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Yesterday’s solid US ISM and hawkish Fed minutes provided the trigger for interest rate markets to rebalance away from risks to growth to central banks continuing to prioritize inflation at the upcoming meetings. Technical support levels in the US (2.70%) and German 10-y (1.15%/1.18%) yields also did their job. European interest rates still had some catching up to do after late yesterday’s jump in US yields. The account of the ECB June policy meeting also kept the focus on inflation, even as the language was less aggressive compared to the Fed. The ECB prefers to start with a 25 bps point rate hike to prevent an excessive market reaction. At the same time, the ECB signaled that gradualism shouldn’t mean small, slow steps. The German curve bear steepens with yields rising between 11 bps (2-y) and 4 bps (30-y). Intra-EMU spreads also widening. Recent spread narrowing was inspired both by lower core yields and by the ECB announcing a forceful mechanism to prevent market fragmentation. On the use of the instrument, ECB’s Villeroy suggested that if the tool was big enough to illustrate the ECB’s limitless commitment, maybe it actually may not need to be used. At least today, the 10-y Italian vs Germany widens 4 bps. Greece even adds 19 bps. US yields trade little changed maintaining yesterday’s rise. US jobless claims (235k) and the trade balance (deficit $85.5 bln from $86.7 bln) were close to expectations. Challenger US job cuts rose further from very low levels. The report suggests a gradual cooling in the job markets as some employers start to cut costs. A broader picture will be provided by tomorrow’s payrolls report. For now, the rebound in yields doesn’t hurt risk assets. European equities are rising 2.0% (Eurostoxx50). US indices open with gains of about 0.75%/1.0%. In the commodity complex, oil (Brent $101.4 p/b) and copper also are looking for a bottom after recent setback.

FX markets finally also enter calmer waters. The DXY (107) index stabilizes near the highest level in almost 20-y. USD/JPY hovers near the 136 big figure. Even so, the overall relative calm on other markets still doesn’t help euro. EUR/USD is holding losses well below the 1.02 barrier (currently 1.017). This doesn’t bode well for the single currency if sentiment would again deteriorate for one reason or another. Sterling recently didn’t react much to the political turmoil. However, the UK currency today made some further headway as UK PM Johnson finally resigned as Prime Minister. EUR/GBP moves further away from the broken uptrend line trading near 0.85.

News Headlines

People close to the German government reported a silent agreement among Chancellor Scholz’ cabinet members that they can’t stick to fiscal plans in case Russia ends gas flows for longer. German FM Lindner earlier indicated that EMU countries should scale back public debt from 2023 to avoid fiscal spending from fueling inflation further. In practice, Germany would again postpone a reintroduction of its debt brake. Scholz on Monday already suggested that more aid measures would be needed to tackle the brewing energy crisis. Later he accused Russian President Putin of using energy as a weapon.

Hungarian Cabinet Minister Gulyas said that the country decided to accept EC demands to secure EU funding. The two were at odds following breaches of the rule of law. The EU delayed the disbursement of €37bn, consisting both of subsidies in the multi-annual budget framework and pandemic-aid programs. Bloomberg reports that compromises include allowing courts to overrule the chief prosecutor on whether to initiate graft investigations; reducing the number of single bids for both EU and national tenders; narrowing the number of rapid legislative changes; and using part of the EU funding to diversify energy resources, now largely reliant on Russia. The timing of the Hungarian U-turn is interesting. The forint is in free-fall in current volatile market and couldn’t even profit from a jumbo 1-week deposit rate hike by the central bank earlier today (9.75% from 7.75%; EUR/HUF 4.15). Ending the dispute with EU pulled EUR/HUF back towards 406 at the time of writing.

Daily Pivots: (S1) 135.24; (P) 135.63; (R1) 136.30; More...

Intraday bias in USD/JPY remains neutral at this point. On the downside, break of 134.25 support will confirm short term topping at 136.99. Considering bearish divergence condition in daily MACD, 136.99 might be a medium term top too. Intraday bias will be back on the downside for 131.34 support resistance turned support. Nevertheless, firm break of 136.99 will resume larger up trend to 100% projection of 114.40 to 131.34 from 126.35 at 143.29.

In the bigger picture, current rally is seen as part of the long term up trend from 75.56 (2011 low). Next target is 100% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 149.26, which is close to 147.68 (1998 high). This will remain the favored case as long as 126.35 support holds.

Daily Pivots: (S1) 0.9673; (P) 0.9708; (R1) 0.9745; More...

Outlook in USD/CHF is unchanged and focus stays on 0.9731 resistance. Firm break there will argue that the consolidation from 1.0063 has completed and bring stronger rally back to retest 1.0063 high. However, another fall below 0.9493 will dampen this view and target 0.9459 resistance turned support.

In the bigger picture, down trend from 1.0342 (2016 high) should have completed with three waves down to 0.8756 (2021 low) already. Rise from 0.8756 is likely a medium term up trend of its own. Next target is 1.0237/0342 resistance zone. This will remain the favored case as long as 0.9471 resistance turned support holds. However, sustained break of 0.9471 will extend long term range trading with another falling leg.

Daily Pivots: (S1) 1.0136; (P) 1.0207 (R1) 1.0251; More...

EUR/USD's fall is still in progress and intraday stays on the downside. Current down trend should target 1.0090 long term projection level. Break there will target 100% projection of 1.1184 to 1.0348 from 1.0773 at 0.9937, which is close to parity. On the upside, above 1.0276 minor resistance will turn intraday bias neutral and bring consolidations first. But recovery should be limited below 1.0614 resistance to bring another fall.

In the bigger picture, the break of 1.0339 long term support (2017 low) indicates resumption of whole down trend from 1.6039 (2008 high). Next target is 61.8% projection of 1.3993 to 1.0339 from 1.2348 at 1.0090. Sustained break there will pave the way to 100% projection at 0.8694. In any case, outlook will stay bearish as long as 1.0786 resistance holds, in case of recovery.

Daily Pivots: (S1) 1.1868; (P) 1.1929; (R1) 1.1982; More...

Intraday bias in GBP/USD is turned neutral with current recovery. Some consolidations could be seen but outlook stays bearish as long as 1.2405 resistance holds. On the downside, break of 1.1874 will resume larger down trend to t 100% projection of 1.2666 to 1.1932 from 1.2405 at 1.1671. Break there will target 1.1409 long term support.

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 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.3103).

Sterling recovers today, in particular against Euro and Swiss Franc, after Boris Johnson resigns as UK Prime Minister. But Aussie is so far still the strongest for the day. Euro remains generally weak but Dollar and Yen are also paring some recent gains. For the week, Aussie is the best performer for now, followed by Dollar and then Yen. Euro is now the runaway loser, followed by Swiss Franc and then Canadian. But the overall picture could still be changed by tomorrow's non-farm payrolls.

Technically, immediate focus is now on 0.8484 support in EUR/GBP. Sustained break there will argue that rebound from 0.8201 has completed at 0.8720, after rejection by 38.2% retracement of 0.9499 to 0.8201 at 0.8697. The would firstly retain medium term bearishness in the cross Secondly, deeper fall could be seen back to retest 0.8201 low.

In Europe, at the time of writing, FTSE is up 1.27%. DAX is up 1.84%. CAC is up 1.67%. Germany 10-year yield is up 0.071 at 1.232. Earlier in Asia, Nikkei rose 1.47%. Hong Kong HSI rose 0.26%. China Shanghai SSE rose 0.27%. Singapore Strait Times rose 0.83%. Japan 10-year JGB yield rose 0.0063 to 0.256.

US initial jobless claims rose to 235k

US initial jobless claims rose 4k to 235k in the week ending July 2, slightly above expectation of 230k. Four-week moving average of initial claims rose 750 to 232.5k.

Continuing claims rose 51k to 1375k in the week ending June 25. Four-week moving average of continuing claims rose 16.5k to 1335k.

ECB accounts: A number of members want door open for a larger hike in Jul

As noted in accounts of ECB's June 8-9 monetary policy meeting, "most members" supported to signal the 25bps rate hike at the July meeting. Starting the rate-hiking cycle with a step of this magnitude was seen as a "proportionate first step". But "a number of members expressed an initial preference for keeping the door open for a larger hike at the July meeting"

"It was broadly agreed that the Governing Council should at this point be more specific about its expectations for the September meeting and, in particular, open the door to an increase in the key ECB interest rates by more than 25 basis points," the accounts added.

"Looking beyond September, members widely agreed that, on the basis of the current assessment, a gradual but sustained path of further interest rate increases would be appropriate, with the pace of adjustment depending on incoming data and developments in the medium-term inflation outlook."

BoE Mann: It's important to front-load policy

BoE MPC member Catherine Mann said, "what the research shows is when there is uncertainty about persistence versus transitory nature of inflation dynamics, it's important to front-load policy."

Mann also noted the recent depreciation in Sterling is feeding into the high inflation rate. Yet, it's "not the point" to target exchanged rate. "The point is to have heightened awareness of the role of the currency, particularly in today's climate of very high inflation rates," she added.

Australia AiG services dropped to 48.8, two-speed pattern to gather pace

Australia AiG Performance of Services Index dropped -0.4 to 48.8 in June. Looking at some details, sales plummeted by -8.8 to 41.9. Employment surged 7.9 to 55.3. New orders ticked down by -0.8 to 58.9. Input prices rose 0.3 to 69.0. Selling prices rose 5.3 to 67.2. Averages jumped 10.3 to 67.7.

Innes Willox, Chief Executive Ai Group, said: "With interest rates rising for the first time in a decade, we have seen a 'two-speed' services sector emerge in June. Industries which are sensitive to sentiment changes – such as business & property, and personal & recreational services – declined into contraction. Less interest-rate-exposed services remained in a growth phase. With the RBA increasing rates by 50 basis points again this week, we would expect this two-speed pattern to gather pace."

Also from Australia, goods and services exports rose 9.5% mom to AUD 58.4B in May. Goods and services imports rose 5.8% mom to AUD 42.4B. Trade surplus widened from AUD 13.2B to AUD 16.0B.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1868; (P) 1.1929; (R1) 1.1982; More...

Intraday bias in GBP/USD is turned neutral with current recovery. Some consolidations could be seen but outlook stays bearish as long as 1.2405 resistance holds. On the downside, break of 1.1874 will resume larger down trend to t 100% projection of 1.2666 to 1.1932 from 1.2405 at 1.1671. Break there will target 1.1409 long term support.

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 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.3103).

Economic Indicators Update

BoE MPC member Catherine Mann said, "what the research shows is when there is uncertainty about persistence versus transitory nature of inflation dynamics, it's important to front-load policy."

Mann also noted the recent depreciation in Sterling is feeding into the high inflation rate. Yet, it's "not the point" to target exchanged rate. "The point is to have heightened awareness of the role of the currency, particularly in today's climate of very high inflation rates," she added.

US initial jobless claims rose 4k to 235k in the week ending July 2, slightly above expectation of 230k. Four-week moving average of initial claims rose 750 to 232.5k.

Continuing claims rose 51k to 1375k in the week ending June 25. Four-week moving average of continuing claims rose 16.5k to 1335k.

Full release here.

The cross extends a steep fall into third consecutive day and cracks significant support at 0.8501 (top of thick ascending daily Ichimoku cloud).

Bears accelerated on Wednesday after a bullish signal was generated on break of trendline support at 0.8584 (bull-trendline off 0.8281, Apr 14 low) and boosted by formation of daily Tenkan-sen / Kijun-sen bear-cross and daily close below pivotal Fibo support at 0.8540 (38.2% of 0.8249/0.8720 rally).

Rising negative momentum and MA’s (10/20/30) in bearish setup support the action, while cloud provides headwinds, which are boosted by oversold stochastic.

Bears need firm penetration into cloud and violation of next Fibo level at 0.8485 (50% retracement) for confirmation that would open way for extension towards next strong supports at 0.8445/42 (converged 100/200 DMA’s) and 0.8434/29 (daily cloud base / Fibo 61.8% of 0.8249/0.8720).

Res: 0.8540; 0.8567; 0.8595; 0.8602
Sup: 0.8445; 0.8429; 0.8392; 0.8360

The impact of British politics is once again dominating UK markets. Numerous cabinet resignations and the demand for Boris Johnson to step down have proved to be a driving force for GBP currency pairs and the British stock market.

Recent reports suggest that Johnson is willing to step down as leader of the Conservative Party but remain Prime Minister until the results of the party election in the autumn.

Markets have taken the latest reports positively in hopes as it will reduce the degree of uncertainty and hope that the new cabinet will focus on dealing with economic hardship rather than the prime minister.

As a result, GBPUSD has added to 1.1980, 100 pips above the lows on Wednesday at the end of the day.

It is unlikely that the change of the UK leader will fundamentally change the economic outlook, as so much now depends on external factors and the Bank of England’s policies.

Nevertheless, a “relief rally” in British assets is likely. This could be especially true for the British pound.

The GBPUSD daily charts show an oversold and bullish divergence with the RSI. Such a disposition suggests support among buyers closely monitoring the technical picture, of which quite a few are on the currency market.