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Daily Pivots: (S1) 0.7262; (P) 0.7305; (R1) 0.7335; More...

AUD/USD is still defending 0.7279 support and intraday bias remains neutral first. On the upside, break of 0.7409 will turn bias back to the upside for 0.7477 and above, to resume the rebound from 0.7105. ON the downside, however, firm break of 0.7279 will dampen our bullish view and turn bias back to the downside for retesting 0.7105 low instead.

In the bigger picture, with 0.6991 cluster support (38.2% retracement of 0.5506 to 0.8006 at 0.7051) intact, we're seeing price action form 0.8006 as a correction only. That is, up trend from 0.5506 low would resume after the correction completes. In that case, main focus will be 0.8135 key resistance (2018 high). Sustained break there will carry larger bullish implications. However, sustained break of 0.6991 will argue that the whole medium term trend has indeed reversed.

Markets

Calm returned to commodity markets yesterday after a hectic Wednesday. Natural gas prices along with electricity plummeted after Norwegian and Russian supply to Europe more or less normalized again. The decline in commodity prices immediately supported the USD even as European risk sentiment turned for the better. Stronger-than-expected August US retail sales later in the session gave the dollar another edge over G10 peers. EUR/USD tanked below 1.18 to close at 1.1767. USD/JPY jumped from 109.38 to 109.73. Cable slipped from 1.384 to below 1.38. Sterling had a good run against the euro initially, enjoying the good labour report and strong inflation earlier this week along with the good mood on markets. EUR/GBP was headed to 0.85 before technical trading kicked in and sold on the uptick. The pair closed at 0.853. The US data, including an unexpected rise of the Philly Fed outlook, also supported yields going into next week’s FOMC meeting. The US curve bear steepened with the belly underperforming wings. Changes varied from 0.9 bps (2y) over 4.4 bps (5y) to 2.5 bps (30y). The 10y yield (+3.9 bps) bounced off support by the upward sloping trendline. German bond yields initially rose in sympathy with the US but didn’t maintain gains. The Bund future did have a minislump after the cash market closed in the wake of a Financial Times report suggesting an ECB rate hike might come sooner than most expect (see below). The bund recovers part of the losses in Asian trading currently. The US counterpart treads water. Stocks in the (far) east trade mixed. The PBOC injected short-term cash to help Evergrande fears. The Chinese yuan stays resilient within the narrow sideways trading range that’s been developing since June. The Japanese yen is sold across the board. EUR/USD holds near yesterday’s close.

Consumer sentiment by the University of Michigan is due today. Consensus expects a moderate increase from 70.3 to 72 in September after the sudden, steep drop in August. We see some small risks for an upward surprise as last month’s drop may have been exaggerated (as suggested by the retail sales for example). If anything, it strengthens the case for the Fed to announce tapering next week. We expect both US bond yields as well as the dollar to hold strong ahead of Sept 22. First resistance for the 10y yield comes in at 1.37%. EUR/USD 1.1752 support was tested yesterday and remains the first reference for today, followed by 1.1704 in case of a break lower. In the UK’s economy final update, August retail sales this morning disappointed strongly. Last month’s reading was revised downwardly on top. Damage for sterling remains limited (EUR/GBP 0.853) but it is early in European trading still. PMI confidence next week come in at the eleventh hour (literally and figuratively) for the Bank of England.

News headlines

According to the Financial Times, ECB Chief Economist Philip Lane in private discussion with German economist on the ECB’s LT inflation projections indicated that inflation might reach the 2% soon after the end of its three year forecast horizon. The ECB last week in its published forecasts saw inflation at 2.2% this year, 1.7% in 2022 and 1.5% in 2023. Inflation reaching the target earlier than expected could change the scenario for the ECB to start raising rates. However, in a reaction the ECB said "Mr Lane didn’t say in any conversation with analysts that the euro area will reach 2% inflation soon after the end of the ECB’s projection horizon.” The ECB also said that the conclusion of the FT that a lift-off of interest rates could already come in 2023 is not consistent with its forward guidance.

In a question-and-answer session at the Czech parliament, Czech Prime Minister Babis on Thursday questioned the current rate hikes of the Czech national Bank. The Prime Minister suggested that current inflation (e.g. higher oil prices) is out of control of the government (and maybe also of the central bank). He indicated that it would be appropriate for the central bank not to raise interest rates, because that would not help at all and it would only hurt the people and companies via higher borrowing costs. He also indicated that inflation was expected to slow down. Recent comments within the CNB suggested that the recent acceleration in inflation is making some governors considering stepping up the pace of rate hikes from 25bps to 50bps, maybe already at the Sept 30 meeting.

Daily Pivots: (S1) 109.36; (P) 109.59; (R1) 109.98; More...

Intraday bias in USD/JPY remains neutral first as range trading continues. On the downside, break of 109.10 will argue that larger fall from 111.65 is resuming. Deeper decline should then be seen to 108.71 support first, and then 38.2% retracement of 102.58 to 111.65 at 108.18 next. On the upside, above 110.44 will turn bias back to the upside for 110.79, and then 111.65 high instead.

In the bigger picture, medium term outlook is staying neutral with 111.71 resistance intact. The pattern from 101.18 could still extend with another falling leg. Sustained trading below 55 day EMA will bring deeper fall to 107.47 support and below. Nevertheless, strong break of 111.71 resistance will confirm completion of the corrective decline from 118.65 (2016 high). Further rise should then be seen to 114.54 and then 118.65 resistance.

Daily Pivots: (S1) 0.9221; (P) 0.9249; (R1) 0.9307; More....

Intraday bias in USD/CHF remains on the upside at this point. Sustained break of 0.9273 resistance will resume whole rise from 0.8925 for 0.9471 key resistance next. On the downside, however, break of 0.9162 support will turn bias neutral and mix up the near term outlook again.

In the bigger picture, USD/CHF is still struggling around 55 week EMA (now at 0.9178) and outlook is mixed for now. Confirmed rejection by the 55 week EMA will retain medium term bearishness. That is, larger fall from 1.0342 would resume through 0.8756 low at a later stage. However, sustained trading above 55 week EMA will tilt favor to the case of bullish reversal. Focus would then be turned to 0.9471 resistance for confirmation.

Daily Pivots: (S1) 1.1799; (P) 1.1816; (R1) 1.1832; More...

Intraday bias in EUR/USD remains mildly on the downside at this point. Fall from 1.1908 would target a test on 1.1663 low first. Break there will resume the fall from 1.2265, as well as the pattern from 1.2348. Next target is 1.1602 key support level. On the upside, above 1.1845 minor resistance will turn bias back to the upside for 1.1908 resistance instead.

In the bigger picture, rise from 1.0635 is seen as the third leg of the pattern from 1.0339 (2017 low). Further rally remains in favors long as 1.1602 support holds, to cluster resistance at 1.2555 next, (38.2% retracement of 1.6039 to 1.0339 at 1.2516). However sustained break of 1.1602 will argue that the rise from 1.0635 is over, and turn medium term outlook bearish again. Deeper fall would be seen to 61.8% retracement of 1.0635 to 1.2348 at 1.1289 and below.

EUR/USD

Current level - 1.1763

Despite the expectations for a test of the resistance zone of 1.1847, the bears managed to prevail and have successfully broken through the support zone of 1.1774. At the time of writing, the currency pair is consolidating just below the mentioned level, and the mood is rather negative – for a test of the next more significant support area at 1.1731. The announcement of the consumer price index data for the euro area (today; 08:00 GMT) could affect market volatility.

USD/JPY

Current level - 109.85

The sell-off was successfully limited to the support zone of 109.18, after which the bulls entered the market and managed to breach the resistance zone of 109.67. This laid the foundations for an upward move, which will aim to reach and test the zone of the next significant resistance area of 110.20, which is also the upper boundary of the narrow range between 109.18 - 110.20. Investors will look forward to the interest rate decision of the Central Bank of Japan scheduled for next week, although no changes are expected at the moment.

GBP/USD

Current level - 1.3785

After the minor rise during the past session and the false breach of 1.3826, the bears entered the market and led the currency pair to the support level of 1.3785. At the time of writing the analysis, sentiments are rather negative – for a deepening of the sell-off towards the next significant support area of 1.3732. The data on retail sales sans autos for the UK (today; 06:00 GMT) could affect the volatility of the currency pair.

Daily Pivots: (S1) 1.3754; (P) 1.3804; (R1) 1.3842; More...

GBP/USD's fall from 1.3912 is extending, but downside is contained by 1.3725 support so far. Intraday bias remains neutral first. On the upside, break of 1.3912 will target 1.3982 resistance next. Decisive break there will indicate that fall from 1.4248 has completed. Stronger rally would then be seen back to 1.4248 high. On the downside, however, break of 1.3725 support will turn bias back to the downside for retesting 1.3570/3601 support zone instead.

In the bigger picture, as long as 1.3482 resistance turned support holds, we'd still treat price actions from 1.4248 as a corrective move. That is, up trend from 1.1409 (2020 low) is in favor to resume. Decisive break of 1.4376 key resistance (2018 high) would indeed carry long term bullish implications. However, sustained break of 1.3482 will at least bring deeper fall to 38.2% retracement of 1.1409 to 1.4248 at 1.3164, or even further to 61.8% retracement at 1.2493.

Overall markets are relatively quiet today so far. Yen continues to reverse this week's gain as risk sentiment appear to have stabilized. Dollar also softens while Sterling dips mildly after poor retail sales data. On the other hand, commodity currencies are recovering, as lead by Canadian, which is then supported as WTI oil price stays firm above 72 handle.

Technically, USD/CAD could be a focus today as it's about time for a range break out. Break of 1.2760 will resume the rebound from 1.2492, to retest 1.2947 high. Also, as 1.2421 support was well defended below, larger rise from 1.2005 should still be in progress. Break of 1.2947 will confirm this bullish case. If that happens, we'd also see whether Dollar would also rise further elsewhere.

In Asia, Nikkei closed up 0.58%. Hong Kong HSI is up 0.46%. China Shanghai SSE is up 0.05%. Singapore Strait Times is down -0.22%. Japan 10-year JGB yield is up 0.0057 at 0.051. Overnight, DOW dropped -0.18%. S&P 500 dropped -0.16%. NASDAQ rose 0.13%. 10-year yield rose 0.027 to 1.331.

UK retail sales dropped -0.9% mom in Aug, ex-fuel sales dropped -1.2% mom

UK retail sales dropped -0.9% mom in August, well below expectation of 0.5% mom rise. For the 12-month period, headline sales rose 0.0% yoy versus expectation of 2.6% yoy.

Overall sales volume were still up 0.3% in the three months to August, compared with the previous three months. It's also 4.6% higher than their pre-pandemic levels in February 2020.

Ex-fuel sales dropped -1.2% mom, well below expectation of 0.7% mom rise too. For the 12-month period, ex-fuel sales dropped -0.9% yoy versus expectation of 2.5% yoy.

New Zealand BusinessNZ manufacturing dropped to 40.1, economic pain being felt

New Zealand BusinessNZ manufacturing index dropped to 40.1 in August, down from 62.6, back in contraction. Looking at some more details, production tumbled from 63.9 to 27.7. Employment dropped from 57.9 to 54.5. New orders dropped from 63.7 to 44.4. Finished stocks dropped from 56.8 to 46.1 Deliveries dropped from 56.3 to 33.6.

BNZ Senior Economist, Doug Steel stated that "while many anticipate a bounce in activity as the country progresses down alert levels (all going well on the Covid front), today's PMI clearly demonstrates the economic pain being felt.  This should not be underestimated, even if there is hope for the future. GDP and manufacturing output are expected to fall heavily in Q3.  It is something of a reality check in the afterglow of yesterday's very strong Q2 GDP outcome."

Silver heading to 22.36 support after rejection by 55 day EMA

Silver follows Gold and drops sharply this week. The development should confirm rejection by 55 day EMA and the bearish signal suggests that larger decline from 30.07 is ready to resume. Near term focus is now back on 22.36 support. Break there will target 61.8% projection of 28.73 to 22.36 from 24.86 at 20.92.

Also, the rejection by 55 week EMA also carries medium term bearish implication. The whole decline from 30.07 has the potential to drop to as low as 61.8% retracement of 11.67 to 30.07 at 18.69 before completion.

Looking ahead

Eurozone will release current account and CPI final. Later in the day, US will release Michigan consumer sentiment.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.3754; (P) 1.3804; (R1) 1.3842; More...

GBP/USD's fall from 1.3912 is extending, but downside is contained by 1.3725 support so far. Intraday bias remains neutral first. On the upside, break of 1.3912 will target 1.3982 resistance next. Decisive break there will indicate that fall from 1.4248 has completed. Stronger rally would then be seen back to 1.4248 high. On the downside, however, break of 1.3725 support will turn bias back to the downside for retesting 1.3570/3601 support zone instead.

In the bigger picture, as long as 1.3482 resistance turned support holds, we'd still treat price actions from 1.4248 as a corrective move. That is, up trend from 1.1409 (2020 low) is in favor to resume. Decisive break of 1.4376 key resistance (2018 high) would indeed carry long term bullish implications. However, sustained break of 1.3482 will at least bring deeper fall to 38.2% retracement of 1.1409 to 1.4248 at 1.3164, or even further to 61.8% retracement at 1.2493.

Economic Indicators Update

Market sentiment is mixed, as investors don't know what to do with the latest economic data and their Federal Reserve (Fed) expectations these days. Released yesterday, the US retail sales data surprised with an unexpected 0.7% rise in August versus a 0.8% decline penciled in. Stronger than expected data seemed to have fueled Fed tapering expectations rather than the bulls' appetite. The S&P500 closed flat to negative, while Nasdaq eked out small gains, only.

Now, all eyes are on Joe Biden's 3.5 trillion fiscal spending package which created controversies among the US policymakers, as some of them are really concerned with the high inflation, and the fact that a huge government spending would only fuel inflationary pressures, which would end up in a stagflationary setup if the economy doesn't recover fast.

Then, there are the soaring debt levels, and the approaching US debt ceiling, which is a classic debate which will obviously end up with Americans raising their debt ceiling. But that debt ceiling discussion could push back the eventual Fed tapering to the end of the year, but not more. The Fed will likely start tapering sometime in the near future.

So, the question is always the same: higher taxes and higher yields should at some point hit the company earnings, hence their share prices, leading to an eventual downside correction in equities. Many see the size of an eventual downside correction between 5-10%.

What really prevents the correction from happening is the fear of missing out a further rally in equities, the so-called FOMO, and the fact that there is no alternative, the so-called TINA. The US 10-year yield surged above 1.30%, and pushed the US dollar higher across the board. The EURUSD tanked to 1.1750 as a result of a broad USD appreciation. But on the yields front, we are still far from an advance to 2% that many expected earlier this year, for the end of the year. And the high inflationary pressures leave investors with no place to go but the equities. Therefore, the US indices will continue claiming new highs in the coming sessions.

Due today, the European final CPI should confirm an advance to 3%. Rising European inflation, partly due to rising energy prices across Europe, should continue fueling the European Central Bank (ECB) doves, but the ECB has already played its hawkish card, announcing a slow down in PEPP purchases. Unless we see an unbearable inflation pressure, there is little chance that the ECB does anything more hawkish. Therefore, the EURUSD should continue finding direction with the Fed expectations. Though, strong European inflation should help limiting the downside potential in EURUSD, and call for a further advance toward the 1.20 in the weeks ahead.

UK retail sales dropped -0.9% mom in August, well below expectation of 0.5% mom rise. For the 12-month period, headline sales rose 0.0% yoy versus expectation of 2.6% yoy.

Overall sales volume were still up 0.3% in the three months to August, compared with the previous three months. It's also 4.6% higher than their pre-pandemic levels in February 2020.

Ex-fuel sales dropped -1.2% mom, well below expectation of 0.7% mom rise too. For the 12-month period, ex-fuel sales dropped -0.9% yoy versus expectation of 2.5% yoy.

Full release here.