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The Japanese yen is slightly lower in Monday trade. In the North American session, USD/JPY is trading at 110.28, up 0.16% on the day.

The yen is coming off its best week since April, as USD/JPY declined 0.81% last week and briefly fell below the psychologically important 110 level.

Import costs jump

Inflation in Japan has been at low levels for years, and massive stimulus programs have failed to coax inflation to move upwards. However, the surge in oil prices and the ramping up of the vaccine rollout may be the recipe for higher wholesale prices.

The Corporate Goods Price Index, which measures corporate inflation, jumped 5.0% in June YoY, after a 5.1% gain in May, which marked a 13-year high. Companies are expected to pass along higher costs to consumers, which should lead to higher inflation.

The yen has been relatively weak, and this has resulted in a surge in raw material prices. The Japan Raw Materials Price index rose 3.5% in June MM and a massive 45.4% YoY, as commodities have surged in prices due to stronger global demand. This has boosted the export sector, but the domestic economy has been sputtering, and a resurgence in Covid has led to the government declaring a state of emergency in Tokyo, which will result in no fans being allowed at the Olympics games later this month.

Over in the US, investors await the June CPI report, which will be released on Wednesday. Inflation rose by 5% in May YoY, and another sharp gain is expected for June, with a consensus of 4.9%. If CPI is within expectations, all eyes will be looking for clues from the Fed regarding a tightening of policy, which would be bullish for the US dollar.

USD/JPY Technical

• USD/JPY is on an upswing and faces resistance at 111.01 and 111.93
•  On the upside, there is a monthly support level at 109.83. Below, there is support at 108.63

Markets

The aggressive unwinding of the reflation trade halted on Friday. Core yields and equities rebounded after an accelerated setback (especially for yields). This morning, it looked that this milder sentiment could continue. Asian equities printed in green with Japan (2%) and China (1%+) outperforming after the PBOC on Friday reduced the Reserve Requirement Ratio. However, European investors didn’t reconnect and soon reverted to last week’s more guarded trading dynamics. ECB’s Lagarde this weekend flagged that the bank will soon (July 22) translate its new policy framework into its actual guidance and repeated that it was too early to start the debate on the exit of policy support. The European economy will continue to enjoy substantial ECB help, also beyond March 2022, which until now was marked as potential end of emergency support. Still, this prospect of prolongued support wasn’t unequivocally reassuring for investors. European equities drifted in negative territory. Admittedly, losses stayed modest and were  reversed when the US joined. Core yields still feel the forces of gravity. German yields are easing up to 1 bp for the 10-y which stays below the -0.30% handle. The 10-y EMU swap yield is holding dangerously close to 0.0%. (0.015%!). The prospect of ongoing flexible ECB backing supported non-core EMU bonds with spreads narrowing up to 3 bp (Italy). Even with equities near record levels, US yields are easing modestly between flat (2-y) and 1.5.bp (30-y). Investors apparently aren’t worried that Treasury supply ($58 mld 3-y and $38 bln 10-y today, $24 bln 30-y sale tomorrow) will be picked up even at heavily discounted yields.

In a series of tweets, ECB Governing Council member Peter Kazimir said that the new inflation target of the strategic review was an "evolution that was necessary, we were looking for". He added, "the redesign will enhance our abilities to guard & deliver on the primary objective - to maintain price stability in the euro area."

"Low inflation has become entrenched over the past few years and our revamped strategy says that we will not allow this to happen in the future," he said. "To achieve that also means, that inflation may sometimes moderately and temporarily be above 2 percent."

"The policy objective is clear and simple. This clarity will strengthen our toolbox and enhance anchoring of inflation expectations as desired.

https://twitter.com/KazimirPeter/status/1414576527036067842

https://twitter.com/KazimirPeter/status/1414576778681544713

https://twitter.com/KazimirPeter/status/1414577030222389253

The Canadian dollar is trading quietly in the European session. Currently, USD/CAD is trading at 1.2505, up 0.51%.

Canada job data sends lifts loonie

The Canadian dollar ended the week on a high note, courtesy of excellent June employment data. The economy created 231 thousand jobs, smashing past the consensus of 175 thousand. This was a strong rebound from May, which disappointed with a reading of -68.0 thousand. What is particularly encouraging is that the economy has recovered most of the jobs which were lost due to Covid. As expected, the unemployment rate fell to 7.8%, down sharply from the previous reading of 8.2%.

The strong employment numbers are unlikely to change the stance of the Bank of Canada, which holds its policy meeting on Wednesday. An ING report said that the BoC will continue to taper its QE programme and will shut down bond purchases by the end of 2021, with rate hikes to follow in the second half of 2022. The report added that inflation is higher than the BoC target and the economy is on an “encouraging growth path”.

The BoC was the first major central bank to scale back bond purchases and is expected to taper for a third time on Wednesday, reducing weekly purchases from 3 billion dollars to 2 billion dollars. Tighter policy is bullish for the Canadian dollar, which could also receive a lift this week from strong oil prices.

The Canadian dollar has received a boost from higher oil prices, but the recent collapse of OPEC+ talks could lead to a fall in oil prices if producers decide to flood the market in order to grab more market share. The group usually finds a way to overcome internal disagreements, and the expectation that a compromise will be reached between Saudi Arabia and the UAE has supported oil prices.

USD/CAD Technical

• USD/CAD faces resistance at 1.2594. Above, there is resistance at 1.2735
• On the downside, there is support at 1.2306. Below, there is support at 1.2161

Daily Pivots: (S1) 109.81; (P) 110.03; (R1) 110.33; More...

Intraday bias in USD/JPY remains neutral and risk stays on the downside with 111.65 resistance intact. On the downside, break of 109.52, and sustained trading below 55 day EMA (now at 109.78) will suggests that it's at least correcting the rise from 102.58. Deeper fall would be seen to 38.2% retracement of 102.58 to 111.65 at 108.18 next.

In the bigger picture, medium term outlook is staying neutral with 111.71 resistance intact. Though, as notable support was seen from 55 day EMA, rise from 102.58 is mildly in favor to extend higher. Decisive break of 111.71/112.22 resistance will suggest long term bullish reversal. Rise from 101.18 could then target 118.65 resistance (Dec 2016) and above. However, sustained break of 55 day EMA would revive some medium term bearishness, and open up deep fall back towards 102.58 support.

Daily Pivots: (S1) 0.9124; (P) 0.9150; (R1) 0.9163; More....

No change in USD/CHF's outlook and intraday bias remains mildly on the downside. Rebound form 0.8925 could completed completed at 0.9273, after rejection by 61.8% retracement of 0.9471 to 0.8925 at 0.9262. Sustained trading below 55 day EMA (now at 0.9121) will pave the way back to retest 0.8925 low. For now, risk will stay on the downside as long as 0.9273 resistance holds, in case of recovery.

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.

Daily Pivots: (S1) 1.3804; (P) 1.3852; (R1) 1.3949; More....

Range trading continues in GBP/USD above 1.3730 and intraday bias remains neutral first. On the downside, break of 1.3730 will resume the fall from 1.4248, as the third leg of the consolidation pattern from 1.4240, to 1.3668 support and possibly below. On the upside, break of 1.4000 will turn bias back to the upside for retesting 1.4240/8 resistance zone instead.

In the bigger picture, as long as 1.3482 resistance turned support holds, up trend from 1.1409 should still continue. Decisive break of 1.4376 resistance will carry larger bullish implications and target 38.2% retracement of 2.1161 (2007 high) to 1.1409 (2020 low) at 1.5134. However, firm break of 1.3482 support will argue that the rise from 1.1409 has completed and bring deeper fall to 1.2675 support and below.

Daily Pivots: (S1) 1.1841; (P) 1.1861; (R1) 1.1897; More...

Range trading continues in EUR/USD above 1.1780 temporary low, and intraday bias remains neutral first. Considering bullish convergence condition in 4 hour MACD, beak of 1.1894 minor resistance will indicate short term bottoming at 1.1780. Corrective pattern from 1.2348 might have completed too. Intraday bias will be turned back to the upside for 1.1974 resistance for confirmation. Sustained break there will pave the way back to 1.2265/2348 resistance zone. On the downside, break of 1.1780 will extend the correction to retest 1.1703 support 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 could be seen to cluster resistance at 1.2555 next, (38.2% retracement of 1.6039 to 1.0339 at 1.2516). This will remain the favored case as long as 1.1602 support holds. Reaction from 1.2555 should reveal underlying long term momentum in the pair. However sustained break of 1.1602 will argue that the rise from 1.0635 is over, and turn medium term outlook bearish again.

Overall markets lack clear direction today. Major European indexes are mixed in tight range. DOW future is down over -100 pts at the time of writing, but NASDAQ futures are up. Dollar recover mildly together with Yen and commodity currencies are the softer ones. But overall, major pairs and crosses are bounded inside Friday's range. Breakout is still awaited.

New Zealand Dollar turns softer as markets await RBNZ rate decision. Speculation of a November rate hike intensified last week. Yet, RBNZ will need to say something to affirm such speculations, or the Kiwi could face some pressure. NZD/USD softens mildly after rejection by 4 hour 55 EMA. But it's staying in range above 0.6921. A breakout from range of 0.6921/7104 could hint on the next move this week.

In Europe, at the time of writing, FTSE is down -0.54%. DAX is flat. CAC is down -0.18%. Germany 10-year yield is down -0.0147 at -0.304. Earlier in Asia, Nikkei rose 2.25%. Hong Kong HSI rose 0.62%. China Shanghai SSE rose 0.67%. Singapore Strait Times rose 0.50%. Japan 10-year JGB yield dropped -0.0012 to 0.030.

Fed Barkin: Employment-to-population ratio to rise to north of 59% before tapering

Richmond Fed President Thomas Barkin told WSJ that labor market recovery doesn't warrant tapering the asset purchase program yet. He said, "if the labor market can clear relatively quickly, then maybe it can happen sooner, but if it takes longer for the labor market to reopen, it goes a little later."

Specifically, the "employment-to-population" ratio would be important to determine whether Fed could dial back the massive stimulus it's providing to the economy. The ratio tumbled from pre-pandemic 61.1 in February 2020 to as low as 51.3% last April. It then gradually climbed back to 58% this June. Barkin said it should be something just north of 59% before he'd consider tapering.

Also he talked down the threat of inflation as it could "cool more than expected once the economic reopening process is complete."

ECB Lagarde expects some interesting variations and changes in Jul meeting

ECB President Christine Lagarde told Bloomberg TV that there will be "some interesting variations and changes" in the upcoming July 22 meeting. "It's going to be an important meeting," she added. "Given the persistence that we need to demonstrate to deliver on our commitment, forward guidance will certainly be revisited."

The immediate task for the Governing Council to align the statement and forward guidance with the result of the strategic review. "We're going to look at the circumstances, we're going to look at what forward guidance we need to revisit, we're going to look at the calibration of all the tools we are using to make sure that it is aligned with our new strategy," she said.

Regarding the PEPP program, she expected it to continue until "at least" March 2022, then followed by a "transition into a new format", without elaboration. She emphasized, "we need to be very flexible and not start creating the anticipation that the exit is in the next few weeks, months."

ECB de Guindos: We will discuss new forward guidance next week

ECB Vice President Luis de Guindos said in an event today, "next week we will discuss new forward guidance that includes new definition of price stability."

"The formulation of the forward guidance has to be modified to include the new definition of price stability", he added.

The comment was inline with President Christine Lagarde that there will be "some interesting variations and changes" in the upcoming July 22 meeting.

Gold at a near term juncture after rebound stalls at 55 D EMA

Gold is now at a near term juncture as rebound from 1750.49 halted after hitting 55 day EMA (now at 1813.31). It's unsure whether the fall from 1916.30 has completed yet. But overall, such decline is still as just a falling leg inside the corrective pattern from 2074.84 high.

In case of another fall, we'd continue to expect strong support from 1676.65 to contain downside. The level is close to long term fibonacci support of 1046.27 (2015 low) to 2074.84 at 1681.62. Meanwhile, break of 1818.13 and sustained trading above the 55 day EMA will be an early signal that the correction has completed. Stronger rise should be seen back to 1916.30 structural resistance next.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1841; (P) 1.1861; (R1) 1.1897; More...

Range trading continues in EUR/USD above 1.1780 temporary low, and intraday bias remains neutral first. Considering bullish convergence condition in 4 hour MACD, beak of 1.1894 minor resistance will indicate short term bottoming at 1.1780. Corrective pattern from 1.2348 might have completed too. Intraday bias will be turned back to the upside for 1.1974 resistance for confirmation. Sustained break there will pave the way back to 1.2265/2348 resistance zone. On the downside, break of 1.1780 will extend the correction to retest 1.1703 support 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 could be seen to cluster resistance at 1.2555 next, (38.2% retracement of 1.6039 to 1.0339 at 1.2516). This will remain the favored case as long as 1.1602 support holds. Reaction from 1.2555 should reveal underlying long term momentum in the pair. However sustained break of 1.1602 will argue that the rise from 1.0635 is over, and turn medium term outlook bearish again.

Economic Indicators Update