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Daily Pivots: (S1) 136.89; (P) 137.27; (R1) 137.84; More...

Despite some loss of upside momentum, intraday bias in USD/JPY stays on the upside for retesting 138.37 high. Strong resistance could be seen from 139.37 high to bring another fall from to extend the corrective pattern from there. On the downside below 134.61 minor support will turn intraday bias back to the downside for 131.72 support.

In the bigger picture, price actions from 139.37 medium term top are seen as a corrective pattern to up trend from 101.18 (2020 low). While deeper decline cannot be ruled out, outlook will stays bullish as long as 55 week EMA (now at 123.21) holds. Long term up trend is expected to resume through 139.37 at a later stage, after the correction finishes.

Daily Pivots: (S1) 0.9592; (P) 0.9625; (R1) 0.9677; More...

USD/CHF's rise from 0.9369 is still extending, and the break of 55 day EMA is a bullish signal. Intraday bias stays on the upside with focus on 0.9648 resistance. Firm break there will argue that whole corrective pattern from 1.0063 has completed, and bring stronger rally back to 0.9884 resistance next. On the downside, below 0.9551 minor support will revive near term bearishness and bring retest of 0.9369 low.

In the bigger picture, while 0.9471 support (2021 high) was breached, there was no follow through selling. Outlook is mixed for now. On the upside, firm break of 0.9648 resistance will revive the case that price actions from 1.0063 are just a corrective pattern, and the larger up trend is no over yet. However, another fall through 0.9369 will affirm the case that medium term up trend from 0.8756 has completed with three waves up to 1.0063.

Daily Pivots: (S1) 1.1726; (P) 1.1782; (R1) 1.1822; More...

GBP/USD's break of 1.1759 support confirms resumption of larger down trend. Intraday bias stays on the downside. Next target is 1.1409 long term support. On the upside, above 1.1835 minor resistance will turn intraday bias neutral and bring consolidations. But recovery should be limited well below 1.2292 resistance to bring another decline.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2292 resistance holds. Next target is 1.1409 low. However, firm break of 1.2292 will bring stronger rise back to 55 week EMA (now at 1.2859).

Markets

The new surge in European gas prices extended the core bond sell-off yesterday. They worsen the inflation outlook with central banks not blinking to increased recession risks and favoring frontloading policy normalization/tightening in their inflation crusade. The Dutch benchmark future (TTF) moved above the March peak (early stages Russian war in Ukraine). European bonds underperformed US Treasuries. German yields added 4.7 bps (30-yr) to 8.9 bps (5-yr). The breakdown of the 10-yr yield movement showed inflation expectations responsible for the lion share of yesterday’s move. German inflation expectations move above 2.5% for the first time since early May. EU swap rates underperformed bonds with the curve bear steepening. Swap rates added 6.8 bps (30-yr) to 14.8 bps (2-yr). Changes on the US yield curve varied between +1.3 bps (30-yr) and +9.1 bps (3-yr) with the curve turning more inverse again. The US 10-yr yield passed the 3% mark for the first time in a month. The fierce sell-off in core bonds spilled again to the equity market with European indices losing up to 2% and US gauges even closing up to 2.5% lower. Rising European inflation expectations and a global risk-off climate pulled EUR/USD one big figure lower, losing parity for a second time this year. We think that the break will this time be sustained. The pair set a new sell-off low this morning around 0.9920. The technical downward trend channel since February suggests more downside towards 0.97. USD/JPY moved to 137.50 with the YTD high at 139.39. Cable suffers a more or less similar faith as EUR/USD with GBP/USD testing the YTD low at 1.1760. EUR/GBP for now failed to regain the 0.85 big figure with the test of the incoming downward trend line ongoing.
 
We expect ruling trends to continue today (stronger dollar, weaker bonds and lower stocks). Even weak August EMU PMI’s probably won’t come to ailing bonds’ rescue. For EUR/USD’s demise, they just risk adding fuel to the fire. UK and US PMI’s will be released as well, but might have less market influence. Ahead of Fed Powell’s Jackson Hole speech, more repositioning on the money market is likely as well with the 2023 rate cut idea still not abandoned. We expect Powell to stress the need for frontloading with the December meeting offering a recalibration point to set out the 2023 framework. Even higher and stable rates are the most likely outcome in our view. ECB executive board member Panetta speaks in an ECB policy panel in Milan. It will be interesting to see whether the Italian follows recent German views in favour of pursuing an aggressive tightening cycle.

News Headlines

In an answer to questions from Bloomberg News, Saudi Arabian Energy Minister Price Abdulaziz Bin Salman indicated that recent extreme volatility and the lack of liquidity in the futures oil market are signs that the futures market is increasingly disconnected from underlying fundamentals. The Oil minister also blamed ‘unsubstantiated’ information about demand destruction, confusion about sanctions, embargoes and price caps as driving the recent decline in oil prices, while he still sees high risk of supply disruptions and thin global spare capacity. According to the Saudi Oil Energy minister OPEC+ has the means to address current problems by cutting production going forward. Brent oil yesterday reversed an initial drop below $93/b to close the session slightly higher near $96.5/b.
 
According to the Valueguard HOX index, Swedish Home prices declined for the fourth consecutive month in July. Prices declined 2.9% M/M to be 2.6% lower compared to the same month last year. Given the high levels of private debt in Sweden, the Riksbank already several times warned for the stability risks of higher inflation and higher interest rates. The Swedish krone this month underperformed other pears with EUR/SEK rising from the 10.35 are mid-August to currently trade near 10.65.

Short Term Elliott Wave View in GBPUSD suggests the rally from 7.14.2022 low ended a wave (4) hit our blue box in 4 hour chart at 1.2298. Then pair was rejected and did a leading diagonal structure as wave 1 ended at 1.2000. The market bounce doing a zig zag correction, testing the high and completed wave 2 at 1.2276. From this point, the pound has continued lower forming wave 3 Elliott wave impulse structure.

Down from wave 2, wave ((i)) ended at 1.2006, and rally in wave ((ii)) ended at 1.2142. Expect wave ((iii)) to end soon with possibly a few more marginal lows, then it should rally in wave ((iv)) in 3, 7, or 11 swing before turning lower again in wave ((v)) and finish wave 3. Wave (i) of ((iii)) finished at 1.2026 and bounce in wave (ii) of ((iii)) ended at 1.2088. Pair extend lower around 1.1739 and we are still looking for a marginal low to complete wave (iii) of ((iii)). Near term, expect any rally to fail in 3, 7, or 11 swing for further downside.

GBPUSD 60 Minutes Elliott Wave Chart

Monday blues kicked in following a $7 trillion rally since July, which was mainly fueled by the expectation that the recession rhetoric would convince the Federal Reserve (Fed) to stop raising the rates and even start thinking about cutting the rates.

Now that the Jackson Hole meeting approaches, those bets are vanishing, as there is no way the Fed will soften its tone while inflation still hangs around the 8.5% level. Plus, the US jobs market has been giving signs that it’s resilient to the policy tightening – with monthly NFP prints coming in way better than expectations each month. And the earnings season has been better than feared as well.

The unstoppable dollar rally

Yesterday’s equity selloff was escorted with a jump in the US 10-year yield to above 3%, and a rally in the US dollar. The dollar index hit the 109 level yet again, and the broad-based rally in greenback sent the major peers depressed.

The EURUSD sank below parity, even before the print of the PMI figures, which will anyway show that the economic activity in Europe is slowing to a point that the ECB cannot start hiking rates at the same speed than the Fed.

And even if it did, it wouldn’t really bring inflation down, knowing that most of the European inflation problem is triggered by the skyrocketing energy prices; instead of hiking the rates by more than necessary, Christine Lagarde would better beg Putin to restore the energy supply to Europe.

Nat gas prices are hard to watch

The Nordstream pipeline is again closed for maintenance for three days. The last time the pipeline was closed for maintenance, Russians restored the gas flow, but much less. The European nat gas prices took a lift, and are now around 20% higher than the March peak.

The soaring nat gas prices shift the energy demand from gas to oil, throwing support under the crude selloff. The barrel of American crude is consolidating a touch above the $90 per barrel, with growing prospects of further gains toward the $100 per barrel.

Saudi Arabia warned that OPEC+ could reduce its oil output to counter sharp declines in oil prices. Saudi Oil Minister Prince Abdulaziz bin Salman said that the extreme volatility and a lack of liquidity mean that the futures market is increasingly disconnected from fundamentals, and that OPEC+ may be forced to cut production.

At this point, the only hope is to see the Iranian oil hit the market again. If the US and Iran could agree on a nuclear deal, Iran could increase its daily oil production to around 4 mio barrels a day, which could give a much-needed relief to the market.

For now, the oil companies are cashing in. Occidental Petroleum jumped 10% on Friday as the US energy regulator gave an OK to Warren Buffett’s Berkshire Hathaway to acquire 50% stake in the company. But to be honest, oil companies don’t need Warren Buffett to feel the energy. BP is up by around 25% since mid-July, and the BP gains cannot be defined as a bear market rally.

Could the euro sink deeper?

Yes, the EURUSD could sink deeper below parity, but how far it could go will mostly depend on how much the dollar can rally from here?

It is increasingly likely we see the dollar index hit 110 mark, but whether it could extend gains meaningfully above that level is the million-dollar question.

Because if it did, we are all in trouble. Not only that the hawkish central bank expectations don’t live up to the hawkish Fed expectations, but the strong dollar will add to the inflationary pressures elsewhere in the world, leaving other countries in an accelerating inflation spiral due to higher import prices, and with tightening monetary policies that don’t even help getting their currency valuations right.

Pray for the dollar to soften

In precious metals, gold sank below the $1730 level yesterday on the back of a stronger dollar and rising US yields, that increase the opportunity cost of holding the non-interest-bearing gold. The yellow metal no longer acts like a good hedge against market selloffs, it sinks along with the risk assets instead. For that to reverse, we need the dollar to soften.

Market movers today

A key focus today will be the August flash PMIs out in most western countries. In Europe, further declines - as also signalled by ZEW - will probably be in store, as the energy crisis is taking its toll on demand in manufacturing and services, and recession fears are rising.

In the US, lower gasoline prices and a rebound in real incomes may support service sector demand while the manufacturing PMI may still be affected by waning goods demand in line with the New York Empire manufacturing survey last week, which dropped sharply.

In the euro area, we will furthermore get the preliminary consumer confidence number for August, which is set to decline further to record low levels on the back of the huge negative shock to real incomes in Europe from surging inflation.

The 60 second overview

Sour risk sentiment in financial markets: It was again a volatile day in the global financial markets with a solid decline in both equity markets and a significant rise in bond yields. Among other victims were the EUR/USD which fell below parity to its lowest level since 2002. Furthermore, the measure of equity market volatility, the so-called VIX index, jumped almost 15%. Asian equity markets are also in red this morning.

As the Fed is expected to stay hawkish: With no macro releases, the move was driven by the expectation that Fed Chairman Powell will state at the Jackson Hole symposium later this week that the rate hikes from the Federal Reserve are far from over even if the pace of the rate hikes is slowing down.

And the energy woes in Europe deepen: At the same time, the mood in Europe was hit by the announcement from Russia of a temporary closure of the Russian gas pipe to Europe, North Stream 1, from 31 August to 2 September due to an unscheduled maintenance from the Russian side. This led to further 19% spike in European gas prices, worsening the stagflationary outlook for Europe.

FX: The surge in European natural gas prices set the tone in the FX market yesterday with the notoriously vulnerable HUF, PLN, CZK and EUR posting significant losses. EUR/USD broke below parity and hit the lowest levels since 2002. SEK continues to trade poorly while NOK has held up remarkably well.

Credit: Yesterday was characterised by negative sentiment in the credit markets with substantial widening in both cash- and CDS indicies. iTraxx main widened 6.7bp to 110.2bp while Xover widened 26.1bp to 551.5bp. In spite of the weak sentiment, several new bond deals were announced, with issuers probably exploiting that the full European investor community is now back from holidays.

Nordic macro

HOX dipped significantly again in July as expected, down 2.9 % mom which puts the decline from peak in March to around 9.0 %. The decline was fairly broad based showing flats and villas declining by 3.5 % mom and 2.7 % mom respectively. Surely this adds to the notion that Sweden is heading for serious times.

Daily Pivots: (S1) 0.9897; (P) 0.9972; (R1) 1.0018; More...

EUR/USD's break of 0.9951 support confirms down trend resumption. Intraday bias stays on the downside for 61.8% projection of 1.0773 to 0.9951 from 1.0368 at 0.9860. Firm break there should prompt downside acceleration to 100% projection at 0.9546. On the upside, above 1.0045 minor resistance will turn intraday bias neutral and bring consolidations. But recovery should be limited well below 1.0368 resistance to bring fall resumption.

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, in case of strong rebound.

European majors, including the Swiss Franc, are under much selling pressure currently. EUR/USD dived through parity, and hit a new low. The development came on worries that Russia will further weaponize its natural gas supplies to Europe, adding further weight to the already troubled economy. Dollar is strong as supported by rising treasury yield, with 10-year yield back above 3% handle. But Aussie and Kiwi are so far also resilient. Yen is mixed with counter forces of risk-aversion and rising yields.

Technically, a focus for the week is US 10-year yield's reaction to 3.101 resistance, as reaction to Jackson Hole symposium too. Firm break there could prompt some upside acceleration towards 3.483 high before the end of the quarter. Such development, if happens, could also come with deeper selloff in stocks, and give support to the greenback. Anyway, a roller coaster is probably awaiting in September.

In Asia, at the time of writing, Nikkei is down -1.16%. Hong Kong HSI is down -0.49%. China Shanghai SSE is up 0.18%. Singapore Strait Times is down -0.61%. 10-year yield is down -0.0089 at 0.222. Overnight, DOW dropped -1.91%. S&P 500 dropped -2.14%. NASDAQ dropped -2.55%. 10-year yield rose 0.048 to 3.037.

Japan PMI manufacturing dropped to 51 in Aug, services down to 49.2

Japan PMI Manufacturing dropped from 52.1 to 51.0 in August, below expectation of 51.8. PMI Manufacturing Output dropped from 49.7 to 48.3. That's also the lowest level in 19 months. PMI Services dropped from 50.3 to 49.2, first contraction since March. PMI Composite dropped from 50.2 to 48.9, first contraction since February.

Usamah Bhatti, Economist at S&P Global Market Intelligence, said: "The latest Flash PMI data showed that Japanese private sector activity declined for the first time since February midway through the third quarter. Both manufacturing and services companies recorded a contraction in output in August, with the former falling at the fastest pace for 11 months.

"August data signalled the second-weakest reading in the composite index so far this year, though the rate of deterioration was only mild. Of concern was the amount of new business received by private sector firms, which reduced for the first time in six months and pointed to further weaknesses to come."

Australia PMI composite output dropped to 49.8, a renewed contraction

Australia PMI Manufacturing dropped from 55.7 to 54.5 in August, a 12-month low. PMI Services dropped from 50.9 to 49.6, a 7-month low. PMI Composite Output dropped from 51.1. to 49.8, a 7-month low.

Laura Denman, Economist at S&P Global Market Intelligence said: "A renewed contraction in Australia's private sector economy indicates that recent interest rate hikes made by the RBA, as well as sustained inflationary pressures, have begun to take a toll on overall demand levels.

"Should new order growth remain subdued, this may help reduce demand-pull inflation factors, but survey data continue to highlight the supply issues that remain prevalent globally, which will continue to keep price levels elevated for the foreseeable.

"As such, the RBA will likely continue along its rate-hiking path, which bodes ill for the wider economy given the latest survey data highlight clear signs of underlying weakness."

EUR/CAD downside breakout, 1.2812 projection level next

Following broad-based selloff in Euro, EUR/CAD finally broke out of range this week and it's now resuming long term down trend. Outlook is clearly bearish with the cross staying well inside falling channel, with recovered capped by falling 55 day EMA.

Next near term target is 61.8% projection of 1.3713 to 1.2970 from 1.3271 at 1.2812. The main question is whether EUR/CAD would accelerate downward further after hitting 1.2812. In that case, the cross could reach 100% projection at 1.2528 and rather quick manner.

There is no clear support level ahead until 2012 low at 1.2127. In any case, for now, outlook will stay bearish as long as 1.3271 resistance holds.

Looking ahead

PMI data from Eurozone, the UK, and the US are the main features for today. US will also release new home sales.

EUR/USD Daily Outlook

Daily Pivots: (S1) 0.9897; (P) 0.9972; (R1) 1.0018; More...

EUR/USD's break of 0.9951 support confirms down trend resumption. Intraday bias stays on the downside for 61.8% projection of 1.0773 to 0.9951 from 1.0368 at 0.9860. Firm break there should prompt downside acceleration to 100% projection at 0.9546. On the upside, above 1.0045 minor resistance will turn intraday bias neutral and bring consolidations. But recovery should be limited well below 1.0368 resistance to bring fall resumption.

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, in case of strong rebound.

Economic Indicators Update

Following broad-based selloff in Euro, EUR/CAD finally broke out of range this week and it's now resuming long term down trend. Outlook is clearly bearish with the cross staying well inside falling channel, with recovered capped by falling 55 day EMA.

Next near term target is 61.8% projection of 1.3713 to 1.2970 from 1.3271 at 1.2812. The main question is whether EUR/CAD would accelerate downward further after hitting 1.2812. In that case, the cross could reach 100% projection at 1.2528 and rather quick manner.

There is no clear support level ahead until 2012 low at 1.2127. In any case, for now, outlook will stay bearish as long as 1.3271 resistance holds.