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On Tuesday, the Australian Dollar declined by 25 pips or 0.34% against the US Dollar. The currency pair encounter a resistance cluster at 0.7370 during yesterday's trading session.

The AUD/USD exchange rate is likely to continue to edge lower during the following trading session. The potential target for bearish traders would be near the 0.7310 area.

However, the weekly support level at 0.7353 could provide support for the currency exchange rate within this session.

On Tuesday, the common European currency fell by 56 pips or 0.43% against the Japanese Yen. The currency pair tested the weekly pivot point at 129.66 during yesterday's trading session.

As for the near future, the exchange rate could continue to edge lower. Bearish traders might target the weekly support level at 129.02 within the following trading session.

However, the weekly PP at 129.66 could still provide support for the EUR/JPY currency exchange rate today.

Markets

Contrary to Monday, European and US markets yesterday failed to withstand a new risk-off wave initiated by China’s regulatory overhaul. US data (durable goods orders, House prices, consumer confidence) were ok or even strong, but failed to change the course of events. European equities lost 0.5%/1.0%. US indices also finished in red but off the intraday lows (Dow -0.24%; Nasdaq -1.2%). The flattening in core yields continued unabatedly with German yields declining 1.3 bp (2-y) to 2.7 bp (30-y) and the US curve between 0.6 bp and 4.8 bp for 10’s and 30’s. (10-y) real yields dropped further in uncharted territory with new historic lows at-1.90 % (Ger) and -1.15 (US). The 5-y $ 61 bln US Treasury auction was ‘average’. Despite the risk of the dollar slightly underperformed. EUR/USD closed at 1.1817. DXY at 92.42. Sterling even outperformed in the broader USD decline. EUR/GBP closed at 0.8514. The 0.8504/0.8472 support/range bottom is coming within reach. In Hungary, the forint rebounded to the EUR/HUF 359 area as the MNB raise policy rates by 0.30%.

This morning, Asian equites are losing further ground but China ‘outperforming’ suggests that the pressure from the regulatory measures is easing. Results from the US big tech names (Apple, Microsoft, Alphabet) triggered a mixed market response. Regulatory fears also hurt the yuan with USD/CNY holding north of 6.50. The dollar remains slightly in the defensive ahead of the Fed meeting (USD/JPY 109.75, EUR/USD 1.1820).

Today, only second tier data will eb published. So today’s session could to be a long drawn-out countdown to the Fed decision. However, the market recently didn’t need data or other external input to develop its own internal dynamics. This might still be the case today. In addition, it isn’t that easy to pinpoint what might be the ‘favored’ outcome for markets from today’s FOMC meeting. On policy stricto sensu, no change is expected. The Fed president will acknowledge a continuation of the economic recovery. At the same time, risks (delta variant) persist and the labour market has a long way to go to reach the Fed’s definition of full employment. Inflation will probably still be labelled as temporary, but it will be interesting to see whether there might be a subtle change in tone or a stronger reconfirmation that the Fed will take action ‘if necessary’ (which probably still isn’t assumed to be the case at this stage). The process of ‘thinking about thinking about tapering’ will continue, but more concrete guidance will probably only come in August (Jackson Hole) or at the September meeting (with new forecasts ). So rather than from the official statement, interesting insights maybe have to come for the press conference. Any specification on what the Fed sees as ’temporary/transitory’ (on inflation) would be interesting. We’re also keen to hear Powell’s view on current development in the (bond) market. In theory, low long yields still can be seen as favourable financing conditions supporting the recovery. However, can a central banker really be happy with an aggressive flattening of the yield curve and historically low real yields at this point in the economic cycle? A steeper curve might give some more comfort on markets (and other economic agents’) confidence in the economic recovery. However, there is probably no silver bullet for the Fed to address current market schizophrenia with low (real) yields & at the same time near record equities. From a technical point of view 1.12% and -0.47% are next support levels on the technical charts for the US and German 10-y yield respectively. The dollar recently took a pause, but no important support has been broken yet. Powell’s tone on whether or not the Fed will give more weight on inflation is important. No change in the ‘temporary inflation narrative’ cause some further USD easing EUR/USD 1.1881/1895 (currently 1.1820) and DXY 92.00 (currently 92.50) are first technical reference on the charts.

News headlines

Australia Q2 headline inflation jumped 0.8% Q/Q and 3.8%, the fastest pace in 13-year, as base effects kicked in. However, the underlying Trimmed Mean measure rose a much more modest 0.5% Q/Q and 1.6% Y/Y, below the RBA 2-3% target. However, the focus for policy short-term is more on the impact of the new corona wave, rather than on inflation. AUD/USD is easing a few ticks this morning (0.7350 area).

Market movers today

• Today's main event is the FOMC meeting (announcement 20:00 CEST). It is one of the interim meetings without updated projections (including Fed dots). We do not expect the Fed to send any new policy signals. We expect the Fed to repeat that high inflation is mostly transitory and that the labour market recovery has further to go still. Fed Chair Powell's press conference begins at 20:30 CEST.
• This morning, Swedish and Norwegian retail sales in June are due out.

The 60 second overview

EU-UK negotiations: EU put the threat of immediate legal action against UK on hold to make room for more talks to find a solution to the recent conflict over the Brexit agreement. Officials said the two sides will be talking through the summer to find a solution.

Equities: US Stocks declined 0.5% yesterday led by tech stocks ahead of some key earnings reports from big tech companies. Apple reported a strong fiscal Q3 earnings report but the share dropped due to warnings from the company that chip shortages could impact sales this quarter.

The Chinese stock rout took a breather overnight with the Chinese offshore index in Hong Kong in slightly positive territory. After falling 17% over the past month, the index trades at a five-year low. It follows China's recent crackdown on some big tech companies and on the private education sector, which has spooked investor sentiment with rumours of big outflows from US investors.

FI: US 10-year bond yields took cue from risk sentiment and dropped 5bp yesterday from 1.29% to 1.24%. The FOMC meeting tonight will be key for the direction the rest of the week. 10-year Bund yields were 4bp lower yesterday going from -0.40% to -044%.

FX: USD continued to weaken on a broad basis yesterday with EUR/USD climbing further above 1.18 and USD/JPY falling below 110. In Scandi space, EUR/NOK tested 10.50 while EUR/SEK stayed just below 10.20. USD/CNY rose sharply above 6.51.

Credit: Credit remained under pressure yesterday where iTraxx Xover widened close to 4bp (to 238bp) and Main closed around 0.6bp wider (in 47bp). Cash bonds also sold off, with HY widening 2bp and IG 1bp.

General trend

• Australia core CPI remains below RBA’s target range (2-3%); Aussie yields track decline in UST yields.
• US equity FUTs pared declines amid Tech earnings (Apple, Alphabet, Microsoft).
• Hang Seng has moved between gains and losses after the higher open [TECH index pared over 2% rise; Education firms trade generally higher after the prior losses; Property firms also trade generally higher].
• Shanghai Composite pared decline after dropping 2% [Consumer Staples, IT and Industrial indices pared losses; Financials rise].
• Nikkei has remained lower [Decliners included TOPIX Information & Communication index; Iron & Steel index rises]; Mitsubishi Motors rises after results/guidance.
• S&P ASX 200 has also declined [Decliners include Energy, Resources and Financial indices].
• Taiex declines amid focus on earnings (Apple, MediaTek); UMC is due to report later today.
• Samsung is due to release final Q2 results on Thursday (Jul 29th).
• Companies due to report during the NY morning include ADP, Amphenol, Avery Dennison, Boeing, Bunge, Bristol-Myers, Cameco, CME, Evercore, General Dynamics, Generac, Garmin, Hess, Humana, McDonald’s, Moody’s, Norfolk Southern, Owens Corning, Penske Auto, Pfizer, Ryder System, Radware, Steven Madden, Shopify, Six Flags, Silicon Labs, Silgan Holdings, Spotify, TE Connectivity, Teva, Tilray, Thermo Fisher, Wingstop , Yandex.

Headlines/Economic data

Australia/New Zealand

• ASX 200 opened 0.0%.
• (AU) AUSTRALIA Q2 CPI Q/Q: 0.8% V 0.7%E; Y/Y: 3.8% V 3.7%E; CPI Trimmed Mean (core) Q/Q: 0.5% v 0.5%e; Y/Y: 1.6% v 1.6%e.
• SKI.AU Receives revised proposal to acquire company at implied A$2.95/shr from Ontario Teachers’ Pension Plan Board and Kohlberg Kravis Roberts ; To further engage with offerors.
• (AU) Lockdown in Sydney to be extended by 4-weeks through August 28th (as expected).
• (AU) CBA: Sees the RBA rate hike pushed back until May 2023 (prior late 2022) due to Sydney lockdown.

Japan

• Nikkei 225 opened -1.1%.
• (JP) Bank of Japan (BOJ) Jul Summary of Opinions: Japan's economy has picked up as a trend, although it has remained in a severe situation due to the impact of COVID.
• (JP) Bank of Japan Gov Kuroda: Buying Green bonds with FX reserves is not monetary policy; BOJ targeting 2% inflation resulted in Japan's economy no longer being in deflation (yesterday after the close).

Korea

• Kospi opened -0.2%.
• (KR) South Korea July Consumer Confidence: 103.2 v 110.3 prior (1st decline this year).
• 034220.KR Reports Q2 (KRW) Net +424B v -504B y/y, Op 701B v -517B y/y; Rev 7.0T v 5.3T y/y.
• (KR) South Korea Fin Min Hong: Govt to monitor speculative actions in the property market; To try to increase supplies in market.
• (KR) South Korea reports record 1,896 additional coronavirus cases (record high).

China/Hong Kong

• Hang Seng opened +1.1%; Shanghai Composite opened -0.8%.
• (HK) China could impose an anti-sanctions law on Hong Kong, expected to start process in August, which will create complications for multinationals - SCMP.
• (CN) Said that China may expand domestic demand with newly proposed policies in H2 - Press.
• (CN) Said that China is preparing fiscal spending during Q3 in order to support the economy - Press.
• (CN) China government reportedly digging a new field for 'what appears to be 110 silos for launching nuclear missiles' - NYT.
• 522.HK Reports Q2 (HK$) Net 730.6M v 365.8M y/y; Rev 5.18B v 4.32B y/y.
• (CN) China PBOC Open Market Operation (OMO): Injects CNY10B in 7-day reverse repos v CNY10B in 7-day reverse repos prior; Net CNY0B v Net CNY0B prior.
• (CN) China PBOC sets Yuan reference rate: 6.4929 v 6.4734 prior.

North America

• MSFT Guides Q1 Rev $43.3-44.3B (implied) v $42.2Be - earnings call comments.
• AAPL Reports Q3 $1.30 v $1.00e, Rev $81.4B v $73.1Be; Guides Q4 strong double digit y/y Rev growth, but lower than June quarters' 36%, citing stronger dollar and more significant supply constraints for iPhone and iPad - earnings call.
• AMD Reports Q2 $0.63 v $0.54e, Rev $3.85B v $3.60Be; Says growing significantly faster than the market with strong demand across all of our businesses.
• GOOGL Reports Q2 $27.26 v $19.89e, Rev $51.0B v $46.1Be, Operating Margin 31% v 17% y/y.
• SBUX Reports Q3 $1.01 v $0.77e, Rev $7.5B v $7.23Be.

Europe

• CSGN.CH Details of Archegos investigation could be released as soon as Thursday (also scheduled to report earnings this day), expected to focus on risk management problems and human errors – press.

Levels as of 01:15ET

• Hang Seng +0.1%; Shanghai Composite -0.5%; Kospi -0.6%; Nikkei225 -1.7%; ASX 200 -0.7%.
• Equity Futures: S&P500 -0.2%; Nasdaq100 -0.3%, Dax -0.3%; FTSE100 -0.2%.
• EUR 1.1828-1.1813; JPY 109.92-109.75; AUD 0.7376-0.7352; NZD 0.6970-0.6949.
• Commodity Futures: Gold +0.3% at $1,804/oz; Crude Oil +0.5% at $71.97/brl; Copper +0.3% at $4.57/lb.

Headline CPI 0.8%qtr/3.8%yr; Trimmed mean 0.45%qtr/1.6%yr; Weighted median 0.42%qtr/1.6%yr.

Inflation came in a bit stronger than expected, 0.8% vs. market median of 0.7% (WBC forecast 0.9%) which given this is a recover from the shock of the lockdowns from last year is quite a modest update. At two decimal places it was 0.76% so just sneaks in as 0.8% rounded.

The annual pace lifted from 1.1% to 3.8%, the fastest pace in 12 years but as noted this was due to based effects of the negative prints last year due to government grants and subsidies that have since expired. As such, this is a transitory blip in inflation and will not be of concern to the RBA.

Confirming this as modest inflation update core inflation printed as expected with the trimmed mean posting 0.5%qtr/1.6%.

We always had a high degree of uncertainty about dwelling prices and the magnitude of grants that would be used/applied in the quarter. In the end new dwelling purchase by owner occupiers fell 0.1% (+0.6% forecast). HomeBuilder and state-based housing grants in WA and Tasmania continued to have a significant impact. Without the government grants, the new dwelling series would have risen 1.9%, reflecting price increases in materials and labour in response to strong demand. However, this was a relatively small error worth 0.06ppt. Looking forwards as the grants are used, applications closed March 230th, and without a corresponding fall in contract prices dwelling prices in the CPI will rise to meet the underlying contract prices.

The key error in our forecasts was in food prices. There was some pressure in food prices but overall it was less than expected (0.5% vs 1.5% forecast). Vegetables (+5.5%), fruit (+4.7%), and beef (+3.6%) prices lifted due to flooding in growing regions of NSW, a shortage of pickers and lower supply of beef as farmers re-stock. However, it was less than what we have expected (fruit & veg gained 5.2% vs. 10.2% forecast) in part due to the NSW Dine and Discover Vouchers having a bigger impact on meals out & take away food (-0.7%).

Other significant price rises were automotive fuel (+6.5% vs 8.1% expected) and medical & hospital services (+2.4% around expectations) due to the annual increase in private health insurance premiums. Electricity prices (+3.3%) also rose due to the continued unwinding of the Western Australian Government's $600 electricity credit. But the gain was less than we had pencilled in (+7.2%) suggesting WA electricity prices are set for a further meaningful gain in the September quarter.

Motor vehicle prices rose (+2.2% ) due to increased demand combined with supply constraints such as the global semi-conductor shortage.

The one area that was stronger than expected was holiday travel & accommodation (-1.0% vs. -5.0% forecast). We had seen that the Federal government's half price airfares package coupled with increased airline competition, led to a fall in domestic airfare prices in the June 2021 quarter. Domestic airfare prices fell 14.4% compared to the pre-COVID March 2020 quarter, while accommodation prices have risen 5.3% over the same period following increased demand. We underestimated the rise in accommodation prices forecasting -7.0% for domestic holiday travel & accommodation vs. the -1.3% print.

Westpac used the NZ CPI for a guide to international holiday travel & accommodation following the commencement of quarantine-free travel between Australia and New Zealand from April 2021. This had suggested that prices could have fallen due to declining airfares but the Q2 print was +8.6%.

The June quarter CPI was still under the push/pull influence of changing government support, subsidies and grants. But as these grants expire or fade from use, prices will drift up towards underlying prices unless softer demand leads to increased discounting. As such, while there may be a bit of fine turning of our forecast inflation profile as we update for the latest data, it will not be enough to change are overall view that the current surge annual inflation is set to fade as we move into 2022 at somewhere around 2%yr, the bottom of the RBA’s inflation target band.

Daily Pivots: (S1) 1.2560; (P) 1.2582; (R1) 1.2626; More...

Intraday bias in USD/CAD remains neutral and outlook is unchanged. Further rally is still expected as long as 1.2485 resistance turned support holds. On the upside, break of 1.2805 will extend the rise from 1.2005 to 1.3022 medium term fibonacci level next. On the downside, however, break of 1.2485 will bring deeper fall back to next cluster support at 1.2301 (61.8% retracement of 1.2005 to 1.2805 at 1.2311).

In the bigger picture, fall from 1.4667 is seen as the third leg of the corrective pattern from 1.4689 (2016 high). It should have completed after hitting 1.2061 (2017 low) and 50% retracement of 0.9406 to 1.4689 at 1.2048. Sustained break of 38.2% retracement of 1.4667 to 1.2005 at 1.3022 will pave the way to 61.8% retracement at 1.3650 and above. Overall, medium term outlook remains neutral at worst with 1.2048/61 support zone intact.

Daily Pivots: (S1) 0.7335; (P) 0.7362; (R1) 0.7386; More...

Intraday bias in AUD/USD remains neutral first as consolidation from 0.7288 could extend. Further fall is expected as long as 0.7443 support turned resistance holds. On the downside, break of 0.7288 will resume the whole decline from 0.8006 to 161.8% projection of 0.8006 to 0.7530 from 0.7890 at 0.7120 next. On the upside, break of 0.7443 will indicate short term bottoming, and bring stronger rebound to 0.7530 support turned resistance instead.

In the bigger picture, rise from 0.5506 medium term bottom could have completed at 0.8006, after failing 0.8135 key resistance. Correction from there could target 0.6991 cluster support (38.2% retracement of 0.5506 to 0.8006 at 0.7051). We'd look for strong support from there to bring rebound. However, sustained break of this level would argue that the whole medium term trend has indeed reversed.

Daily Pivots: (S1) 109.47; (P) 109.93; (R1) 110.28; More...

Intraday bias in USD/JPY remains mildly on the downside at this for 109.05 support first. Break there will resume the fall from 111.65 to 38.2% retracement of 102.58 to 111.65 at 108.18. On the upside, above 110.58 will turn bias back to the upside for retesting 111.65 resistance.

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. For now, outlook won't turn bullish as long as 111.71 resistance holds, even in case of strong rebound.

Daily Pivots: (S1) 0.9122; (P) 0.9154; (R1) 0.9180; More....

Range trading continues in USD/CHF and intraday bias remains neutral for the moment. On the downside, break of 0.9116 support will affirm the case that rebound from 0.8925 has completed at 0.9273. Deeper fall would then be seen back to retest 0.8925 low. On the upside, however, break of 0.9273 and sustained trading above 61.8% retracement of 0.9471 to 0.8925 at 0.9262 will target 0.9471 resistance next.

In the bigger picture, medium term outlook is currently neutral with focus on 0.9471 resistance. Sustained break there will indicate completion of whole decline from 1.0342 (2016 high). Medium term outlook will be turned bullish for a test on 1.0342 high. But, rejection by 0.9471 again will revive bearishness for another fall through 0.8756 low.