from 1.2292 at 1.1063 next.

In the bigger picture, based on current momentum, fall from 1.4248 (2018 high) is probably resuming long term down trend from 2.1161 (2007 high). Sustained break of 1.1409 will target 61.8% projection of 1.7190 (2014 high) to 1.1409 (2020 low) from 1.4248 (2021 high) at 1.0675. This will remain the favored case for now as long as 1.2292 resistance holds.

Daily Pivots: (S1) 0.9892; (P) 0.9918; (R1) 0.9958; More...

EUR/USD is losing some downside momentum but further fall is still expected as long as 1.0078 resistance holds. Decisive break of 61.8% projection of 1.0773 to 0.9951 from 1.0368 at 0.9860 should prompt downside acceleration to 100% projection at 0.9546. On the upside, however, firm break of 1.0078 will indicate short term bottoming, and turn bias back to the upside for 1.0368 resistance instead.

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, outlook will stay bearish as long as 1.0368 resistance holds, even in case of strong rebound.

Daily Pivots: (S1) 1.3122; (P) 1.3148; (R1) 1.3168; More...

USD/CAD is staying in consolidation from 1.3207 temporary top and intraday bias remains neutral. Further rise is expected with 1.2971 support intact. On the upside, decisive break of 1.3222 will resume larger up trend from 1.2005. Next target is 100% projection of 1.2005 to 1.2947 from 1.2401 at 1.3343.

In the bigger picture, down trend from 1.4667 (2020 high) should have completed at 1.2005, after defending 1.2061 long term cluster support. Rise from there should target 61.8% retracement of 1.4667 to 1.2005 (2021 low) at 1.3650. This will remain the favored case now as long as 1.2516 support holds.

Market movers today

As markets await the ECB meeting on Thursday, energy price developments will remain in focus, after Russia has conditioned a resumption of North Stream 1 gas flows to sanctions relief from the West. Markets have calmed down after an initial rise in prices yesterday morning.

German factory orders will give some hints on how industry started into Q3. A further decline in orders during July might well be in store, in line with weakening demand conditions signalled by business surveys.

In the US, ISM Services will probably stay more positive than its Markit/S&P Global counterpart in August. Another upbeat report would support the case for a modest rebound in GDP during Q3 (see also Research US - Fed continues to guide US economy towards a recession, 1 September).

The 60 second overview

Quiet markets overnight: Equities are slightly higher overnight and US bond yields up 2-3bp after US markets were closed yesterday for Labour Day. EUR/USD is up a bit trading at 0.995.

Oil market faces headwinds again: Yesterday, OPEC+ announced it cuts production by 100kb/d and EU voiced concerns over the near-term prospect of a revival of the Iran nuclear deal. The market reaction was relatively muted with Brent oil rising by USD 1,5 per barrel and overnight it has fallen back to USD 95 per barrel, the same level as yesterday morning. It likely reflects that the OPEC+ cut is miniscule and the Iran nuclear deal is not off the table. We expect Brent to average USD100-105/bbl for the rest of the year.

New UK prime minister: Yesterday, Liz Truss was elected new Prime Minister of the UK as head of the Conservative Party. On top of her agenda are: the rising cost of living, energy politics (a possible energy bill freeze) as well as further Brexit related discussion on the Northern Ireland Protocol. As the outcome was widely expected, the market reaction was muted and we expect this to continue in the short-term. To avoid massive increases in energy bills to kick in for households, Truss has drafted plans to fix annual electricity and gas bills for a typical UK household at or below the current level of GBP1,971 (USD2,300).

RBA hikes 50bp: The Reserve Bank of Australia hiked rates by 50bp in its meeting this morning in line with our expectations. While there were no new economic forecasts, RBA notes that the outlook for the Australian economy has turned even more negative. Inflation is being driven increasingly by domestic factors, as unemployment rate fell to only 3.4% in July, the lowest level in nearly 50 years. While the statement was largely unchanged from August, RBA now explicitly notes that wage growth is clearly picking up in some sectors, leading to risks of further upward pressure on prices. At the same time, consumer spending remains a key factor of uncertainty, as higher policy rates will feed into higher mortgage rates with a delay. RBA continues to expect further rate hikes, but emphasizes data-dependency when it comes to the exact hiking pace. AUD/USD moved slightly higher after the release due to the bearish economic outlook.

Equities: Equities fell yesterday in Europe with US closed for Labour Day. For MSCI world, this was the seventh day in a row with declines. Energy the only industry in green in the Stoxx600 index. Interesting to see energy continuing to outperform despite the oil price trending lower and the risk of windfall taxes are rising. Automobiles and transportation are the two biggest laggards. Defensives outperformed cyclicals in the sell-off that softened during the day. In Europe yesterday, STOXX 600 -0.8%, FTSE -0.2%, DAX -2.1% and CAC -1.3%. Asian markets are mostly higher this morning on renewed stimulus effort in China. US futures higher as well while European futures are marginally lower.

FI: It was again a volatile day in the European fixed income markets yesterday on the back of soaring gas prices as Gazprom closes for the gas to Europe. This comes after Europe is expected to put a price cap on oil. Hence, at the end of the day yields rose by 4-5bp in the 5Y to 10Y segments. The US Treasury market was closed yesterday, but in Asian trading the 10Y US Treasuries are up 5-6bp in 2Y segment and 3bp in the 10Y segment.

FX: EUR/USD has recovered slightly overnight but remains below parity and is still on a downward trend. Europe's energy crisis is adding headwinds to the cross currently.

Credit: Credit markets had a difficult Monday following the Russian announcement to halt gas supplies though the key Nord Stream 1 pipeline. The negative sentiment also impacted the level of new issues negatively. Overall iTraxx Main widened by 6bp while Xover was 30bp wider at 586bp.

Nordic macro

No movers in the Nordics today.

Daily Pivots: (S1) 0.6779; (P) 0.6792; (R1) 0.6810; More...

Intraday bias in AUD/USD is turned neutral with a temporary low formed at 0.6770. Further decline is expected as long as 0.7008 resistance holds. Break of 0.6770 will resume the decline from 0.7135 to retest 0.6680 low. Decisive break there will resume larger down trend.

In the bigger picture, price actions from 0.8006 (2021 high) is seen more as a corrective pattern to rise from 0.5506 (2020 low). Or it could also be a bearish impulsive move. In either case, outlook will remain bearish as long as 0.7282 resistance holds. Next target is 61.8% retracement of 0.5506 to 0.8006 at 0.6461.