economic data

A busy week ahead for Hungary with July's economic activity data and August's inflation reading. Retail sales should improve while inflation is expected to lift further. We're also expecting a 25bp rate hike from the National Bank of Poland In this article Poland: central bank decision on rates Russia: inflation subsiding after a big spike Turkey: annual inflation expected to increase further Hungary: August core inflation reading expected to be 18.6% Kazakhstan: above expected inflation calls for another key rate hike Source: Shutterstock Poland: central bank decision on rates In recent public statements, Polish policymakers pointed out the need to continue monetary tightening albeit at a smaller scale than before. Rate-setters mainly mentioned a 25bp rate hike and some even seemed reluctant to hike at all. An upward surprise from the August flash CPI means that a 25bp rate hike to 6.75% (our baseline scenario) looks like a done deal and the Council may even discuss a 50bp rate hike. Still, the end of the rate-hiking cycle is nearing and we currently see the terminal National Bank of Poland rate at 7.0-7.5%. Russia: inflation subsiding after a big spike Following a sharp spike to 17.8% year-on-year in April, Russia has been on a disinflationary path due to weaker demand, ruble appreciation and a good harvest. Next Friday’s CPI numbers for August are likely to show a 0.6% month-on-month decline in prices and a deceleration in the annual rate to 14.2% YoY. This challenges our year-end expectations of 13% and suggests that the actual print is likely to be at the lower end of the Bank of Russia’s 12-15% range. This means that the key rate, which has already been cut from 20.0% in February-March to 8.0% in July, has room to go lower. Yet given the stabilisation of households’ inflationary expectations and unclear supply-side prospects, we expect CPI to remain elevated next year and doubt that this downside to the key rate could exceed 100 basis points by year-end. The next Central Bank of Russia meeting is scheduled for 16 September. Turkey: annual inflation expected to increase further We expect annual inflation to have risen further in August to 81.6% (2.2% on monthly basis) from 79.6% a month ago, despite a decline in gasoline prices, as pricing pressures will likely remain broad-based with a largely supportive policy framework leading to currency weakness and external factors weighing on import prices. Hungary: August core inflation reading expected to be 18.6% We are facing a really busy calendar in Hungary next week. The first set of data will be July economic activity. Retail sales could improve a bit as pensioners got extra transfers from the government which is practically a retroactively increased pension due to higher-than-expected inflation. This could boost food consumption, while non-food retail got a boost from the new (less favourable) utility bill support scheme, which urged households to replace old household appliances with newer, more energy-efficient ones. Based on PMI data, July industrial production could still be OK, though we see some downside risk here due to planned summer shutdowns. While industry is doing well despite the plethora of challenges, the trade balance is rather driven by the ever-rising energy bill of the country, and so we see further deterioration in the trade deficit in July. The highlight of the week is going to be the August inflation reading. Due to a refined fuel price cap, which narrowed the range of beneficiaries, the Statistical Office will recalculate the fuel price higher in the consumer basket (some weighted average of capped and market prices). This might explain 0.9-1.0ppt from the 2.3% month-on-month inflation, which will lift the yearly reading up to 16.2%. As rising energy and agricultural commodity prices spill over into processed food and service providers adjusting their prices to the rising utility bills, we see core inflation at 18.6% year-on-year. However, there is one beneficiary of this sky-high inflation environment: the government budget, where we expect yet another surplus on rising revenues in August. Kazakhstan: above expected inflation calls for another key rate hike National Bank of Kazakhstan is likely to make another key rate hike on Monday from the current level of 14.50% to 15.00% or higher. Following the latest 50bp hike at the end of July, inflation continued to outperform the market and NBK expectations, reaching 16.1% YoY in August. Higher inflationary pressure appears to be broad-based in terms of structure and most likely calls for an adjustment in the key rate level. Key events in EMEA next week Source: Refinitiv, ING TagsEmerging Markets EMEA Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Summary:  Risk sentiment bounced yesterday after December US Consumer Confidence came in far stronger than expected, jumping to an eight-month high. And yet, US Treasury yields fell gently all along the curve yesterday, in part as the same US confidence survey showed inflation expectations dropping more quickly than expected and on a strong 20-year US treasury auction. In FX, the Aussie has rebounded sharply on hopes for stimulus measures in China and a friendly diplomatic tone in recent talks between Australian and Chinese leaders.   Note: This is the final Saxo Market Quick Take until Monday January 2, 2023. What is our trading focus? Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) S&P 500 futures rallied 1.5% yesterday closing above the 50-day moving average as positive earnings from Nike helped lift sentiment yesterday and provided a positive assessment of the US consumer. Equity trading will slowly enter hibernation as the holiday period approaches so expect little price action today and tomorrow. Hong Kong’s Hang Seng (HIZ2) and China’s CSI300 (03188:xhkg) rallied on stimulus rhetoric and talk of shortening quarantine The Hang Seng Index rallied 2.4% and CSI 300 climbed 0.4% as of writing, after China’s State Council, the People’s Bank of China, and the China Securities Regulatory Commission separately released meeting readout or statements to pledge to implement the decisions from the recent Central Economic Work Conference to boost the economy, support the property sector, and the internet platform companies. Adding to the risk-on sentiment is market chatter about the shortening of quarantine to three days. Mega-cap China internet stocks surged 3% to 6%. Leading retail and catering stocks jumped by 2% to 11%. FX: choppy markets as USD starts day on a weak footing Some gentle back and forth in FX yesterday as the USD put on a show of rallying, while most of the action has been in the crosses and the greenback has eased back lower after a strong session for risk sentiment yesterday and lower US treasury yields helping USDJPY back lower after its traumatic sell-off and broad JPY rally on Tuesday’s surprise tweak of BoJ policy. The biggest mover to the upside has been the Aussie, which is enjoying the more friendly diplomatic tone with China and has suddenly rallied in the crosses, especially in AUDNZD, on more rhetoric overnight from China on its intent to boost growth. Crude oil (CLG3 & LCOG3) rally extends on US inventory data Crude oil closed at the highest level since December 5 after the US DoE inventory reports showed a nearly 6M barrel draw on crude oil stocks, while gasoline inventory levels rose nearly 2.5M barrels, a half million more than expected, and distillates inventories fell –242k vs. A rise of 1.5M barrels expected. Gasoline and distillate stocks have been generally building of late, but the latter remains slightly below the inventory range of the past 5 years. Gold (XAUUSD) and silver (XAGUSD) remain near recent highs ... after surging in the wake of the Bank of Japan policy tweak on Tuesday and despite yields easing lower yesterday in the US. BOth 2020 and 2021 saw gold ending the year on a strong note and then sharp follow-on rallies in January were quickly reversed. Yields on US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas) remained subdued despite surge in US Consumer Confidence US Treasury yields eased lower all along the curve yesterday despite a large and unexpected surge in US Consumer Confidence as that same survey’s drop in inflation expectations may have received more attention. Later in the day, a strong US 20-year auction, where bidding metrics were the firmest since this spring. End-of-year portfolio rebalancing may obscure the next bigger move for treasuries until we roll into the New Year. What is going on? Mixed U.S. data: weaker home sales, higher consumer confidence, lower inflation expectations Economic data were mixed. The 1-year-ahead inflation expectation in the Conference Board Consumer Confidence survey softened from 7.1% in November to 6.7% in December, the lowest since September of 2021. On the other hand, Headline consumer confidence as well as the present situation and expectations components rose in the Conference Board Consumer Confidence survey. The headline consumer confidence improved to 108.2, (vs consensus 101.0; Nov: 101.4), the highest level since April this year. Elsewhere, the annualized rate of existing home sales fell -7.7% in November, the 10th consecutive month of declines as the historic surge in US mortgage rates this year continues to pressure the US housing market. Micron shares down 2% as glut in memory chips continues The US memory chip manufacturer delivered last night a positive surprise on FY23 Q1 (ending 1 December) adjusted EPS at $0.04 vs est. $-0.88 and announced a 10% headcount reduction to reduce costs. The real negative surprise was the Q2 revenue outlook of $3.6-4bn vs est. $3.9bn and the Q2 adjusted gross margin of 6-11% vs est. 17.8% suggesting significant pricing headwinds compared to market expectations. Micron is also drastically reducing its 2024 capex plans. China and Australia seek to improve the relationship between the two countries During a phone call to mark the 50th anniversary of the official diplomatic relationship between China and Australia, China’s President Xi told Australian Prime Minister Anthony Albanese that China would seek to “promote a sustainable development of the China-Australia comprehensive strategic partnership”. Meanwhile, Australian Foreign Minister Penny Wong told reporters that China and Australia agreed to continue high-level dialogue on issues including the removal of China’s trade sanctions on Australian goods. What are we watching next? Japan’s November Inflation data up tonight After an historic move in the JPY this week, the market will be watching the latest batch of Japan’s CPI data, which has surged to multi-decade highs recently and is expected in at +3.9% YoY for the headline and +2.8% YoY ex Fresh Food and Energy. The rally in the JPY by some 12% from its lows of two months ago will help moderate the relative inflation risks for Japan. US PCE inflation data for November out tomorrow This is arguably the last interesting macro data point out of the US until the first week of the New Year. The PCE data is expected to show that core inflation will drop sharply to 4.6% YoY vs. 5.0% in October, while the headline is expected in at 5.5% versus 6.0% in October. Hotter than expected inflation readings will be an interesting test for markets in coming months as the market has a strong view that the Fed is poised to halt rate hikes as soon as Q2 of next year and will be cutting by year end, despite the Fed “dot plot” projections suggesting the Fed will have a policy rate at the end of next year of above 5% (versus 4.25%-4.50% now). Earnings to watch The earnings calendar is winding down for the year, with payroll and HR-services company Paychex reporting today before the market opens and struggling US used car seller and servicer CarMax, which is trading near its lows for the year, likewise reports before the market open today. Today: Paychex, CarMax Friday: Nitori Economic calendar highlights for today (times GMT) 1100 – Turkey Rate Announcement 1330 – US Weekly Initial Jobless Claims 1530 – US Weekly Natural Gas Storage Change 2330 – Japan Nov. CPI Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:   Source: Financial Markets Today: Quick Take – December 22, 2022 | Saxo Group (home.saxo)

A considerably calmer week ahead compared to this week, at least in terms of the economic calendar.  Monday 06.02. 09:30 GMT, UK Construction Purchasing Managers Index (PMI) January UK Purchasing Managers Index provides insight into the activity level within the construction industry as reported by purchasing managers. This measure gives an understanding of the condition of the UK construction industry, as purchasing managers are considered to have access to first-hand data on their company's performance.   A reading above 50 indicates expansion, while a reading below 50 indicates contraction in the construction industry. UK construction companies have signalled a resuming slowdown in business activity growth since the November data came out, reflecting slower demand and reduced risk appetite due to higher borrowing costs and uncertainties about the economic outlook. The forecast for the January PMI is 49.6, indicating a slight contraction in the construction sector.  Higher than expected reading may have a bullish effect on the GBP, while a lower-than-expected reading could be bearish for the GBP.  Impact: GBP Tuesday 07.02. 13:30 GMT, US Trade Balance (Dec) The trade balance measures the difference in value between imported and exported goods and services during the reporting period. A positive figure indicates that more goods and services were exported than imported. The US trade balance has historically been negative, and a worsening trend could be observed over the long term. In March 2022, the US trade balance surpassed -100 billion USD for the first time in history, and since then, it has fallen to -61.50 billion USD, according to the November data. December's data are expected to show a slight deterioration to -68.70 billion USD. A higher-than-forecast reading may be seen as bullish for the USD, while a lower-than-forecast reading (larger negative number) may be interpreted as bearish for the USD. An outflow of USD from the country and lower foreign demand for US products during a trade deficit could lead to a depreciation of the currency, which in turn may boost the country's exports as its goods become cheaper for the rest of the world. Impact: USD Read next: Japanese Startup Aerwins Technologies Will Be On NASDAQ| FXMAG.COM Friday 10.02. 13:30 GMT, Canada Employment Change (Jan) The employment change report shows the change in the number of people employed, which is an essential indicator of consumer spending. While an increase in the number of people in employment usually signals a positive move in economic expansion, market participants may be hoping for a lower number as this would indicate that the central bank's tightening policy is working and further interest rate hikes may not be necessary.  Previous figures for employment changes in Canada have been very volatile. While August saw a decline (-39.7 thousand jobs), September and November showed slight gains (+21.1 thousand and +10.1 thousand jobs, respectively), followed by increases of over 100 thousand in October and December. Friday's data for January are expected to show a possible increase of 8 thousand.  A higher-than-forecast reading may have a bullish effect on the Canadian dollar and a bearish effect on the stock market. In contrast, lower-than-forecast reading may have a bearish impact on the Canadian dollar and a bullish effect on the stock market. Impact: CAD, S&P/TSX Composite Index Stocks to watch Activision Blizzard (ATVI) announcing its earnings results for the quarter ending on 12/2022. Forecast: 0.7946. Positive earnings surprise in 7 out of the last 10 reports. Time: Monday, February 6, after the market closes. Walt Disney (DIS) announcing its earnings results for the quarter ending on 12/2022. Forecast: 1.51. Positive earnings surprise in 7 out of the last 10 reports. Time: Wednesday, February 8, after the market closes. AstraZeneca ADR (AZN) announcing its earnings results for the quarter ending on 12/2022. Forecast: 0.6825. Positive earnings surprise in 7 out of the last 10 reports. Time: Thursday, February 9, before the market opens. PayPal Holdings Inc (PYPL) announcing its earnings results for the quarter ending on 12/2022. Forecast: 1.19. Positive earnings surprise in 9 out of the last 10 reports. Time: Thursday, February 9, after the market closes. Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Conotoxia investment service) Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement, or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76,41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

ClearBridge Investments continue to believe a recession is more likely than a soft landing, given many of these data points are lagging or coincident in nature. Key takeaways A string of positively surprising economic releases including robust jobs and retail sales reports has caused Wall Street and even some FOMC members to more firmly embrace the soft landing narrative. We continue to believe a recession is more likely than a soft landing, given many of these data points are lagging or coincident in nature. A recessionary red overall signal on the ClearBridge Recession Risk Dashboard supports this view. Leading indicators continue to erode, portending market volatility in the coming months. This could lead to a reversal in market leadership with a return to favor for the stalwarts of the 2022 bear market, including high-quality dividend growth stocks. Improving economic data suggest reacceleration over recession The first two months of the year have been anything but boring when it comes to the prevailing economic narrative. Coming into 2023, consensus was convinced a recession was imminent. By mid/late January, a soft landing became the primary storyline following cooler inflation and wage prints, with several Federal Open Market Committee (FOMC) members reinforcing this possibility. Given firming inflation data and an economy that appears to be reaccelerating, today the main narrative centers around whether the Federal Reserve (Fed) is (once again) behind the curve. In a more “normal” environment, one could shrug off this potential uptick given one of the fastest starts to a hiking cycle in modern history. However, this cycle has been anything but normal, with the pandemic altering many “typical” business cycle dynamics over the past three years. The improvement in economic data over the last month has been robust and broad-based, including but not limited to nonfarm payrolls, job openings and retail sales. Tellingly, the Citigroup Economic Surprise Index started the month at -6.1 and rose to +38.6 in February, indicating a series of better-than-expected economic data releases. On the back of this renewed economic momentum, many investors adopted the view that a soft (or no) landing will materialize. In fact, when looking at Google search trends, searches for “soft landing” jumped to a 15-year high last month. Search activity was last at (or greater than) current levels in May 2008, a few months prior to Lehman’s bankruptcy and the beginning of the Global Financial Crisis. While today’s backdrop is clearly different, this should serve as an important reminder that many head fakes and pockets of optimism occur along the way as the economy moves toward and through a recessionary period. Exhibit 1: Soft Landing Searches are Spiking   Note: 3-Month Moving Average; Search Interest is a relative measure where a value of 100 represents peak popularity and 50 means the term is half as popular.Data as of Feb. 28, 2023. Source: Google Trends. Past performance is not an indicator or a guarantee of future results.   When faced with conflicting data, we come back to the ClearBridge Recession Risk Dashboard as a guiding light when evaluating the most likely path for the economy. The dashboard has maintained an overall recessionary red signal since August 2022 and has continued to weaken under the surface in recent months. At present, the dashboard shows only three non-red signals and had no indicator changes in February. Despite improving economic momentum, we continue to believe a U.S. recession is in the cards this year. Exhibit 2: ClearBridge Recession Risk Dashboard   Data as of Feb. 28, 2023. Source: ClearBridge Investments.   We think a recession is more likely than a soft landing given the nature of the economic data that has been surpassing expectations. Most of the reports that have surprised to the upside have been lagging or coincident in nature, telling us more about where the economy has been rather than where it might be headed. Nonfarm payrolls, for example, is a coincident indicator that is useful in interpreting what is happening in real time. However, payrolls demonstrate non-linearity in recessions, collapsing rapidly as a recession takes hold. As a result, healthy payroll readings in one month do not mean much in terms of where they may be in the next quarter or two. This suggests investors should temper their enthusiasm about what a healthy labor market means in terms of the economic outlook for 2023. Put differently, we believe emerging signs of a soft landing are more of a head fake than the real McCoy. By contrast, many leading indicators look far more precarious at present. January marked the 10th consecutive monthly decline in the Conference Board’s Leading Economic Index (LEI), more than double the string of declines seen ahead of past recessions (four months). Combined with the recessionary red signal emanating from the dashboard, which focuses more on leading indicators, this affirms our view that a recession is looming on the horizon later in 2023. Exhibit 3: Leading Indicators Point to Recession   Data as of Jan. 30, 2023, latest available as of Feb. 28, 2023. Source: Conference Board US and FactSet. Past performance is not an indicator or a guarantee of future results.   With recession risks remaining elevated, we continue to see a choppy year for equities. With financial markets discounting less of a recession over the last few months, we believe a tactical opportunity is emerging in high-quality dividend growers. The 2023 rally has been led by 2022’s laggards (growth stocks) with investors buying (and/or covering shorts) in the most beaten-down areas of the market based on an improving outlook. At the same time, better economic data points have helped to create a bid for more cyclical areas of the market, meaning defensives and quality have been relative laggards so far this year. If our recession call for 2023 is correct, a reversal of the recent leadership should ensue, supporting blue chip dividend growth stocks. Such stocks have historically outperformed during and after the onset of monetary tightening cycles. Separately, equities demonstrating these characteristics could also do well in a “no landing” scenario in which the Fed would need to hike rates even further than currently anticipated due to overly resilient economic growth and elevated inflation, similar to much of 2022. Exhibit 4: Dividend Growers Have Historically Outperformed   Source: BMO Capital Markets Investment Strategy Group, FactSet, Compustat, FRB. Dividend Growth Screening Methodology: S&P 500 stocks screened each month end, no dividend cuts in the past five years, latest one-year dividend per share growth greater than the S&P 500, current dividend yield greater than the S&P 500, free cash flow yield greater than the dividend yield, dividend payout ratio lower than the S&P 500. Past performance is not an indicator or a guarantee of future results.   Definitions The ClearBridge Recession Risk Dashboard is a group of 12 indicators that examine the health of the U.S. economy and the likelihood of a downturn. The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. The Global Financial Crisis (GFC) refers to the economic disruption that followed the collapse of prominent investment banks in 2007-2008, marked by a general loss of liquidity in the credit markets and declines in stock prices. The term “soft landing” refers to an effort on the part of the Fed to slow the economy and bring down inflation, while preventing the U.S. from entering a recession. "The real McCoy" is an idiom and metaphor used in much of the English-speaking world to mean "the real thing" or "the genuine piece/article". The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. The Citigroup Economic Surprise Index tracks whether a core set of economic data series has been coming in under expectations, at expectations, or over expectations. The Conference Board’s Leading Economic Index (LEI) is an American economic leading indicator intended to forecast future economic activity from the values of ten key variables. WHAT ARE THE RISKS? Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors. U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities. Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.  

US stocks settled lower in a volatile session as traders digested a cooling wage/ robust job growth report and SVB contagion risks. This was supposed to be an easy Friday with one massive jobs report, but SVB, a large bank with exposure across a range of sectors failed and triggered distress for several other smaller banks.  At the end of the day, traders are seeing this cooling/hot payroll report as confirmation that Fed policy is restrictive and that the their tightening work is almost done.  If we didn’t have SVB’s failure and contagion risk the case for a half-point rate hike would be valid. The focus will fall on SVB contagion risks and Tuesday’s inflation report.  As long as we don’t see a scorching hot inflation report, the Fed should continue with its quarter rate point hiking pace.   US data The US economy added 311, 000 jobs in February, more than both the consensus estimate of 225,000 and the whisper number of 250,000.  The NFP report had a strong headline beat, but the rest of the report supported the idea that the labor market is ready to cool.  Wage pressures came in much softer than forecasts and the unemployment rate rose from 3.4% to 3.6%.  Fed rate hike odds went on a rollercoaster ride post NFP as traders now have the March 22nd meeting as a coin flip between a 25bp rise or half-point increase and are also pricing in a rate cut by the end of the year.  The peak is in place and it seems traders got a preview about how this tightening cycle will start to drag down economic growth.  SVB SVB Financial Capital’s demise is bad news for many small tech companies as they were a go-to lender in silicon valley.  After Venture Capitalists decided to pull their money, SVB ended up losing ~$2 billion from selling securities as they rushed to secure funds, which is what triggered this bank run.     Startups and debt refinancing are some of the biggest financial risks that traders are analyzing, but this pressure on small banks appears it should remain contained and not weigh on the big banks. The KBW bank index had its worst drop since early in the pandemic and the contagion fears dragged down Comerica, Keycorp, and US Bancorp.  Signature Bank Investors are skeptical to hold anything crypto related in this market environment.  Banks vulnerable to financial instability risk and crypto exposure are easy targets and that has some traders eyeing Signature Bank. There are not a lot of publicly trade banks with significant crypto exposure, so the ones that have some are seeing selling pressure.  Oil Crude prices are rallying after a mixed jobs report sent the dollar lower as optimism grew that the Fed won’t have to be as aggressive with the end of its rate hiking campaign. Oil is quietly rallying as parts of Wall Street enter panic mode following small banking contagion risks.  It appears that parts of the economy are breaking and that is good news for bets that the Fed won’t have to accelerate their tightening pace.   Gold Gold is surging as Fed rate hike bets get scaled down and as SVB contagion risks trigger some safe-haven buying. The bond market is now starting to price in rate cuts by the end of the year and that is triggering a major collapse with yields.  The two-year yield posted its biggest two day decline since 2008.  Gold is becoming everyone’s favorite trade again and that could continue as liquidity risk concerns won’t be quickly answered for that corner on Wall Street.    Bitcoin All the headlines just turned bearish for Bitcoin.  The list of bearish crypto drivers are plentiful: Fallout from SVB as many crypto companies depend on small banks, mining might be harder if the White House pushes through a new 30% tax, NY crypto crackdown now covers KuCoin and after Huobi token’s flash crash.  Bitcoin was in a comfortable trading range and that just broke, which has many investors nervous that we could see a retest of the October lows. Bitcoin fell below the $20,000 level and has many traders nervous over what might happen over the weekend.  Crypto volatility appears to be back as Bitcoin’s range has been breached.  The $18,400 level is key support, but if that breaks momentum selling could look to target a retest of the October lows.   This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.  

EUR: Can China come to the euro's rescue? EUR/USD has quietly slipped below support at 1.0700/1.0720 and may be gently making its way to the March lows at 1.0515/0530. As we mentioned last week, we think   EUR/USD is relatively cheap given the massive reversal in energy prices over the last year and that, in time, the 1.05/1.07 area will come to be seen as a summer base.   Helping that proposition would be some kind of recovery in China. The release of the China Beige Book has shown some recovery in the China manufacturing sector in May.   Official May Chinese PMI figures are released later this week. A bounceback here, helping to reverse the recent run-up in USD/CNH, could provide the euro with some support.   For today, the eurozone focus will be on the release of industrial and consumer confidence figures for May. Consensus expects some further deterioration here and if so this should keep EUR/USD on the soft side. We will also hear from a raft of ECB speakers today.   Expect more hawkish rhetoric especially in advance of the May eurozone CPI data on Thursday. Consensus expects core eurozone CPI to edge lower to 5.5% year-on-year in May. Another upside surprise here – feeding the sticky inflation narrative – warns that investors could return to pricing a 4.00% ECB deposit rate.   - Chris Turner

CEE: US dollar remains the region's nightmare The second print of first quarter GDP in the Czech Republic will be published today. Besides the GDP breakdown, we will also see the wage bill, which has been mentioned several times by the Czech National Bank as a potential reason for a rate hike in June.   Tomorrow, inflation for May and the details of first quarter GDP in Poland will be published. We expect headline inflation to fall from 14.7% to 13.0% YoY, below market expectations, mainly due to fuel and energy prices. On Thursday, we will see PMI numbers across the region, where we expect a slight deterioration in sentiment across the board.   Later, we will see state budget data in the Czech Republic, which posted its worst-ever result in April, raising questions about additional government bond issuance. The European Parliament is also scheduled to hold a session on Thursday, which is expected to cover the Hungarian EU presidency and is also likely to touch on the topic of EU money and the rule of law.   The FX market, as usual in recent weeks, will be dominated by the global story and the US dollar. So, even this week, CEE FX will not be in a bed of roses. We still see the Polish zloty as the most vulnerable, which despite some weakening in the past week remains near record highs. The market has built up a significant long position in PLN over the past two months.   Plus, we may hear more election noise. Moreover, the significant fall in inflation should push the interest rate differential lower. Thus, we see EUR/PLN around 4.540.   The Czech koruna remains the most sensitive currency in the region against the US dollar, which should be the main driver this week. On the other hand, the reversal in the rate differential has been indicating a reversal in EUR/CZK for a few days now.   Thus, at least a stable EUR/USD could allow the koruna to move toward 23.600. The Hungarian forint can expect a headline attack from the European Parliament this week, and given the current strong levels, we could easily see weaker levels again closer to 375 EUR/HUF.   However, we believe the market will use any spike to build long positions in HUF again.

Europe set for a mixed open, as debt ceiling deal heads towards a vote. By Michael Hewson (Chief Market Analyst at CMC Markets UK) With both the US and UK markets closed yesterday, there was a rather tepid response to the weekend news that the White House and Republican leaders had agreed a deal to raise the debt ceiling, as European markets finished a quiet session slightly lower. The deal, which lays out a plan to suspend the debt ceiling beyond the date of the next US election until January 1st 2025, will now need to get agreement from lawmakers on both sides of the political divide to pass into law. That could well be the hardest part given that on the margins every vote is needed which means partisan interests on either side could well derail or delay a positive outcome. A vote on the deal could come as soon as tomorrow with a new deadline of 5th June cited by US Treasury Secretary Janet Yellen. US markets, which had been rising into the weekend on the premise that a deal was in the making look set to open higher when they open later today, however markets in Europe appear to be less than enthused. That's probably due to concerns over how the economic recovery in China is doing, with recent economic data suggesting that confidence there is slowing, and economic activity is declining. Nonetheless while European stocks have struggled in recent weeks, they are still within touching distance of their recent record highs, although recent increases in yields and persistent inflation are starting to act as a drag. This is likely to be the next major concern for investors in the event we get a speedy resolution to the US debt ceiling headwind. We've already seen the US dollar gain ground over the last 3 weeks as markets start to price in another rate hike by the Federal Reserve next month, and more importantly start to price out the prospect of rate cuts this year. Last week's US and UK economic data both pointed to an inflationary outlook that is much stickier than was being priced a few weeks ago, with core prices showing little sign of slowing. In the UK core prices surged to a 33 year high of 6.8% while US core PCE edged up to 4.7% in April, meaning pushing back any possible thoughts that we might see rate cuts as soon as Q3. At this rate we'll be lucky to see rate cuts much before the middle of 2024, with the focus now set to shift to this week's US May jobs report on Friday, although we also have a host of other labour market and services data between now and then to chew over. The last few weeks have seen quite a shift, from the certainty that the Federal Reserve was almost done when it comes to rate hikes to the prospect that we may well see a few more unless inflation starts to exhibit signs of slowing markedly in the coming months. In the EU we are also seeing similar trends when it comes to sticky inflation with tomorrow's flash CPI numbers for May expected to show some signs of slowing on the headline number, but not so much on the core measure. On the data front today we have the latest US consumer confidence numbers for May which are expected to see a modest slowdown from 101.30 in April to 99, and the lowest levels since July last year. EUR/USD – has so far managed to hold above the 1.0700 level, with a break below arguing to a move back towards 1.0610. We need to see a rebound above 1.0820 to stabilise. GBP/USD – holding above the 1.2300 area for now with further support at the April lows at 1.2270. We need to recover back above 1.2380 to stabilise. EUR/GBP – currently struggling to move above the 0.8720 area, with main resistance at the 0.870 area. A move below current support at 0.8650 could see a move towards 0.8620. USD/JPY – having broken above the 139.60 area this now becomes support for a move towards 142.50 which is the 61.8% retracement of the down move from the recent highs at 151.95 and lows at 127.20. Further support remains back at the 137.00 area and 200-day SMA. FTSE100 is expected to open unchanged at 7,627 DAX is expected to open 17 points higher at 15,967 CAC40 is expected to open 30 points lower at 7,273

The main news of the weekend was the agreement on the US debt limit, which may serve as a basis for increased risk demand at the beginning of the week. The House of Representatives is expected to vote on Wednesday.   It was reported that the debt ceiling will be approved until the 2024 presidential elections. Non-defense spending will remain at current levels in 2024 and will increase by only 1% in 2025. This is a compromise between Republican demands for sharp spending cuts and Democratic intentions to raise taxes.   The aggregate short position in the US dollar decreased by 3.3 billion to -12.1 billion during the reporting week. Overall, sentiment towards the dollar remains negative, but the trend may have changed.     It is also worth noting a decrease in the long position on gold by 4 billion to -31.7 billion, which is also a factor in favor of the US dollar. The core PCE deflator increased by 0.4% MoM, which is slightly higher than the consensus forecast of 0.3%.   Despite the faster-than-expected price growth, real consumer spending rose by 0.5% MoM, surpassing the expected 0.3%. The rise in the PCE deflator indicates that the fight against inflation is still far from over. In a 3-month annualized expression, the core PCE deflator stands at 4.3%, the same as in April 2022. The combination of higher spending and faster price growth is expected to lead to the Federal Reserve raising rates in June. Cleveland Fed President Loretta Mester, commenting on the released data, stated that "the data that came out this morning suggests that we still have work to do."   The CME futures market estimates a 63% probability of a Fed rate hike in June, compared to 18% the previous week, making the strengthening of the dollar in the changed conditions more than likely. Monday is a banking holiday in the US, so by the end of the day, volatility will decrease, and we do not expect strong movements. EUR/USD The ECB maintains a firm stance on continuing rate hikes as part of its fight against inflation.   On June 1, preliminary inflation data for the Eurozone will be published, and the forecast suggests a slowdown in core inflation from 5.6% to 5.5%. If the data release aligns with expectations, it will lower the ECB rate forecasts and put additional pressure on the euro.   The net long position on the euro decreased by 2.013 billion to 23.389 billion during the reporting week, marking the first significant reduction in the past 10 weeks. The calculated price is moving further south, indicating a high probability of further euro weakening.     EUR/USD has predictably declined to 1.0730, where support held, but we expect another attempt to test its strength, which will likely be more successful. Within a short-term correction, the euro may rise to resistance at 1.0735 or 1.0830, but the upward movement is likely to be short-lived and followed by another downward wave. Our long-term target is seen in the support zone of 1.0480/0520.   GBP/USD The decline in inflation in the UK is once again being called into question. The core Consumer Price Index rose from 6.2% YoY to 6.8% in April, with yields sharply increasing. The retail sales report for April, published on Friday, showed that the slowdown in consumer demand remains more of an aim than a reality. Retail sales excluding fuel increased by 0.8% MoM, significantly higher than the forecast of 0.3%.   If it weren't for the sharp decline in energy demand, both the monthly and annual retail growth would have been noticeably higher than expected. Monday is a banking holiday in the UK, and there are no macroeconomic data expected this week that could influence Bank of England rate forecasts.   Therefore, the pound will be traded more in consideration of global rather than domestic factors. We do not expect high volatility or significant movements. The net long position on the pound slightly decreased by 84 million to 899 million during the reporting week. The bullish bias is small, and the positioning is more neutral than bullish. The calculated price is below the long-term average and is downward-oriented.     The pound has predictably moved towards the support zone at 1.2340/50, but the decline has slowed down at this level. We expect the decline to continue, with the nearest targets being the technical levels at 1.2240 and 1.2134. There is currently insufficient basis for a resumption of growth.  

10Y US Treasury yields are more than 60bp away from the peak they reached in early March, prior to the regional banking crisis. The Fed has been pushing a more hawkish line disappointed by the lack of progress on the inflation front, but end-2023 Sofr futures still price a rate that is 50bp below the early March peak.   At least so far, this doesn’t feel like a wholesale reappraisal of the market’s macro view although a more forceful Fed communication at the 14 June meeting, with potentially a hike and a higher end-2023 median dot, could push us closer to this year’s peak in rates.     ECB pricing is hard to move but markets look to the BoE for guidance In Europe, today’s inflation prints from France, Germany, and Italy will, in addition to yesterday’s Spanish release, give us a pretty good idea of where the eurozone-wide number will fall tomorrow. If the drop in Spain’s core inflation is any guide, EUR markets will struggle to follow their US peers higher.   Add to this that it is difficult for euro rates to price a path for policy rates that materially diverges from their US peers. Even if the Fed hikes in June or July, the EUR swap curve already prices ECB hikes at both meetings. Swaps assign a low probability to another hike in September for now.   That probability may well rise but we think any labour-market induced sell-off in US Treasuries will reflect, in part, in wider rates differentials between the two currencies.   It is difficult for euro rates to price a path for policy rates that materially diverges from their US peers  

The US and UK markets were closed on Monday, but European government bond yields sharply fell, which is a direct consequence of rumors that the Biden administration and the Republican majority in Congress are close to reaching an agreement.   The removal of the US default threat contributes to an increase in risk appetite and, at the same time, a slight decrease in demand for the US dollar as demand for bonds decreases. The dollar is also facing pressure due to the upcoming meetings of the Bank of England and the European Central Bank, where further rate hikes are anticipated, and uncertainty regarding the possible actions of the Bank of Japan at the June 16 meeting.   NZD/USD The Kiwi is facing increasing pressure as the reasons that could prompt the RBNZ to raise rates above the current 5.50% are diminishing, with the main one being the threat of an almost inevitable recession.   Retail sales showed zero growth in April (forecast was +0.2%), a decline of 1.4% in the first quarter, and a decline of 1% in the last quarter of the previous year. This means that consumer activity is declining despite high migration rates. Trade indicators have also deteriorated significantly, with a 3.4% decrease in terms of trade for goods in the first quarter and an expected decline in exports.   While expectations for an increase in the Fed rate are growing and markets are anticipating another hike in either June or July, the Reserve Bank of New Zealand (RBNZ) announced a pause that is expected to last at least until November. Additionally, there is the threat of an economic slowdown amid still uncertain prospects for inflation.   Although inflation is expected to slow down in the second half of the year, it is currently only a forecast, while the threat of a recession is very real, as is the pause taken by the RBNZ.       Overall, based on the data, the demand for NZD is expected to decrease due to worsening trade indicators, pressure on the current account, and an increase in the yield spread in favor of the US dollar.   Positioning on NZD continues to balance at near-zero levels, with slight deviations in either direction. Over the reporting week, the net short position decreased by 107 million to -23 million, reaching a negligible level. The calculated price has shifted downwards.     Last week, we predicted that after the RBNZ decision, the Kiwi would move downwards towards support at 0.6020. This scenario has played out, and it can be assumed that the southward movement will continue. A probable correction will find resistance near 0.6079, where selling may resume.   We expect another test of support at 0.6020 and further movement towards the target of 0.5940/50, and then 0.5900. AUD/USD RBA Governor Lowe, as reported in the Australian media, held a "pessimistic" briefing behind closed doors with the parliamentary economics committee. Sources described the tone as "noticeably more pessimistic due to the emphasis on risks to achieving the bank's forecast targets for inflation and unemployment."   Markets are currently assessing the probability of another rate hike by the RBA and the likelihood of the bank taking a pause approximately equally. The key value will be the tone of Lowe's testimony before the Senate Economics Committee. The NAB Bank estimates the peak rate to reach 4.1%, which will be achieved in August or July.   On Friday, June 2, an important decision will be made regarding the minimum wage. Changes will be announced for two indicators - the minimum wage, which will affect around 200,000 workers, and the volume of bonus payments, which will be significant for 2.4 million workers.   Preliminarily, according to the Treasury, a 7% increase is expected for the first indicator and a 4% increase for the second, which will likely be seen by the markets as a factor fueling inflation. The net short position on AUD decreased by 323 million over the reporting week to -3.244 billion. The positioning remains persistently bearish, with the calculated price below the long-term average and directed downwards.     The bearish impulse we anticipated in the previous review has developed, although the price did not reach the stated target of 0.6466. Nevertheless, there are no grounds to expect a resumption of growth, and any potential upward retracement is likely to be halted in the 0.6560/80 zone, after which selling will resume.   The nearest target is 0.6466, followed by technically significant levels down to the local low of 0.6172.        

Weak Chinese manufacturing data put pressure on the single currency as Europe, particularly Germany, is highly correlated with China.   However, the Eurozone's data is not so bad today. The number of unemployed in Germany rose by 9K, down from 23K and 19K in the previous two months. Unemployment is rising much more slowly than in the recessions of 2009 and 2020, and the unemployment rate (5.6%) is low by historical standards.   Second estimates confirmed a 0.2% q/q and 0.9% y/y rise in French GDP in the first quarter, although private consumption fell by a further 1% in April after a 0.8% decline in the previous two months.   For Italy, the final data pointed to economic growth of 0.6% q/q and 1.9% y/y, 0.1 percentage points higher than previously estimated.   Despite the upbeat economic data, the EURUSD fell to 1.0660 in early European trading, its lowest level since 17 March.

On Friday, there will be a few macroeconomic reports, but all of them will be very important. Neither the European Union nor the United Kingdom will issue data today. All the information will come from the US. There will be three reports, two of which are of the highest significance. Nonfarm Payrolls show the number of jobs created in a month outside the agricultural sector. This is a key labor market indicator. It is expected that 180-190 thousand jobs were created in May. Any number lower than this will be considered negative.       The unemployment rate is the second key labor market indicator. It is expected that by the end of May, the rate will increase to 3.5%. However, even 3.6% should not shock traders as it is still a very low value, close to the lowest one recorded 50 years ago. The average hourly earnings is the last report that will be issued today.   This indicator has a direct impact on the inflation rate. The annual increase in wages should not exceed the previous month's value. However, this data is less significant than the first two reports. Analysis of fundamental events:     There are no fundamental events planned for Friday. In recent days, both pairs have been showing a persistent desire to grow, which is not always justified by specific factors. If the growth in the euro makes sense, the pound's appreciation is raising many questions. However, the short-term trend has changed to ascending for both pairs. Thus, further growth can be expected unless the reports from the US are much stronger than the forecasts.   General conclusions: On Friday, there will be two important reports. Both of them will be published at the start of the US trading session. There will be no important events in the first half of the day. Also, yesterday, it was reported that the US House of Representatives approved an increase in the debt ceiling. Thus, there will be no default in the US. Yesterday's fall in the dollar was partially caused by this event. However, it is not logical. The market could have priced in the approval of the increase (since there were no other options, really), and now it could be benefiting from short orders. Nevertheless, we still expect a stronger drop from the euro and the pound.   Basis trading rules: 1) The strength of a signal is judged by the time it took to form the signal (a bounce or overcoming level). The less time it took, the stronger the signal is. 2) If two or more trades were opened around any level based on false signals, then all subsequent signals from this level should be ignored. 3) In a flat market, any pair can form a multitude of false signals or not form them at all. In any case, at the first signs of a flat movement, it is better to stop trading. 4) Trades are opened in the time period between the beginning of the European session and the middle of the US one when all trades should be manually closed. 5) In the 30-minute period, you can trade using signals from the MACD indicator only when there is good volatility and a trend, which is confirmed by a trend line or a trend channel. 6) If two levels are located too close to each other (from 5 to 15 pips), they should be considered as a support or resistance area.     What we see on the chart: Price levels of support and resistance are levels that act as targets when opening buy or sell orders. Take profit levels can be placed near them. Red lines are channels or trend lines that show the current trend and indicate in which direction it is preferable to trade now. MACD indicator (14,22,3) is a histogram and signal line, that is an auxiliary indicator, which can also be used as a source of signals. Important speeches and reports (always included in the macroeconomic calendar) can have a significant influence on the movement of a currency pair. Therefore, during their release, you should trade with maximum caution or exit the market to avoid a sharp price reversal against the previous movement. Beginners should remember that not every trade can be profitable. A clear strategy and money management are key to success in long-term trading.      

France: consumption plunges while inflation moderates The second quarter got off to a poor start in France, with household consumption falling for the third consecutive month in April, and the outlook has been revised downwards. Against a backdrop of falling demand, inflationary pressures are moderating more quickly than expected.   Consumption continues to plummet In April, for the third consecutive month, consumer spending on goods fell. This time, the fall was 1% over the month, following a 0.8% fall in March. Household consumption of goods is now 4.3% lower than a year ago and 6.3% below its pre-pandemic level. The fall is due to lower energy consumption (-1.9% over one month) and a further fall in food consumption. Food consumption is now 11% below its pandemic level.   The magnitude of the fall shows the significant impact of the inflationary context and the fall in purchasing power, which has led households to significantly alter their consumption habits.   These figures were eagerly awaited, as they are the first real activity data available for the second quarter. And we can now say that the second quarter got off to a poor start. It is clear that the French economy is slowing sharply. It is unlikely that consumption will make a positive contribution to GDP growth in the second quarter, especially as the slowdown is beginning to have an impact on the labour market, as suggested by the employment climate data published by INSEE last week.   The prospect of a recovery later in the year seems to be fading. This has led us to revise our growth outlook slightly downwards. We are now expecting GDP growth of 0.6% in 2023 and 0.7% in 2024, with the risks still tilted to the downside. Although France escaped recession last winter, today's indicators are a reminder that a recession in the coming months cannot be ruled out.   Strong moderation in inflationary pressures Against this backdrop of falling demand, inflationary pressures are moderating. As expected, the pace of consumer price inflation eased in France in May. Inflation stood at 5.1%, down from 5.9% in April, while the harmonised index, which is important for the ECB, reached 6% in May, compared to 6.9% in April. The good news is that the fall in inflation is now visible in all consumer categories. Energy inflation fell sharply to 2% year-on-year in May.   Unlike in other European countries, it remains positive, however, as the rise in household energy bills did only take place at the start of 2023, rather than in 2022, as a result of the "tariff shield" introduced by the government last year. Food inflation remains very high but is starting to fall, to 14.1% in May from 15% in April.   At 4.1% year-on-year, compared with 4.6% in April, growth in the prices of manufactured goods is also moderating, as is that of services, which stood at 3% compared with 3.2% in April. These last two developments are very good news, as they signal that the inflation peak is behind us, but also that inflation is likely to fall rapidly over the coming months. Indeed, the signs of moderation in inflationary pressures are mounting.   For example, tensions in supply chains have disappeared and the growth in industrial producer prices, which gives an indication of changes in production costs for the manufacturing sector, slowed sharply to 5% year-on-year in April (compared with 9.5% in March). Over one month, producer prices fell sharply, by 4.1%, after +1.2% in the previous month. This indicates that growth in the prices of manufactured goods is set to slow markedly over the coming months.   Furthermore, business forecasts for selling prices fell sharply in May, particularly in the industrial and construction sectors, but also in services. Inflation in services should therefore continue to weaken over the coming months.   Finally, given the fall in agricultural commodity prices on international markets and the weakness of demand, food inflation should continue to fall gradually, and more rapidly once the impact of the price agreement between food producers and big retailers has been absorbed, i.e. during the summer. Ultimately, inflation is likely to fall over the coming months, helped by weak demand. We are expecting inflation to average 4.7% over the year (5.7% for harmonised inflation).

FXMAG.COM: Do you expect any radical moves of EUR/GBP price in the near future? What can cause such fluctuations?  As forex traders keenly observe the EUR/GBP currency pair, there is speculation surrounding the likelihood of substantial price movements in the near future. Examining the underlying factors that can trigger notable fluctuations is essential for making informed decisions in the market.   Macroeconomic indicators, including GDP growth, inflation rates, and employment figures, offer valuable insights into the potential for significant moves in the EUR/GBP price.   Based on the latest available data for Q1 of 2023, Eurozone GDP growth experienced a 1.3% increase, while the UK maintained a stable growth rate of 0.10%. Political developments exert a considerable impact on the EUR/GBP exchange rate. Notably, events such as the recent UK election or updates related to Brexit have proven to be catalysts for volatility.   Staying well-informed about key political developments is crucial, as they can significantly influence the price of this currency pair. Central bank policies play a pivotal role in shaping the EUR/GBP exchange rate.   The European Central Bank (ECB) and the Bank of England (BoE) periodically announce monetary policy decisions that affect this currency pair. It is important to keep a close watch on interest rate adjustments, quantitative easing programs, and forward guidance statements.   As of the latest interest rate decision on February 2, 2023, the ECB maintained rates at 3%, while the BoE held rates at 4.5% with a slight increase of 0.25% on May 11, 2023. Global economic trends and market sentiment can also influence the EUR/GBP price.   Trade relations between the Eurozone and the UK, as well as global economic conditions, can cause significant fluctuations. Monitoring geopolitical events, risk appetite indicators, and market sentiment can provide valuable insights into potential radical moves in this currency pair.   Predicting significant shifts in the EUR/GBP price is a complex task. However, analysing key factors such as macroeconomic indicators, political developments, central bank policies, and global economic trends can enhance your understanding of potential fluctuations. As of the latest available data on May 23, 2023, at 12:51, the EUR/GBP exchange rate stands at 0.87057. Stay well-informed about the latest news and events to navigate the market effectively and make informed trading decisions.

A hawkish hold from the Bank of Canada next week We expect the BoC to leave the policy rate at 4.5% next week, but after stronger-than-expected consumer price inflation and GDP and with the labour data remaining robust we cannot rule out a surprise interest rate increase. The market is pricing a 25% chance of a hike on 7 June, and a hawkish hold should be anough to keep the Canadian dollar supported.   Canadian resilience means a rate hike can't be ruled out The Bank of Canada last raised rates on 25 January and have held it at 4.5% ever since. The statement from the last meeting in April commented that global growth had been stronger than expected and that in Canada itself, “demand is still exceeding supply and the labour market remains tight”. The bank warned that it was continuing to “assess whether monetary policy is sufficiently restrictive and remain prepared to raise the policy rate further” to ensure inflation returns to 2%.   Since then we have had additional warnings from Governor Tiff Macklem that the bank remains concerned about upside inflation risks with the latest CPI report showing a month-on-month increase in prices of 0.7% versus a consensus forecast of 0.4%, resulting in the annual rate of inflation rising to 4.4%. The economy added another 41,400 jobs in April, more than double the 20,000 expected with wages rising and unemployment remaining at just 5%. The resilience of the economy was then emphasised further by first quarter GDP growth coming in at 3.1% annualised, beating the 2.5% consensus growth forecast. Consumer spending was the main growth engine, rising 3.1%.     But we favour a hawkish hold – signalling action unless inflation softens again soon Nonetheless, the BoC accept that monetary policy operates with long and varied lags and continue to believe that “as more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year”. This will help to dampen inflation pressures and with commodity price softening we still believe that inflation can get close to the 2% target by the early part of 2024.   With the US economic outlook also looking a little uncertain, we doubt that the BoC will want to restart hiking interest rates unless it is certain that inflation pressures will not moderate as it has long been forecasting. Consequently we favour a hawkish hold, signalling that if there isn’t clearer evidence of softening in price pressures it could raise rates again in July.     The loonie's resilience can continue The Canadian dollar has been the best G10 performing currency in the past month, largely thanks to its high beta to the US economic narrative and a repricing of Canada’s domestic rate and growth story. These factors have outshadowed crude’s subdued performance in May and some risk sentiment instability.   A hawkish tone by the Bank of Canada at the June meeting is clearly an important element to keep the bullish narrative for CAD alive. As shown below, the recent repricing in Fed rate expectations caused a rebound in short-term USD swap rates relative to most currencies (like the euro), while the USD-CAD 2-year swap rate differential has remained on a declining path also throughout the second half of May.     As long as the BoC does not push back against the pricing for a hike in the summer, we expect CAD to remain supported. Some lingering USD strength in June can put a floor around 1.33/1.34 in USD/CAD, but we expect a decisive move to 1.30 in the third quarter and below then level before the end of the year.  

Market sentiment could change depending on the Fed's final decision at its June monetary policy meeting. This decision, however, could be affected by upcoming economic data from the US. Ahead lies key manufacturing indicators from both the US and Europe, followed by reports on China's export volume, import volume, and trade balance. Equally important will be the meetings of other central banks, where key parameters of monetary policy will remain unchanged. Markets will likely establish equilibrium, as investors expect a 0.25% increase in the Fed's interest rates. However, the recently-released strong US labor market data for May changed the sentiment, pushing market players to opt for a pause. Now, only 19.6% expect a 0.25% increase in rates. Resolving the debt problem, as well as very positive employment data, allow investors to believe that the US will no longer face recession.   As such, the Fed may opt not to raise rates, primarily because they do not want to shake the markets and stimulate another sell-off in the government bond market, given the government's high need for new loans at relatively low interest rates. Most likely, until June 14, consolidation in broad ranges will be observed in the forex market. Similar expectations can be set for stock and commodity markets.   Forecasts for today:     EUR/USD The pair trades above 1.0685. A neutral or weakly positive market sentiment will push the quote between 1.0685 and 1.0825. However, a decline below 1.0685 mark could lead to a `further fall to 1.0540.   XAU/USD Gold trades within the range of 1933.75-1983.75. A pause in the fed's rate hike cycle will push the quote towards 1983.75. Pati Gani Analytical expert of InstaForex © 2007-2023 Back to the list  

CEE: Dovish NBP leads us to bearish view on zloty Today, another series of economic data from the CEE region continues. Industrial production data will be published in Hungary and retail sales for April in the Czech Republic. Later, the Czech National Bank will release intervention numbers for April – but it can be assumed that the central bank was not active in the market given the current EUR/CZK level. The last time the central bank intervened in the FX market was last October.     Later today, at 3pm local time, we will see a press conference from the Governor of the National Bank of Poland. As expected, rates remained unchanged yesterday and the statement didn't show anything new either. Today's press conference will be the main focus of the market and we can expect a rather dovish tone supported by lower-than-expected inflation for May.     The situation in the FX market in the region remains unclear in what direction it will take. The Polish zloty will of course be the main focus. Given the expected dovish tone of the governor, the market is likely to be open to price in more monetary easing, pushing the interest rate differential down.   However, this is not the main driver at the moment and if anything, it is more global sentiment that is deciding the zloty. At the same time, it is hard to see what role the MinFin operation in the FX market may play in the strongest levels of the zloty since June 2021. However, the strong long market positioning and dovish NBP leads us to a rather bearish view on the zloty and we see a rather higher EUR/PLN after the end of the press conference today above 4.490.

The recent range is a tough ceiling to break for euro rates Even if ECB hawks continue to talk up the odds of July and September hikes, with the former still flagged as a more than even probability even by centrist members, it will take a pick-up in activity data for markets to price a terminal rate above 4%, as they did before the Silicon Valley Bank failure in March.   We’re not expecting a huge change in communication in short, and markets will focus on changes in economic data instead to infer how many more hikes the ECB has under its belt. In that context, we think longer-dated rates struggle to break above the top of their recent range, which roughly sits at 2.54% for 10Y Bund and 3.16% for 10Y swaps against 6m Euribor.   In light of the current lack of direction in financial markets, these levels may seem difficult to achieve, but the pre-ECB and Federal Reserve meeting lull is proving a fruitful time for primary market activity. On the sovereign side, Spain and France announced deals yesterday which we think will add to other deals in pushing yields up today.   Taking a step back, May has seen issuance volumes above historical averages every single week as opportunistic borrowers used this window of calm to push deals. We don't think this week will be any different. This shouldn’t be mistaken for a conviction macro trade, but we think the benign market conditions should continue to result in higher bond yields and weaker safe havens as investors feel more comfortable with owning riskier alternatives.       Big debate on direction from the US. We look for upward pressure on yields for now In the US, there is a stark juxtaposition between strong ongoing payroll growth versus PMIs and ISMs entering recessionary territory (low 40s for some components of the manufacturing PMI). On the inflation front, there is evidence of more subdued pipeline pressure while core inflation remains elevated (in the area of 5%).   Our model for US "rates" pitches fair value at 6% when we take everything into account. That has drifted up from 5.75% in the past week or so. Relative to this, the funds rate (ceilling at 5.25%) is not too deviant from that. But longer tenor rates are quite low relative to the big figure of 6%, reflecting ongoing deep inversion of the curve.   While there are some good reasons to expect market rates to fall (weak PMIs for example), our preferred expectation from here is to see some further upward pressure on market rates first. The 4% area for the 10yr Treasury yield for example remains a generic target that could well be hit in the coming month or so.     Today's events and market view Today’s session should be relatively light on economic releases with only US trade standing out. Instead, we expect the focus to be on the Bank of Canada’s meeting in the afternoon. Consensus is for no change in policy rates but the surprise Reserve Bank of Australia hike yesterday, as well as a greater skew towards a hike in the most recent contributions to the Bloomberg survey, means markets are on high alert. Bond supply will be concentrated in the 3Y sector with sales from the UK and Germany (a green bond in the latter’s case). Spain and France mandated banks for the sale of 10Y and 15Y linker bonds via syndication. ECB speakers on the last day before the pre-meeting quiet period will be VP Luis de Guindos, Klass Knot, Fabio Panetta, and Boris Vujcic.

Rates Spark: Inflation in focus before central bank meetings US inflation will affect the odds of a June Fed hike but should not move longer-dated rates much. A week heavy in supply promises more volatility but we expect curve flattening to persist into the Fed and ECB meetings.   Rolling the inflation dice once again A higher than expected US core inflation print is the last event that could boost the odds of a 25bp hike at tomorrow’s Fed meeting. Currently, these stand at just under 30%, reflecting the importance of, and uncertainty associated with, today’s CPI release. Currently, consensus stands at 0.4% MoM for the core reading, more than twice the rate needed for inflation to go back to the Fed’s 2% annual inflation target. Still, the less than 50% probability assigned by the curve to a 25bp June hike suggests markets collectively think that the Fed will be happy enough with 0.4% monthly core inflation to refrain from hiking.   One reason, we think, is the over-reliance on economic consensus to assess market moves. The second reason is that, even without a June hike, the Fed has dropped some heavy hints that it could hike in July regardless of its decision in June. For rates markets, this means that even if the Fed ‘skips’ the June meeting, odds of a 25bp hike by July, currently standing at around 80%, may not fall much.   The upshot for traded interest rates, such as swaps and US Treasury yields, is that the market reassessing June hike odds lower will not necessarily mean a drop in longer-dated rates. In fact, investors may well draw the logical conclusion that 0.4% core inflation would reinforce the case for a higher Fed dot plot and hawkish tone, regardless of what consensus is for today’s core inflation print.   What is sure is that price action today, and later this week into the Fed and European Central Bank meetings, is set to be choppy. In addition to the US CPI print, there is a heavy supply slate from sovereign issuers on both sides of the Atlantic. This tends to pressure yields higher into the supply and lower afterwards. In addition to, justified in our view, expectations of hawkish ECB and Fed tones, this skews yields higher. Whether this impacts the front-end or long-end the most depends on appetite to absorb this supply but the current market regime suggests that short-dated rates, ie the section most sensitive to central bank policy rates, is in the lead. This means a tendency to flatten when rates rise.     Curve flattening extends on the back of more hawkish central bank reaction functions   Today's events and market view A strong raft of UK employment data is likely to keep upward pressure on sterling front-end rates today although these have already priced more than 100bp of additional hikes as of yesterday's close. Faster wage and employment growth will probably be discussed by new MPC member Megan Greene today. Other Bank of England testimonies include that of governor Andrew Bailey. Today’s Eurozone inflation numbers are final reads and therefore less likely to surprise at the headline level. It will still be interesting to parse through the inflation components for signs of narrowing or broadening inflation pressure. Germany’s Zew survey will be an opportunity to get a (very) early read on June sentiment indicators. Consensus is for a decline as, we think, actually economic data and China’s reopening, are not living up to expectations. Italy is back on primary markets with auctions in the 3Y/7Y/30Y sectors, adding to auctions from the UK (10Y), Germany (5Y), and Finland (10Y/13Y). Later in the day, the US Treasury will auction 30Y T-bonds. Germany also mandated banks for the launch of a 30Y green bond which should take place today. The US release calendar kicks off early with the national federation of independent business’ optimism indicator. The main event, however, with be the publication of the May CPI report. Consensus is for the monthly core inflation print to remain at an elevated 0.4% but most seem to think this will be enough for the Fed to refrain from hiking at this week’s meeting.

Fed set for a rate pause; UK GDP set to rebound in April    European markets closed higher for the second day in a row, after the latest US inflation numbers for May came in at a 2-year low, and speculation about further Chinese stimulus measures boosted sentiment.   US markets followed suit although the enthusiasm and gains were tempered ahead of today's Fed meeting as caution set in ahead of the rate announcement.   Having seen US CPI for May come in at a two year low of 4%, in numbers released yesterday, market expectations are for the US central bank to take a pause today with a view to looking at a hike in July. Of course, this will be predicated on how the economic data plays out over the next 6-7 weeks but nonetheless the idea that you would commit to a hike in July begs the question why not hike now and keep your options open regarding July, ensuring that financial conditions don't loosen too much.   Today's May PPI numbers are only likely to reinforce this more dovish tilt, if as expected we see further evidence of slowing prices, with core prices set to fall below 3% for the first time in over 3 years. Headline PPI is expected to slow to 1.5%, down from 2.3%.       When Fed officials set out the "skip" mindset in their numerous briefings since the May decision when the decision was taken to remove the line that signalled more rate hikes were coming, there was always a risk that this sort of pre-commitment might turn out to be problematic.   So, while markets are fully expecting the Fed to announce no change today, Powell's biggest challenge will be in keeping the prospect of a July rate hike a credible outcome, while at the same time as outlining the Fed's economic projections for the rest of the year, as well as for 2024.   In their previous projections they expect unemployment to rise to a median target of 4.5% by the end of this year. Is that even remotely credible now given we are currently at 3.7%, while its core PCE inflation target is 3.6%, and median GDP is at 0.4%.     Before we get to the Fed meeting the focus shifts back to the UK economy after yesterday's unexpectedly solid April jobs data, as well as the sharp surge in wages growth, which prompted UK 2-year gilt yields to surge to their highest levels since 2008, up almost 25bps on the day.   While unemployment slipped back to 3.8% as more people returned to the work force, wage growth also rose sharply to 7.2%, showing once again the resilience of the UK labour market, and once again underlining the policy failures of the Bank of England in looking to contain an inflation genie that has got away from them.   This failure now has markets pricing in the prospect that we could see bank rate as high as 6% in the coming months, from its current 4.5%. The risk is now the Bank of England, stung by the fierce and deserved criticism coming its way, will now overreact at a time when inflation could well start to come down sharply in the second half of this year.   So far this year the UK economy has held up reasonably well, defying the doomsters that were predicting a 2-year recession at the end of last year. As things stand, we aren't there yet, unlike Germany and the EU who are both in technical recessions.   Sharp falls in energy prices have helped in this regard, and economic activity has held up well, with PMI activity showing a lot of resilience, however the biggest test is set to come given that most mortgage holders have been on fixed rates these past two years which are about to roll off.     As we look to today's UK April GDP numbers, we've just come off a March contraction of -0.3% which acted as a drag on Q1's 0.1% expansion. The reason for the poor performance in March was due to various public sector strike action from healthcare and transport, which weighed heavily on the services sector which saw a contraction of -0.5%.     The performance would have been worse but for a significant rebound in construction and manufacturing activity which saw strong rebounds of 0.7%.     This isn't expected to be repeated in today's April numbers, however there was still widespread strike action which is likely to have impacted on public services output.   The strong performance from manufacturing is also unlikely to be repeated with some modest declines, however services should rebound to the tune of 0.3%, although the poor March number is likely to drag the rolling 3M/3M reading down from 0.1% to -0.1%.       EUR/USD – failed at the main resistance at the 1.0820/30 area, which needs to break to kick on higher towards 1.0920. We still have support back at the recent lows at 1.0635.     GBP/USD – finding resistance at trend line resistance from the 2021 highs currently at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area. We have support at 1.2450.      EUR/GBP – has slipped back from the 0.8615 area yesterday, however while above the 0.8540 10-month lows, the key day reversal scenario just about remains intact. A break below 0.8530 targets a move towards 0. 8350.     USD/JPY – looks set to retest the recent highs at 140.95, with the potential to move up towards 142.50.  Upside remains intact while above 138.30.      FTSE100 is expected to open 10 points lower at 7,585     DAX is expected to open 15 points lower at 16,215     CAC40 is expected to open 3 points lower at 7,288

As Fed delivers a "hawkish" pause, attention turns to the ECB  European markets closed the day higher yesterday, with the DAX making a new record high, ahead of last night's Fed decision, while US markets closed the session mixed after a choppy session, which saw the Fed deliver a hawkish pause to their rating hiking cycle.     Asia markets were mixed with the latest Chinese retail sales data for May coming in below expectations, rising by 12.7%, along with industrial production which gained 3.5%. The last few weeks have delivered plenty of evidence that headline inflation is slowing sharply, and while core prices are probably stickier than the Fed would like, the direction of travel with respect to PPI suggests that in a couple of months we could be looking at a very different outlook.   Having indicated that they would be looking to hike in July, after removing the line that signalled more rate hikes were coming at the May meeting, there was always a risk that this sort of pre-commitment might turn out to be problematic. So, it has proved, with many suggesting that they would be better off hiking today, and then playing a game of wait and see.   In any case with the Federal Reserve unwilling to step back from its commitment to a pause this month, and delivering on an expectation to keep rates unchanged, they compensated for that by raising their expectation this year for at least 2 more rate hikes, putting the terminal rate at 5.6%, with 12 Fed officials, projecting such a move.    This unexpected hawkish shift saw US 2-year yields spike sharply as the market priced out the prospect of rate cuts later this year, which was never likely anyway, however we also saw the US central bank change their forecasts for unemployment to rise to 4.1% by the end of this year, down from 4.6%, while tweaking its PCE forecast to 3.2% from 3.3%.     Unsurprisingly, the US dollar which had been in retreat, rebounded strongly and stock markets dropped back sharply, over concerns that the US central bank could be on the cusp of a policy mistake.  Once Powell started his press conference the initial moves started to unwind and markets attempted to absorb the message from last night's events, and whether the two more hikes guidance, was based on any type of empirical evidence, or merely a mechanism to steer market expectations, and keep last night's decision unanimous.   The tone of Powell's press conference suggests it was the latter While yesterday's post decision reaction shows that markets were caught the wrong side of last night's decision, the bigger test will be in the economic data. If inflation continues to slow and jobs growth remains steady, the question needs to be asked as to whether the Fed will really pull the trigger on more rate hikes? It seems unlikely.     Moving on from last night's decision, attention will now shift towards today's ECB rate decision.   There appears to be little doubt that we will probably see another 25bps rate hike from the European Central Bank at today's rate meeting.   Nonetheless this would be a notable shift from some of the recent narrative that has accompanied recent discussions about the likely rate path for the ECB. The change of emphasis appears to have come about because of recent sharp falls in the headline rate of CPI, as well as evidence that core prices may well have also seen a peak.   In the latest flash CPI numbers for May, headline inflation fell to 6.1%, a sharp fall from the 7% we saw in April, as well as the 9.2% we were seeing at the end of last year. The big concern in recent months has been core prices which hit a record high of 5.7% in March and fell to 5.3% in the most recent numbers released earlier this month. Based on these numbers alone one can understand the ECB's reluctance to stop hiking, however there are already risks emerging that might suggest the ECB could be close to its own pause moment.       These risks are sharp slowdowns in PPI, which tends to act as a leading indicator for future inflation trends with German PPI now in negative territory. The German economy is also in recession, along with the rest of the eurozone, and yet various ECB policymakers are still calling for several more rate rises, including the likes of Joachim Nagel head of the German Bundesbank, due to still high levels of CPI inflation.     This comes across as particularly risky at a time when we are starting to see increasing signs of deflation across the global economy. Whatever the ECB does today, and a hike is priced in, it is what comes next which is very much up for debate, where ECB President Christine Lagarde will need to tread carefully.     Will the hawks on the ECB maintain their hawkish narrative or will see those claws start to get reined in until we get a better idea of the cumulative effect that the current spate of rate hikes has had. Coming so soon after last nights Fed decision we get US retail sales for May and weekly jobless claims.   Retail sales for May are expected to decline by -0.2%, down from 0.4% in April, while weekly jobless claims which spiked up to 261k last week are expected to slip back to 245k.     The last time we spiked above 260k a few weeks ago it was revised away. Will the same thing happen today?   EUR/USD – pushed above the 1.0820/30 area yesterday and closing in on the 50-day SMA at 1.0880, with resistance now at 1.0920. We still have support back at the recent lows at 1.0635.     GBP/USD – broke above trend line resistance from the 2021 highs at 1.2630 and testing above 1.2680 with the next resistance at 1.2760, which is a key barrier for a move towards the 1.3000 area. We have support at 1.2450.      EUR/GBP – still looking soft despite the key day reversal day earlier this week, but still above 0.8540 support. A break below 0.8530 targets a move towards 0.8350. Resistance at 0.8620.     USD/JPY – still trying to move through the 140.30 area with resistance behind that at the recent highs at 140.95.  Upside remains intact while above 138.30.      FTSE100 is expected to open 10 points lower at 7,592     DAX is expected to open 12 points lower at 16,298     CAC40 is expected to open 15 points lower at 7,313  

While the Fed and ECB sound hawkish, the BoJ continues to remain dovish    While European markets underwent a rather subdued and negative finish yesterday, US markets continued their recent exuberant run, with the S&P500 and Nasdaq 100 both closing higher for the 6th day in a row. This was a little surprising given that the Federal Reserve and the European Central Bank both delivered very hawkish outcomes in the space of 24 hours of each other, as well as painting very cautious outlooks for growth and inflation over the course of the next 12 months. While the Federal Reserve kept rates unchanged, they upgraded their terminal rate forecast for this year by indicating that they expected to deliver another 2 rate hikes by the end of this year. This was a little surprising even with the fact that the labour market continues to exhibit significant tightness.     This is because a lot of the main inflation indicators, particularly the forward-looking ones, are showing increasing evidence of disinflation. If they are showing these signs now then the signs will be much more evident in the next few weeks, which means that for all the Fed's jawboning today its highly unlikely they will be able to follow through on it.     Quite simply markets aren't buying it with US 2-year yields below the levels they were prior to Wednesday's Fed meeting. In essence the market thinks the Fed is done as far as rate hikes are concerned.     Yesterday's economic data also cast doubt on the Fed's forward guidance for rates this year with US import prices for May plunging by -5.9% year on year, close to levels last seen in April 2020. Export prices on the other hand fell even more sharply, falling to a record low of -10.1%   While the ECB did deliver a rate hike, they also revised upwards their core inflation forecasts for this year from 4.6% to 5.1%, which was quite punchy given that core inflation has already fallen back to 5.3% in this month's flash numbers, down from 5.6% in April, and just below the record high of 5.7% set in March. This core number is expected to be confirmed in data scheduled to be released later this morning.   ECB President Christine Lagarde even went as far as more or less pre-committing to another 25bps rate hike in July, which in turn helped to push European yields sharply higher. They may well be able to deliver on this, however there is room for scepticism when it comes to any rate moves beyond that.   This is because their core inflation expectations for the end of this year come across as way too high. Does anyone at the ECB seriously believe that core prices won't have fallen below 5% from where they are now by the end of this year, when producer price inflation is already slowing sharply. If they do, they need to have another look at their economic models.   This morning the Bank of Japan delivered their own assessment of the outlook for the Japanese economy, with traders and investors increasingly scratching their heads as to why new Bank of Japan governor Kazuo Ueda seems so reluctant to even consider starting to look at paring back their own easy monetary policy, when core CPI is at 4.1% and the highest level since the 1980's. The BoJ seems to be of the opinion that current levels of core inflation aren't sustainable and that prices will fall back towards 3.5%, before accelerating modestly again.      The central bank is due to update its economic forecasts in July, while Governor Ueda is due to speak in a couple of hours' time when he might offer further insights as to why the Bank of Japan is reluctant to alter its policy settings quite yet.   EUR/USD – pushed above the 50-day SMA at 1.0880, as well as pushing through 1.0920/30 opening the prospect for a return to the April highs at 1.1095. We now have support back at the 1.0820/30 break out level.     GBP/USD – broken above previous highs this year at 1.2680 and kicked on above the 1.2760 area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – continues to hold above the 0.8530/40 area rallying back to the 0.8600 area before slipping back. The key day reversal from earlier this week is just about still valid, however the lack of a rebound is a concern. A break below 0.8530 targets a move towards 0.8350. Resistance at 0.8620.     USD/JPY – pushed up to 141.50 yesterday, before slipping back, with the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 7 points higher at 7,635     DAX is expected to open 15 points higher at 16,305     CAC40 is expected to open unchanged at 7,290     By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

Rates Spark: Keeping upward pressure on the front end After the Fed, the ECB has managed to more than live up to the market's hawkish expectations. The central banks have had some success in giving the high-for-longer narrative more traction and providing especially front-end rates more room to rise. Whether the narrative sticks will ultimately depend on the data.   The ECB more than lives up to hawkish expectations The ECB has lived up to the hawkish expectations, especially on the back of having revised up its own inflation forecasts. In the press conference, President Christine Lagarde used the words we have become accustomed to, that “more ground needs to be covered”. And she heavily hinted at another hike in July. The initial reaction to the ECB decision saw a strong bear flattening of the curve. Note that it mainly comes from pricing out 2024 cuts than pricing in a higher terminal rate. That move later faded somewhat, but 2Y Bund yield still ended 10bp higher on the day, while the 10Y yield was up by 5bp and thus stayed shy of its recent highs at 2.55%. The 2s10s curve now stands at close to -63bp, its most inverted since the banking turmoil in March when the curve briefly hit -73bp.   The inversion is reflective of the ECB having to straddle persistently high inflation on the one hand, but also already weakening economic data on the other. The way the ECB deals with it is to focus on the former while being quite optimistic about the latter. That optimistic view on the economy also gives it more room to keep tightening, keeping front-end yields elevated. But the market will have to account for the increasing probability that this narrow focus on current inflation to determine the ECB's success results in a policy error further down the road. Hence the reluctance in longer rates to follow the front end higher. As a final note, the ECB confirmed that APP reinvestments will end in July. Lagarde signalled that ECB was not worried about the declines in excess reserves in the banking system also with the €477bn TLTRO redemption coming up at the end of this month. Today the ECB will also announce any further voluntary TLTRO repayments from banks.   ECB and Fed were successful in curbing rate cut expectations

FXMAG.COM: Could you please comment on the FOMC decision?  Fed Downshifts with "Hawkish Hold," All Eyes on Economic Data Heading into the Summer   The Federal Reserve (Fed) held its meeting and decided to maintain interest rates at their current levels, as widely anticipated. However, there were notable developments and insights provided during the meeting and subsequent press conference. Chairman Powell reaffirmed a hawkish stance and reiterated the Fed's commitment to achieving 2% inflation and a strong labor market. Powell highlighted that the full effects of tightening have not yet been felt, indicating the potential for further rate hikes in the future. The Fed's Summary of Economic Projections revealed an upward revision in GDP growth forecasts for 2023, reflecting an improved outlook for the US economy. Additionally, the dot plot indicated that the median FOMC member expects interest rates to be higher by the end of the year.  During the press conference, Chairman Powell emphasized that the labor market remains tight, although there are signs of supply and demand coming into better balance. He acknowledged that labor demand still exceeds the available workforce. Powell expressed caution regarding inflation, stating that getting it back to the target of 2% requires continued efforts. He highlighted that reducing inflation may necessitate below-trend growth and some softening of labor conditions. Powell also mentioned that decisions will be made meeting by meeting based on evolving data and the outlook. Looking ahead, the Fed's next meeting in July is expected to be significant, as Powell referred to it as a "live meeting." This indicates that decisions regarding interest rates and monetary policy may be made during that meeting. The Fed will closely monitor incoming data, the evolving outlook, and assess the impact of policy decisions before making any changes. Overall, the Fed's meeting underscored a hawkish tone, with an acknowledgment of the strong labor market and a willingness to address inflation concerns through potential rate hikes in the future.   Read more

In the ever-evolving landscape of financial markets, decisions made by major central banks have a significant impact on shaping trends. We recently had the opportunity to speak with Matthew Weller, an analyst at StoneX, to gain insights into the current state of affairs.   Read more   The European Central Bank (ECB) recently made headlines with its "Hawkish Hike," raising its key interest rate by 25 basis points to 3.5%. This move aims to combat the escalating inflation in the eurozone, marking the eighth consecutive rate hike since July 2022. The ECB's determination to bring inflation down from its current 6.1% to its target of 2% is evident. ECB President Christine Lagarde has hinted at the possibility of further rate hikes at the next meeting in July, emphasizing the need to tackle inflation head-on. Lagarde made it clear that the ECB has no plans to pause its rate hikes. While the ECB focuses on inflation control, other central banks, such as the US Federal Reserve, have taken a pause in their rate hikes to assess their impact on economic growth and employment. However, the Fed's projections indicate the potential for two more rate hikes this year. Similarly, central banks in Australia and Canada have resumed rate increases after a temporary pause, underscoring the global challenge of high inflation. The ECB's decision to raise rates comes at a time of economic uncertainty, influenced by factors such as the ongoing conflict between Russia and Ukraine and potential wage agreements that may further fuel inflationary pressures. The ECB acknowledges that short-term economic growth may remain subdued, but it expects improvements as inflation subsides and supply disruptions ease. While concerns persist regarding the potential negative impact of higher rates on the economy and the risk of a recession, the ECB remains committed to addressing inflation as a top priority   FXMAG.COM: Could you give as your point of view about how the gold prices would behave in next weeks? Is there a chance that there will be new ATH? Gold Consolidates Amid Hawkish Central Bank Actions   With major central banks continuing to tighten monetary policy and inflation still receding (if more gradually than before) gold prices are likely to remain on the back foot in the near term. As of writing, the yellow metal is trading in the mid-$1900s, where it has spent the last three weeks consolidating. Bulls will be looking for a break above the June high near $1990 to signal a potential retest of the record highs near $2075 as we move into July, whereas a confirmed break below $1930 could open the door for a retest of the 200-day EMA near $1900 next.

The aluminum industry plays a critical role in various sectors including transportation, building & construction, electrical engineering, consumer goods production, foil & packaging, machinery & equipment and many others. By some estimations, the global aluminum market is projected to grow from roughly $169 billion in 2022 to almost $256 billion by 2029, at a CAGR of 6.1% in the forecast period. Current economic cooldown shouldn’t be a barrier for increased global demand for aluminum. Two major sectors, the transport, which accounts for almost a third of the global aluminum market share, and construction, are the two main drivers for the aluminum market. Another major growth factor is machinery demand, which has been growing in the aftermath of COVID-19 as industrial activities picked up. Some of the factors driving the demand for aluminum are the implementation of strict greenhouse gas (GHG) and carbon emission requirements, increase in focus on the use of lightweight aluminum for the fabrication of vehicle durable components, and low hazardous emission. Here are some key possibilities and risks emerging from the growing demand for aluminum worldwide.   Possibilities: Growing demand: Demand for aluminum is expected to increase due to its lightness, recyclability and its use in sectors such as electric vehicles, renewable energy infrastructure and lightweight building materials. Sustainability Focus: Aluminum's recyclability and low carbon footprint make it attractive to industries looking for sustainable solutions, making it attractive to companies and investors looking for sustainability. Technological advances: Continuous research and development is aimed at improving the properties and applications of aluminum, opening the door to new opportunities in various industries.   Risks: Price Volatility: The aluminum market is subject to price fluctuations, which are affected by factors such as global economic conditions, supply and demand dynamics, energy costs and geopolitical events. Raw material availability: Aluminum production is dependent on the availability and cost of raw materials such as bauxite and alumina. Any disruptions or price fluctuations in these markets could affect the profitability of aluminum companies. Regulatory and trade policy: Changes in regulations and trade policy, including tariffs and export restrictions, could affect the global aluminum market, which could lead to problems for companies operating in this sector. As the market is being shaped by these possibilities and possible risks, its future is ultimately dependent on whether it could satisfy the increased focus on sustainability and the transition to a low-carbon economy.  Demand for aluminum is expected to continue to grow as industries seek lightweight and energy efficient materials, especially fir the global infrastructure development projects in emerging markets, and the market could see significant growth if it succeeds in technological innovation.

Despite the weak GDP growth data, economists at Goldman Sachs still believe that the US economy will avoid a recession. Goldman Sachs' estimates are based on bold corporate earnings forecasts, steady decline in inflation and strong labour market data. While the economy is headed for a so-called soft landing, the investment bank recommends focusing on value stocks with strong balance sheets.   Goldman Sachs presented a list of the Russell 3000 stocks, which demonstrate stable financial performance and have reasonable valuations. Analysts from a Freedom Finance Europe, a company operating Freedom24 online brokerage platform, analysed the Goldman Sachs list and chose three stocks which have the best potential return per unit of risk accepted: 3M Company (MMM) PayPal Holdings (PYPL) Sealed Air Corporation (SEE)   3M Company: Manufacturing business with stable prospects Ticker: MMM.US Entry price: $99–$101 Target price: $129 Horizon: 12 months  About company   3M Company (MMM) is a diversified business conglomerate offering a wide range of products including adhesives, abrasives, laminates, medical dressings and healthcare information systems. 3M Company operates through four business segments: Safety and Industrial, Transportation and Electronics, Health Care, and Consumer.   Why do we like 3M Company? 3M Company has a strong competitive position thanks to its broad portfolio of over 100,000 patents, a recognizable brand and a corporate culture focused on innovation. Continuous investment in research and development allows the company to introduce new products and register more than 3,500 patents annually, which improves product quality and production efficiency. 3M owns 51 technology platforms covering areas such as ceramics, abrasives, adhesives, and nanotechnology. 3M serves a large number of end markets, including the most dynamic and promising markets of personal protective equipment and medical software. The growth of the personal protective equipment market is fueled by the increasing companies’ attention to the health and safety of employees, also monitored by government agencies. According to Grand View Research, in the US, the market will grow at a compound annual rate (CAGR) of 6.7% until 2030 and reach $32.5 billion by the end of the period. The global market for personal protective equipment is also likely to grow, helped by rapid industrialisation in developing countries.  The medical software market is also experiencing strong tailwinds amid the rising rates of wound infections, diabetes and chronic diseases, and ageing population. According to Acumen Research and Consulting, the global healthcare software market was estimated at $41.2 billion in 2021 and is expected to reach $104.1 billion by 2030, implying a CAGR of 10.9%. Last year, 3M announced a plan to spin-off its medical solutions business into a separate firm. With the medical equipment and healthcare companies trading at a significant premium to industrial enterprises, we expect the transaction to help 3M to unlock its value potential. The spin-off is expected to be completed by the end of 2023.   3M is a so-called dividend aristocrat, as the company has maintained dividend payments for more than 100 years and has increased its annual dividend for 64 years in a row. At the current market value, the dividend yield of the stock is about 6%, which is the highest level since 1996. We believe that 3M is able to maintain the current level of dividend payments because of the following reasons: In 2022, the company allocated 87.7% of free cash flow to dividends, which is a reasonable level for a mature business. Given the company’s restrained investment programme, we believe that 3M will continue to generate significant free cash flow. In Q1 2023, 3M announced a plan to improve operational efficiency, including a reduction in headcount by 6,000 people. The company plans to increase operating profit by $700–$900 million by the end of the year. That is, the payout ratio will decrease organically, due to the growth of cash flow. 3M has a healthy balance sheet (more below) with no significant debt repayments expected in coming years.   Financial performance 3M Company's financial performance in the trailing twelve months (TTM) can be summarised as follows: TTM revenue amounted to $33.43 billion, down by 2.3% from the end of the last year. The decrease was observed in all segments except healthcare. Gross profit decreased slightly from $15.00 billion to $14.41 billion. Gross margin stood at 43.11% against 43.81% for the year. Operating profit amounted to $6.14 billion versus $6.54 billion at the end of the last year. Operating margin decreased from 19.10% to 18.36%. Net income was down from $5.78 billion to $5.45 billion. Net margin decreased from 16.88% to 16.31%. Cash from operations increased from $5.59 billion to $5.86 billion, driven by a decrease in net working capital. Free cash flow rose from $3.84 billion to $4.06 billion.   During the latest conference call, the company's management announced efficiency measures that include cutting jobs, simplifying the structure of the supply chain and optimising operating expenses. In case of successful implementation of the presented measures, 3M is likely to return to the moderate growth trajectory.   Stock valuation Market headwinds have been overly reflected in the current 3M stock value. However, it does not fully reflect the business potential in case of successful implementation of efficiency measures. 3M currently trades at a significant discount to peers. The minimum price target from investment banks set by Crispidea is $103 per share. At the same time, Langenberg estimates MMM at $210 per share. According to the Wall Street consensus, the stock’s fair market value is $114, implying a 14.5% upside potential. Our estimate is based on industry average multiples. The sector average EV/Sales multiple is 1.71x (-17.79% to the current price), EV/EBITDA is 11.73x (+53.13%), P/Cash flow is 14.29x (+51.86%), and P/E is 19.30x (+86.47%). For each multiple, we assigned a specific gravity of 0.125. As noted above, the Wall Street consensus implies a 14.5% upside potential. We assigned a specific gravity for this factor at 0.50. Thus, we determined the stock’s fair market value at $129 per share, implying a 29% upside potential.   Key risks 3M Company operates in a highly cyclical industry. Although we believe that macroeconomic challenges have already been priced in, there is a possibility that the deterioration in consumer sentiment will have a greater impact than we think. In this case, the stock may remain under for an extended period of time. 3M’ margins have been declining steadily since 2020. If the efficiency plan is not implemented or does not produce the expected results, the stock could remain under pressure.   PayPal Holdings: Online payments benefiting from the market growth Ticker: PYPL.US Entry price: $63–$65 Target price: $93 Horizon: 12 months   About company PayPal Holdings (PYPL) operates a technology platform that allows users to make digital payments worldwide in 150 currencies and withdraw funds to their bank accounts. The company provides a digital alternative to traditional money transfer methods. PayPal was founded in 1998 and is headquartered in San Jose, California.   Why do we like PayPal Holdings? Over the past few years, PayPal’s stock has shown disappointing returns. The lifting of Covid-19 restrictions, global supply chain issues, deteriorating consumer sentiment, monetary tightening and the war in Ukraine have all weighed on the firm's financials and growth potential. Changes in the company's management did not add confidence to investors either. As a result, one of the largest online payments market players has lost about 80% of its market cap compared to its highs of 2021. During the Investor Day 2021, PayPal’s management set a goal to increase the number of active accounts from 377 million to 750 million over five years, i.e. more than 70 million a year. However, already in Q4 of the same year, the company announced that it would not be able to achieve the goal and in 2022 the number of accounts would  increase by only 15–20 million. In fact, PayPal managed to attract only 9 million new customers in 2022, and the number decreased by 2 million in Q1 2023. The company’s inability to maintain growth was the main reason behind the stock price depreciation. However, in our view, the market has overreacted to the growth slowdown. PayPal is a mature business with a high penetration level. According to Oberlo, 8.2% of all digital shoppers in the world used PayPal in 2022. With this level of penetration, it is difficult for the company to continue to grow market share, and given the overall decline in sales in the e-commerce sector, PayPal's headwinds seem completely natural. The long-term outlook for the digital payments market remains promising. According to Mordor Intelligence, the market size will grow from $8.7 trillion in 2023 to $14.8 trillion by 2028, implying a CAGR of 11.08% over the forecast period. With its large user base, network effect, brand strength and business scale, PayPal has a significant competitive advantage. The company has 433 million active accounts and serves 35 million merchants worldwide. Over the last 12 months, the firm has processed payments worth $1.39 trillion, earned $28 billion in fee and commission income, and $5.1 billion in free cash flow. PayPal has been actively investing in its future. The company owns one of the leading digital wallets, Venmo, and plans to develop another “super app” that would provide users with a complete set of commercial and communication services in one package. According to the company, citing third-party research, 60% of consumers choose PayPal as their primary tool for making online transactions. Only 8% of respondents were in favour of the closest competitor. PayPal customers are twice as likely to make a purchase when they see the company’s icon. PayPal has significantly increased the number of new and repeating purchases, as well as improved the placed orders’ conversion rate. In other words, PayPal is an essential tool for any online merchant. The company seeks to maximise shareholder value through share buybacks. In Q2 2022, PayPal’s board of directors authorised a $15 billion buyback programme, of which only $4.1 billion was spent. Thus, the current programme allows the firm to buy back shares worth $10.9 billion, or about 15% of PayPal's current cap.   Financial performance PayPal’s financial performance in the trailing 12 months (TTM) can be summarised as follows: TTM revenue was $28.08 billion, up 2.0% YoY. The largest increase was observed in the company’s key market of the US (+13%). Operating income increased from $3.84 billion to $4.13 billion. Operating margin rose from 13.94% to 14.69%. Net income amounted to $2.71 billion versus $2.42 billion at the end of the last year. Net margin increased from 8.79% to 9.63%. Cash from operations declined slightly from $5.81 billion to $5.77 billion, driven by an increase in net working capital. Free cash flow amounted to $5.08 billion against $5.11 billion at the end of 2022. PayPal’s management seeks to increase business margins by cutting costs and focusing on the most active and profitable users. This strategy is already showing positive results: the firm raised its net income guidance twice in the past two quarters. PayPal has a strong balance sheet, with total debt of $10.48 billion, cash equivalents and short-term investments of $10.66 billion, and net debt of -$179 million.   Stock valuation PayPal trades at a significant discount to the industry average. The minimum price target from investment banks set by BNP Paribas is $58 per share. At the same time, Berenberg estimates PYPL at $145 per share. According to the Wall Street consensus, the stock’s fair market value is $93, implying a 46.4% upside potential.   Key risks Working in the market of cross-border money transfers makes PayPal susceptible to macroeconomic conditions. High inflation, tight monetary policy and a slowdown in economic growth — all these factors carry risks for people’s payment activity and, as a result, for the company's financial performance. Amid the rapidly increasing popularity of fintech platforms, competition in the cross-border money transfer market has intensified. Companies such as Wise, Payoneer and Revolut have established strong market presence and are constantly increasing their market shares. The current trend threatens PayPal's position.   Sealed Air Corp.: Packaging supplier with good chances to rise Ticker: SEE.US Entry price: $38–$40 Target price: $54 Horizon: 12 months    About company Sealed Air Corp. (SEE) provides packaging solutions for food, consumer goods, pharmaceutical and medical devices, and industrial manufacturing markets. The company operates through two business segments: Food and Protective. Sealed Air was founded in 1960 and is headquartered in Charlotte, North Carolina.   Why do we like Sealed Air Corp.? As a major supplier of consumer packaging, Sealed Air has benefited greatly from the tailwinds in the e-commerce sector during the pandemic. However, declining demand in the protective packaging segment and weakness in the retail end markets affected the company’s financials and market value. Over the past year, Sealed Air’s market cap has lost more than 36%. Sealed Air is not the only cyclical business company facing consumer weakness and destocking. Similar headwinds have been experienced by intermodal railroads and retailers, who continue to cut inventories to cope with declining consumer demand. However, headwinds are temporary. Sealed Air's management expects the challenges to remain in Q2 2023, but predict the market environment to normalise in H2 2023. The company cites China’s recovery from Covid lockdowns as one of the growth drivers. The long-term potentials of Sealed Air's target markets remain favourable. According to Grand View Research, the global food packaging market is valued at $362.9 billion and is expected to reach $565.4 billion by 2030, implying a CAGR of 5.7% over the forecast period. The segment accounts for more than half of Sealed Air's revenue. The industrial packaging market is also expected to grow faster than inflation. According to Mordor Intelligence, the industrial packaging market is forecast to grow at a CAGR of 5.0% and reach $80.9 billion by 2028. Sealed Air has been regularly increasing its target markets by adding new offerings. In November 2022, the company signed a definitive agreement to acquire Liquibox and use its packaging solutions, such as bag-in-box, to expand into new markets. The company's management expects liquid packaging sales to reach $1 billion by 2027. Another area with significant potential is Automated Protective Solutions, which currently account for about 35% of Sealed Air's business. The segment targetes a variety of customers, from industrial enterprises to e-commerce. The company has been working to expand and optimise its existing portfolio while increasing its market penetration. The segment’s address market is estimated at $15 billion. Sealed Air plans to expand its portfolio by implementing a comprehensive strategy and aggressively expanding its fibre solutions and equipment independent systems. This will create new opportunities and provide an additional growth driver. Sealed Air seeks to maximise shareholder value through a prudent capital allocation strategy. The stock’s current dividend yield of 2% is not very high, but the company is buying back its shares. Under the current $1 billion share buyback programme, authorised by the board in August 2021, Sealed Air can purchase shares worth $537 million, or about 10% of the firm's current market cap.   Financial performance  Sealed Air's financial results in the trailing 12 months (TTM) can be summarised as follows: TTM revenue was $5.57 billion, down 1.2% YoY. The decline was driven by weak results in Q1, which saw the Protective segment shed 19% and the food segment up 6%. Gross profit decreased from $1.77 billion to $1.70 billion. Gross margin fell from 31.42% to 30.52%. Operating profit amounted to $852.2 million versus $944.8 million at the end of 2022. Operating margin decreased from 16.75% to 15.29%. Net profit amounted to $404.3 million against $491.6 million at the end of 2022. Net margin decreased from 8.71% to 7.25%. Cash from operations slightly increased from $613.3 million to $616.8 million due to a decrease in net working capital. Free cash flow amounted to $381.6 million versus $376.0 million at the end of the year.   The decline in financial performance in the last reporting period was due to the cyclical nature of the Protective segment, which offers packaging materials for consumer goods, pharmaceutical and medical devices, as well as industrial markets. We expect the segment to recover as end-market inventory levels stabilise, declining steadily after abnormal growth amid global supply chain issues. Sealed Air is heavily leveraged, with total debt of $4.83 billion, cash and cash equivalents of $303.1 million, and net debt of $4.53 billion. However, we do not see any risks to the firm's financial stability, as the interest coverage ratio remains within normal levels. In addition, the next repayment of the company's debt in the amount of $423.7 million is not expected until December 2024.   Stock valuation Sealed Air currently trades at the industry average on the main multiples: EV/Sales — 1.67x, EV/EBITDA — 9.21x, P/Cash flow — 9.04x, P/E — 13.98x, FWD P/E — 10.20x. However, the company enjoys a stronger market position compared to its peers as it has better margins (meaning the firm's cash flow is less volatile) and significant exposure for the non-discretionary and less cyclical food segment. The minimum price target from investment banks set by Morgan Stanley is $48 per share. At the same time, UBS values SEE at $59 per share. According to the Wall Street consensus, the stock’s fair market value is $54, implying a 40% upside potential.   Key risks Sealed Air operates in a highly cyclical industry. Although we believe that macroeconomic challenges have already been priced in, there is a possibility that the deterioration in consumer sentiment will have a greater impact than we think. In this case, the stock may remain under pressure for an extended period of time.   While we see no risks to Sealed Air's financial strength, the company's high leverage, coupled with the cyclical nature of the industry, could increase the volatility of the firm's stock.

Rates Spark: Where rates upside could come from Yield curves are already consistent with the new hawkish message from central banks, so any rise in yields is more likely to come from economic data. Yields may well continue rising, to 4% for 10Y Treasuries, but this pis set to come with a more inverted curve.   Data is already in the price, as is the new more hawkish central bank reaction function At the fundamental level, rates are currently driven by two forces. Firstly what the market’s current economic projections suggest is the appropriate path for policy rates in the future to bring inflation to target, and second what central banks suggest this path should be. Most of the time, these two estimates are very close to each other. It is worth remembering that in a “data dependent” setting where central banks are reacting to incoming data, efficient markets should quickly reprice with each important economic release, that is if central banks’ reaction function is clearly communicated and understood. Market interest rates over the past few weeks have been driven by a reassessment in central banks’ reaction function     This point of the above reminder is to highlight that the retracement higher in market interest rates over the past few weeks has been driven mostly by a reassessment in central banks’ reaction function, especially in a context where the global outlook, for instance China's recovery, is dimming.   Cases in point are the resumption of the Bank of Canada’s hiking cycle, or the Fed’s skipping the June meeting but communicating that more hikes are likely. From here, the question is whether the much-awaited Powelltestimony tomorrow will deliver a further update to the Fed’s reaction function, or if markets materially differ from what the Fed sees as the appropriate path for policy rates.     Dollar and euro swap forwards are no longer pricing cuts before early 2024

Not much mis-pricing for central banks to push back against Rate cut expectations have all but disappeared from the dollar curve for 2023. Similarly, the euro curve doesn’t price a first cut before the first or even second quarter of next year. In our view, this counts as a communication success for central banks, and it reduces the mis-pricing (in their view) that they can push back against. The conclusion from this is that barring yet another central bank communication change, say Powell wanting more explicitly the curve to price two more hikes this year rather than one, any re-pricing higher in rates will be to be driven by the data. Similarly from the ECB, we do not get the feeling that the debate over a potential September hike is settled. Data to be released by the end of the summer, and another update to the Bank's forecast will be key, data-dependence in short.   Of course one might simply disagree that current market rates accurately reflect the data. One such example is the very inverted state of the US yield curve when one compares 10Y Treasury yields, below 4%, to policy rates, above 5%. Inversion can persist if the market’s conviction is high that rates will be cut aggressively in the future. In the case of the Fed, but it is also true of the ECB, upbeat central bank economic forecasts explain their hawkish tone, while dimmer predictions from investors justify lower longer-dated yields.   All this shouldn't prevent another sell off on long-dated bonds, for instance to 4% for 10Y Treasuries if the economic outlook improves, but it should all but ensure that another rise in yields will bring a more inverted curve until rates cuts are much closer in time.   Yields already reflect hawkish central banks, but also a dim economic outlook   Today's events and market view Economic data today consists mainly of the European construction output and US housing data, in the form of housing starts and building permits. The US session will also see the release of the Philadelphia non-manufacturing index. There will be front-end bond supply from Europe, namely a 2Y auction from Germany, and a new 5Y launch from the UK. In this relatively thin economic and supply calendar, central bank comments will be in focus. They include, among other, VP Luis De Guindos from the ECB and John Williams of the Fed. We argue above that with the recent flurry of central bank meetings, it is unlikely that market rates are too far away from where bankers would like to see them.

European and US stock markets have seen a significant shift in sentiment over the past few days when it comes to the global economy. Rising bond yields, driven by more hawkish central banks, which has prompted investors to reassess the outlook when it comes to valuations and growth.     While European markets saw their biggest weekly loss since March, US markets also took a tumble, albeit the first one in 8 weeks, as a succession of central banks pledged that they had significantly further to go when it comes to raising rates. Bond markets also started to flash warning signs with yield curves becoming more inverted by the day whether they be France, Germany, or the UK. Friday's weak finish hasn't translated into a strongly negative vibe as we start a new week for Asia markets, even allowing for events in Russia at the weekend which aren't likely to have helped the prevailing mood, with the US dollar slightly softer this morning after getting a haven bid at the end of last week.     With economic data continuing to show varying signs of vulnerability, particularly in manufacturing the situation could have got even spicier over the weekend when Wagner Group boss Yevgeny Prigozhin set his troops on the road to Moscow in an insurrection against the Kremlin, and Russian President Vladimir Putin.   As it turns out a crisis was quickly averted when it was announced that Prigozhin would go into exile in Belarus, with any charges against him dropped, and Wagner troops would return to their bases. One can only imagine the reaction if that news had broken if markets had been open at the time, however it only adds to the general uncertainty surrounding the war in Ukraine and how quickly things can start to unravel.   This weekend's events also serve to indicate how fragile Vladimir Putin's position is given that one of his most trusted advisors suddenly went rogue.   As we look ahead to the final week of June and the end of the quarter, as well as the first half of the year we can reflect to some extent that markets have held up rather well when all things are considered. They have been helped in that by the sharp falls in energy prices back to pre-Russian invasion of Ukraine levels, as well as the low levels of unemployment which have served to keep demand reasonably resilient.     The elephant in the room has been the stickiness of core inflation as well as signs that demand is starting to falter, and this week we could get further confirmation of that trend.   Today we get the latest Germany IFO Business Climate survey for June, which if last week's flash PMI numbers are any guide could well show that the confidence amongst German business is faltering, with expectations of a slowdown to 90.6, from 91.7.     We also get flash CPI inflation numbers from Germany, France and the EU where headline prices are likely to show further signs of softening, with core prices set to remain sticky. At around the same time we get the latest PCE inflation numbers from the US for May.   These are likely to be important in the context of the Federal Reserve's stated intention to raise interest rates at least twice more before the end of the year.     In April the core PCE Deflator edged up from 4.6% to 4.7%, an area it has barely deviated from since November last year. You would have thought that even with the long lags seen from recent rate hikes they would start to have an impact on core prices.   This perhaps explains why central banks are being so cautious, even as PPI prices are plunging and CPI appears to be following.       EUR/USD – pushed briefly back above the 1.1000 level yesterday before slipping back, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – currently holding above the lows of last week, and support at the 1.2680/90 area. Below 1.2670 could see a move towards the 50-day SMA. Still on course for a move towards the 1.3000 area but needs to clear 1.2850.      EUR/GBP – failed to rebound above the 0.8630/40 area last week. The main support is at last week's low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – has finally moved above the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move, as it looks to close in on the 145.00 area. This now becomes support, with further support at 140.20/30.      FTSE100 is expected to open 6 points higher at 7,468     DAX is expected to open 28 points higher at 15,858     CAC40 is expected to open 8 points higher at 7,171

Strong data and soft inflation boost appetite US stocks shrugged off the early week pessimism on the back as of a set of strong economic data released yesterday.   The durable goods orders rose – along with strong jobs data, this is a sign that the US businesses are not in cash-saving mode, Richmond manufacturing index fell less than expected, house prices recovered and house sales beat expectations – in line with the rest of the strong data from US housing market over the past few weeks. US consumer confidence jumped more than expected in June, to the highest level since the beginning of last year.     We would've normally expected sentiment to be dampened by strong data because of more hawkish Federal Reserve (Fed) expectations, but the S&P500 jumped more than 1%, Nasdaq rallied almost 2%, while the Russell 2000 advanced around 1.5%.      Easing inflation is maybe why stock investors are happy with strong data The Australian inflation fell to a 13-month low, and the Canadian inflation fell more than expected, in a sign that the central bank efforts to pull prices lower is paying off. The AUDUSD was sharply sold below its 50-DMA which stands near the 0.6680 level, while the USDCAD rebounded off a fresh low since September on the back of soft inflation and a 2% fall in crude oil prices.   Across the Atlantic Ocean, some encouraging news came in regarding inflation, as well. The British shop prices dipped to 8.4% this month, down from 9% recorded in May. That was the sharpest decline in prices since the end of 2021 – when prices took a lift, and it was not thanks to the Bank if England (BoE) hikes, but it was because Tesco, Sainsbury's, Asda and Morrisons were asked to 'behave' in their pricing to prevent them from passing the higher costs, and higher wages on to their clients more than necessary. So, it is possible that Jeremy Hunt rolling up his sleeves would be more effective to bring inflation down than any BoE hike at this stage.   The good news for the Brits is that, Rishi Sunak and Jeremy Hunt have all the motivation in the world to bring inflation down if they don't want to be minced at next year's election. The bad news is that, if they don't achieve fast results, they will still be minced because the BoE will continue hiking rates and that will leave millions of households facing an enormous rise in their housing costs.   And the Bank for International Settlements, known as the central bank of the central banks, warned that the final stretch of the monetary tightening will likely be the toughest, with some 'surprises' on the way. Another banking crisis, real estate chaos, a financial crisis? We will see. Today, the Fed will reveal the result of its stress test for the banks. If they see no issue, they will keep pushing, until something breaks.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank

Oil It’s going to take a lot to change the minds of energy traders. Fears of a weaker global growth outlook are not going away anytime soon. In the US, good news is bad news as that will suggest the Fed might have to do more tightening. ​ Inflation is stubbornly high in Europe that could trigger a lot more rate hikes and a harsher recession. ​ Even comments from Delta CEO about demand outpacing expectations was unable to provide a boost for oil prices. ​ Oil is looking very vulnerable here as it is getting close again to the spring lows near the upper mid- $60s. One more plunge and that should make OPEC+ very nervous. A drop below the $67.50 level could ​ trigger momentum selling that won’t stop until the $62.50 region.   Gold Gold remains under pressure as the US consumer still looks strong. Today’s economic data in the US painted a picture of a resilient economy that could be subject to further Fed tightening. The ECB also signaled there is no end in sight for their rate hiking cycle and that has also helped send Global Bond yields higher. It has been pretty ugly for gold since early May and if expectations grow for further Fed tightening, that could send gold tentatively below the $1900 level.      

Global bond yields rise; 10-year Treasury rises 4.1bps to 3.762% Consumer Confidence hits highest levels since January 2022 Dow eyes first gain in 7 trading days   US stocks are bouncing back after some strong US economic data gave a boost to consumer discretionary stocks and as investors piled back into AI trades. The losing streak had to end, but that doesn’t mean the market will resume.     US data There was a lot of US economic data released today and the key takeaway was that the economy is not breaking just yet. The first key reading was durable goods and that surged, but the reason behind that was due to strong aircraft orders. The overall trend is expected to be softer, going forward as higher, borrowing costs and tighter lending from banks, will dampen demand. We also got a couple housing reports, the case Shiller report showed home prices are stabilizing as prices recover, mainly because there’s just not enough supply. New home sales impressed with a buying spree that hit the highest levels in more than a year. The main event was the Conference Board’s consumer confidence report which surged 7.2 points to 109.7, the best reading since January 2022. The strong consumer confidence report will likely suggest expectations are not for the labor market to deteriorate quickly, which should confirm expectations that a recession will not happen this year, but most likely next.     We also saw a couple fed regional surveys, the Richmond Fed manufacturing index remained in negative territory, and so did the Dallas Fed’s services activity report, which is in line with the other federal regional surveys. Overall the US economy is still chugging along, and that will complicate the disinflation process for the Fed. ​ Swap futures are still expecting one more rate hike by the Fed.  

Services PMIs (Jun) – 05/07 - despite the dire start of manufacturing activity, services have held up well but even here we are seeing pockets of weakness with France seeing a sharp drop in the flash numbers a few days ago, sliding from 52.5 to 48, while activity in the rest of the euro area remains broadly positive. This is an area that could help boost economic activity in Italy and Spain now we're in the holiday season and which may help avert a 3rd quarter of weakness. We're also expected to see positive readings from the UK and the US.   Fed minutes – 05/07 – recent briefings from various Fed officials do suggest that a divergence of views is forming on how to move next, as well as in the coming months, and while the commitment to a pause in June was well flagged the commitment and guidance did pose a bit of a problem to the Fed given the strong economic data only days before the meeting in question. Powell managed to overcome that with a strongly hawkish message at his press conference along with an upgrade to the central banks key economic forecasts. A number of members changed their dots to reflect the prospect that they were prepared to raise rates twice more by the end of the year, with a hike in July looking increasingly likely.  This was somewhat surprising given markets were pricing one more rate hike, however key in amongst this is the Fed's determination that markets stop pricing rate cuts by the end of this year. This insistence of pricing in rate cuts by year end has been one of the key characteristics that has helped drive recent gains in stock markets. This slowly appears to be being priced out, as is the possibility that the Federal Reserve, along with other central banks, looks to prioritise pushing inflation down at the risk of raising the level of unemployment. This week's minutes ought to give us an indication of the thought processes of the more dovish members of the FOMC, and how comfortable they are with the prospect of further rate rises.    AO World FY 23 – 05/07 – has had its share of problems after getting a huge lift during the pandemic as business for electrical goods shifted online. These growing pains presented problems of their own in terms of scaling its operations so when the inevitable slowdown happened the business struggled to cope as costs surged. Back in 2021 the shares rose to a record high of 443p, as a pandemic buying frenzy pushed the shares up from lows of 48.5p in the space of 9 months. It's taken a little bit longer to round-trip that journey with the shares hitting a record low back in August of 39p. We've seen a decent recovery since then, helped by a number of guidance upgrades this year, one on January, with the focus on reducing costs with revenues set to see a 17.2% decline from last year. In March EBITDA guidance was raised again, to between £37.5m and £45m, with management citing further margin improvements. In April this was followed by a Q4 trading update which predicted UK revenues of £1.13bn while updating its profit guidance to the top end of its recent range upgrade of EBITDA of between £37.5m to £45m. In a sign of confidence regarding AO's turnaround plan, in June Mike Ashley's Fraser Group acquired a 19% stake in the business at 68p per share in a welcome boost for the online retailer.  

The first half of the year ends on a positive note for equities and not so much for the bonds. This is the exact opposite of what was predicted. The bond markets were supposed to recover due to economic pains which should have led to a more dovish central bank landscape, while equities should have suffered due to the economic woes, slowing spending and recession. But no. Equities did well. Even though profits fell, they fell less than expected and more importantly, AI saved the day sending the Big Tech stocks to a nice bull market. Bonds on the other hand tumbled as US spending and growth remained resilient. The latter convinced the Federal Reserve (FeD) that it should keep hiking the interest rates. The spread between the US 2 and 10-year yield hit nearly 110bp, as an indication of recession in the coming months.  But last week's strong economic data released in the US, combined with Friday's softer-than-expected PCE figures supported, yet again, the idea of a soft landing and further fueled the rally in stocks. As such, the S&P500 hit a fresh year high at the last trading day of the first half and gained more than 17% so far this year, while Nasdaq 100 soared more than 40%! Apple hit $194 per share, and closed last week with a valuation above $3 trillion.   Of course, this incredible performance makes many investors wonder whether the equit rally could continue in the second half.     On the data dock  The Reserve Bank of Australia (RBA) is expected to keep its rate unchanged at this week's policy meeting, after being partly responsible of the latest hawkish spree in global central bank expectations when it raised rates unexpectedly the last time. A no action from the RBA could calm down the nerves this week. But for that, we must also see loosening in US jobs data. Due Friday, the US NFP is expected to print more than 220K nonfarm job additions in June, with steady wage growth of around 0.3% over the month. The best scenario for stock investors is a strong NFP read combined with softening wages growth.   In China, Caixin manufacturing index for China came in slightly better than expected, and slightly above the 50 threshold, though sentiment weakened to an 8 month low and new orders rose at a softer pace. China could recover in the H2 amid People's Bank of China's (PBoC) efforts to boost growth, but we won't get the growth bang that we were looking for. That means that we will probably bypass a dangerous long-lasting rally in energy and commodity prices, which could help central banks contain inflationary pressures with more success.   For now, oil prices remain mostly ranged despite OPEC's malicious efforts to boost them artificially. The barrel of crude jumped past the $70 level on the back of a broad-based risk rally following the US softer than expected PCE read, which fueled some dovish central bank expectations. The Chinese data also give some support this morning, but the 50-DMA, near $71.30pb will likely act as a solid resistance. This week, risks remain tilted to the upside, as OPEC meets with the industry heads. This week's meeting is not a policy meeting so there won't be any production cuts, or any important decision from OPEC, but what we could well hear slowing demand forecasts, which would then bring traders to assess another production cut from OPEC down the road. In all cases, we have seen clearly that cutting production hasn't been enough for a sustained price rally so far. Therefore, any rally triggered by comments could be interesting top selling opportunities for short-term traders.   Tesla delivered a record number of cars worldwide in Q2, something like 466K cars, as Elon Musk is up to aggressively cutting prices to boost volume. It looks like it is paying off. The latest figures will likely keep Tesla shares on a positive path to challenge the $280 level again. But competition is not far. The Chinese BYD did better than Tesla, selling more than 700K cars last quarter, its best-ever quarter as well. BYD shares jumped 2.70% in Hong Kong.   

US It will be an eventful week, the ISM manufacturing report, the fourth of July Holiday, the Fed Minutes, and the nonfarm payroll report.  Wall Street is starting to believe in those Fed dot plots and this week’s economic data points may provide more evidence for the hawks.  The ISM manufacturing report is expected to show activity is stabilizing.  The Fed minutes will emphasize the fear that core inflation is proving to be stickier.  The June US jobs report is expected to show hiring cooled from the 339,000 pace to 200,000 jobs. The unemployment rate however is expected to improve from 3.7% to 3.6%.  Wage pressure is also expected to remain steady with a 0.3% increase from a month ago.    We will hear from a couple of Fed speakers this week. Williams participates in a moderated discussion at the 2023 annual meeting of the Central Bank Research Association at the New York Fed. Logan speaks on a panel about the policy challenges for central banks at the Central Bank Research Association annual meeting at Columbia University.     Eurozone Eurozone inflation data on Friday was very promising and while it likely won’t influence whether the ECB hikes or not in July – Lagarde previously strongly hinted they will – if followed by further signs of disinflation over the summer, it could see the central bank consider a pause in September.  Next week is a little short of tier-one releases but final PMIs on Monday and Wednesday will be of interest, as will another appearance by ECB President Christine Lagarde on Friday.   UK  Very little data of note next week with final PMIs the only highlight. That aside, central bank speak will be followed closely although in the absence of better inflation data, their hands are seemingly tied. The real question ahead of the next meeting is whether they’ll hike by 25 basis points or 50 again.   Russia A relatively quiet week with PMIs on Monday and Wednesday as the only notable releases. That aside there’s the Russian central bank financial congress on Thursday and Friday so we may hear from Governor Elvira Nabiullina.   South Africa The whole economy PMI is the only notable economic release or event next week.   Turkey With the CBRT pivoting toward more conventional monetary policy in the aftermath of the election, the economic data becomes increasingly relevant and next week we’ll get June inflation numbers on Wednesday. The CPI is expected to remain close to 40% but with the currency in freefall, the inflation outlook is likely to get worse before it gets sustainably better. The central bank has stepped back from burning through reserves to support the lira and effectively pay for bad policy choices and that has sent the lira to record lows, falling more than 20% in the last month, alone.

Oil remains range bound but ending the week on a positive Oil prices are edging higher again today but given how they’ve traded over the last couple of months I’m struggling to read too much into it. The inventory data on Wednesday was bullish on the face of it and the eurozone inflation data today won’t do it any harm either, but uninspiring Chinese PMIs overnight don’t fill me with confidence. Broadly speaking, it’s range-bound as it has been since early May, and showing little signs of breaking in either direction. The range is getting very gradually smaller but at such a slow pace that it doesn’t really tell us much at this point. It very much feels like traders are awaiting more information on inflation and, by extension, interest rates, and until we have a better idea of the outlook, it could remain in this pattern.   Gold struggling amid US interest rate concerns Gold continues to languish around $1,900 after slipping below here briefly on Thursday for the first time since March. Strong economic data from the US has reaffirmed fears that a resilient economy may stand in the way of the Fed ending the tightening cycle, increasing the possibility of more hikes and a harder landing. There are clear signs of progress on inflation but with the economy and labour market showing such resilience, officials may be concerned that getting from 4.4% to 2% may be much harder than what’s been achieved so far. And the longer it remains above, the longer rates will remain high which is a big risk to the longer-term economic prospects.  

Money markets split on RBA decision on Tuesday US PCE Price Index eases in May The Australian dollar is showing some movement right off the bat on Monday. AUD/USD fell as much as 70 pips in the Asian session but has recovered most of those losses. In the European session, AUD/USD is trading at 0.6657 down 0.03%.     Money markets split on RBA decision The Reserve Bank of Australia meets on Tuesday, and it’s a coin-toss as to whether the central bank will raise rates for a third straight time or will it take a pause. Traders have priced in a 52% chance of a pause, according to the ASX RBA rate tracker. Just one week ago, the odds of a pause were 70%, after May inflation declined more than expected. Headline CPI fell from 6.8% to 5.6%, its lowest level in 13 months. Core CPI eased to 6.1%, down from 6.7%. The split over what call the RBA will make on Tuesday is indicative of the case that can be made both for a hike and a pause. The drop in inflation is certainly welcome news, but the RBA wants inflation to fall faster, as it remains almost triple the target of 2%. Additional rate hikes would likely send inflation lower, but that would raise the risk of the economy tipping into a recession. The Australian economy has cooled down, but the labor market remains strong and consumer spending has been resilient, despite high inflation. Retail sales for May jumped 0.7% m/m, up from 0.0% in April and smashing the consensus of 0.1%. RBA members in favor of a hike can point to employment and retail sales data as evidence that the economy can withstand additional hikes. The RBA minutes, which can be considered a guide of its rate policy plans, might point to a pause at Tuesday’s meeting. The April and May minutes were hawkish and the RBA raised rates after these releases. The June minutes were more dovish, sending the Australian dollar lower. Could that signal a pause? In the US, the week wrapped up with the PCE Price Index, the Fed’s preferred inflation indicator. In June, the index rose 0.1% m/m, down from 0.4% in May. This indicates that the disinflation process continues and traders have raised the probability of a July hike to 88%, up from 74% a week ago, according to the CME FedWatch tool.   AUD/USD Technical 0.6659 is a weak resistance line. Above, there is resistance at 0.6722 0.6597 and 0.6534 are providing support    

Gold pares losses after a rough couple of months Gold has struggled in recent weeks against the backdrop of persistent stubborn inflation, resilient economic data, and, as a result, higher interest rate expectations. We’re seeing it bounce back a little over the last couple of sessions after briefly dipping below $1,900 but the trend is still very much against it. That said, we may be seeing some weakening of momentum around $1,900 which could hint at a corrective move, although a loss of momentum in itself doesn’t mean the price will suddenly reverse. A significant break below $1,900 could see it plunge again, and on improving momentum, but after falling almost 9% since early May, a correction could make sense.

Europe set for flat open, as RBA stays on hold         Yesterday saw a snoozy start to July for European markets with an initially positive open giving way to a mixed session, with US markets only opening for a short time ahead of the US Independence Day holiday today.     US markets finished their shortened trading session making some modest gains, but interest was relatively low-key with the latest ISM manufacturing numbers for June pointing to continued weakness in that part of the US economy.     On a more positive note, if you can call it that, the weak prices paid component of the data showed that inflationary pressure has continued to ease and as such might offer the hope that a July rate hike from the Fed could well be the last one before a lengthy pause.     European manufacturing PMIs also exhibited similar weakness in their respective components, with varying degrees of contraction, however there was a common theme running through them, which was declining output, as well as falls in new orders.     In the UK numbers we also saw reports of falling input costs due to lower fuel costs, commodity price decreases, and improvements in supply chains. Average output prices also fell for the first time since April 2016. These trends would appear to suggest that for all the hawkish narrative coming from central bankers that a wave of disinflation is working its way through the global economy, and that if they aren't careful, they could end up over tightening at a time when inflation is already on a downward path.     That said, central banks biggest problem is that they are so wedded to their 2% inflation target that rather than accepting the fact it may take years to fall back to that level, they risk breaking something in order to get it back there quicker.     Earlier this morning the Reserve Bank of Australia took the decision to follow up its surprise 25bps rate hike of last month, by deciding to keep rates on hold, albeit with the same hawkish bias as last month. The central bank statement went on to say that inflation was still too high and that more tightening may well be required.     With meetings occurring on a monthly basis the bank appears to have decided to wait and see the effects recent rate hikes have had on the wider economy, as well as waiting to see what other central banks do later this month, even though we pretty much know that further rate hikes are coming from the likes of the Federal Reserve and ECB.     With the labour market looking strong, services inflation still looking sticky it remains unlikely that we've seen the terminal rate yet for the Australian dollar, with markets pricing at least another 38bps of hikes by year end, although this number could come down.     Today's European session looks set to be a quiet one with the US off for the 4th July holiday, and little in the way of economic data ahead of tomorrow's services PMI numbers for June which are likely to make for better reading from an economic resilience point of view.           EUR/USD – continues to find support in and around the 1.0830/40 area and 50-day SMA, with resistance remaining at the 1.1000 area. A break below the lows last week opens the way for a potential move towards 1.0780.     GBP/USD – while above the 50-day SMA at 1.2540, as well as trend line support from the March lows, bias remains higher for a move back to the 1.3000 area. Currently have resistance at 1.2770.       EUR/GBP – finding support between 0.8570/80 area, with resistance at the 50-day SMA which is now at 0.8663. Behind that we have 0.8720. Below 0.8560 targets 0.8520.     USD/JPY – slipped back to the 144.00 area yesterday before rebounding but has so far held below 145.00. The key reversal day remains intact while below 145.20.  A break below 143.80 targets a move back to the 142.50 area. Above 145.20 opens up 147.50.      FTSE100 is expected to open unchanged at 7,527     DAX is expected to open 19 points higher at 16,100     CAC40 is expected to open unchanged at 7,386     By Michael Hewson (Chief Market Analyst at CMC Markets UK)

Services PMIs and Fed minutes in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK) In the absence of US markets yesterday, European markets underwent a modestly negative session on a fairly quiet day, and look set to open modestly lower this morning, with Asia markets drifting lower. For the past few days, markets have been trading in a broadly sideways range with little in the way of momentum, as investors weigh up the direction of the next move over the next quarter.   The last few weeks have been spent obsessing about the timing of a possible recession, particularly in the US, with the timing getting slowly pushed back into 2024, even as bond markets flash warnings signs that one is on the horizon.     As we look ahead to Friday's US payrolls report, speculation abounds as to how many more central bank rate hikes are inbound in the coming weeks, against a backdrop of economic data that by and large continues to remain reasonably resilient, manufacturing notwithstanding.     Despite the dire start of manufacturing activity as seen earlier this week, services have held up well, although we are now starting to see some pockets of weakness. A few days ago, in the flash numbers France saw a sharp fall in economic activity, sliding from 52.5 to 48 for June, although activity in the rest of the euro area remains broadly positive.     This is an area of the economy that could help boost economic activity, particularly in Italy and Spain now we're in the holiday season and has seen these two countries perform much better in recent months. The outperformance here could even help avert a 3rd quarter of economic contraction for the euro area.       Expectations for Spain and Italy are 55.7, and 53.1, modest slowdowns from the numbers in May, while France and Germany are expected to slow to 48 and 54.1.     We're also expected to see a positive reading from the UK, albeit weaker from the May numbers at 53.7. US PMI numbers are due tomorrow given the July 4th holiday yesterday.     Later today with the return of US markets, we get a look at the most recent Fed minutes, when the FOMC took the collective decision to keep rates on hold, with the likelihood we will see a resumption of rate hikes later this month.     In the lead-up to the decision there had been plenty of discussion as to the wisdom of pausing given how little extra data would be available between the June and July decisions. The crux of the argument was if you think you need to hike again, why wait until July when the only data of note between the June and July decisions is one payrolls report, and one set of inflation numbers.     All of that is now moot however and while inflation has continued to soften, the labour market data hasn't. Here it remains strong with tomorrow's June ADP report, the May JOLTs report, weekly jobless claims, as well as Friday's June payrolls numbers.     Tonight's minutes may offer up further clues as to the Fed's thinking when it comes to why they think that two more rate hikes at the very least will be needed by the end of this year.     A few members changed their dots to reflect the prospect that they were prepared to raise rates twice more by the end of the year, with a hike in July now almost certain. This stance caught markets off guard given that pricing had been very much set at the prospect of one more rate hike, before a halt.     A key part of the thinking may have been the Fed's determination that markets stop pricing rate cuts by the end of this year. This insistence of pricing in rate cuts by year end has been one of the key characteristics that has helped drive recent gains in stock markets.     This has now been largely priced out, so in this regard the Fed has succeeded,   The key now is to make sure that the Federal Reserve, along with other central banks, while prioritising pushing inflation down, don't break something else, and start pushing the rate of unemployment sharply higher.   This is the balancing act central banks will now have to perform, and here it might be worth them exercising some patience. Given the lags being seen in the pass through of monetary policy it may be that a lengthy pause after July, keeping rates at current levels for months, is a wiser course of action than continuing to raise rates until the tightrope snaps, and the whole edifice comes tumbling down.       Today's minutes ought to give us an indication of the thought processes of the more dovish members of the FOMC, and how comfortable they are with the prospect of this balance of risks.             EUR/USD – remains range bound with support around the 1.0830/40 area and 50-day SMA, with resistance remaining at the 1.1000 area. A break below the lows last week opens the way for a potential move towards 1.0780.     GBP/USD – still looking well supported above the 50-day SMA at 1.2540, as well as trend line support from the March lows, bias remains higher for a move back to the 1.3000 area. Currently it has resistance at 1.2770.       EUR/GBP – rolling over again yesterday, sliding below the 0.8570/80 area, and looks set to retarget the 0.8520 area. Resistance remains at the 50-day SMA which is now at 0.8655. Behind that we have 0.8720.     USD/JPY – currently capped at the 145.00 area, with support at the 144.00 area this week.  The key reversal day remains intact while below 145.20.  A break below 143.80 targets a move back to the 142.50 area. Above 145.20 opens up 147.50.      FTSE100 is expected to open 5 points lower at 7,514     DAX is expected to open 28 points lower at 16,011     CAC40 is expected to open 23 points lower at 7,347

As the Eurozone grapples with the latest economic data, investors and market participants are keen to understand the forecast for the Euro (EUR). We engage in a conversation with Santa Zvaigzne-Sproge, CFA, to gain insights into the potential implications of recent developments on the Euro's performance. The manufacturing and services Purchasing Managers' Index (PMI) in the Euro area has shown signs of decline, introducing downward pressure on the common currency. This suggests a potential deterioration in economic health and raises concerns about the onset of a recession. These factors may impact the valuation of the Euro against other major currencies.     FXMAG.COM: In light of the latest data from the Eurozone, what forecast can you make for the EUR?   Santa Zvaigzne-Sproge, CFA: Lowering manufacturing and services PMI in the Euro area might contribute to downward pressure on the common currency as they indicate a potential deterioration of economic health and a potential recession.   However, the Euro value may be more dependent on the ECB's decisions on further interest rate hikes and the value of the US Dollar. During recent uncertainties in the financial markets, the US Dollar has been slightly regaining strength due to its “safe haven” asset features.   Furthermore, the FED is expected to raise key interest rates in their July meeting potentially giving additional strength to the US Dollar. Meanwhile, continued deterioration of macroeconomic data in the Euro area may push the ECB to halt raising interest rates resulting in a weakening Euro.   

In the ever-changing landscape of the global economy, staying informed about the latest developments in individual countries is crucial for understanding the factors driving currency movements. In this article, we turn our attention to the Norwegian economy and delve into the implications of the recent data releases and central bank actions, as we engage in a conversation with Michael Stark, an expert from Exness. The recent data from Norway has shown remarkable strength, providing insights into the actions taken by the Norges Bank, the country's central bank. The Norges Bank surprised the markets by opting for a double interest rate hike last month, deviating from the expected single hike. This decision is rooted in the robust economic indicators witnessed in the country. The June job report, for instance, revealed an unemployment rate of 1.7%, slightly below the consensus and approaching the pre-recession lows of early 2008. Such positive labor market conditions bode well for the overall economic health of Norway.   Michael Stark, Exness: Overall, recent data from Norway have been quite strong, which is part of the reason the Norges Bank called for a double hike last month instead of a single as expected. June’s job report showed 1.7% unemployment, slightly lower than the consensus and very close to the pre-recession low in early 2008.   Industrial production in Norway has been dropping consistently for some months now, but this isn’t necessarily a major factor for the Norwegian krone which usually trades cyclically and has some correlation to crude oil. Inflation doesn’t display a clear downtrend yet, actually rising to 6.7% in May for the annual non-core figure, so the Norges Bank might continue to hike while major central banks are mostly at least slowing down.   Finding a good opportunity to trade USDNOK or EURNOK in high summer would usually be a very challenging exercise. These pairs already have among the lowest volume for minors on average, and combined with seasonality the likelihood of false signals is greater. Over the last several years, USDNOK has generally retraced or corrected against the main trend during summer, so given the fundamental situation it might be possible to see that happen again and the price test support around 10.20 kr, but that depends on 10 July’s Norwegian inflation and the Fed’s meeting on 26 July.   

Inflation front and centre this week as China slips towards deflation By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets underwent a shocker of a week last week, posting their biggest declines since March, despite a modest rebound on Friday. With economic data continuing to look on the soft side and central banks showing little sign of easing up when it comes to interest rate rises there was little to cheer for markets in Europe, with concerns about weakness in the Chinese economy adding to the gloom.   US markets on the other hand, while still finishing the week lower, still managed to perform better after a slightly weaker than expected non-farm payrolls job report, which showed that the US economy added 209k jobs in June, down from 306k in May. There was also a 2-month net revision lower of -110k, taking some of the lustre off recent gains, and removing some of the euphoria around the ADP jobs number of 497k, the day before. The unemployment rate still fell to 3.6%, while average hourly earnings growth came in unchanged at 4.4%, which was at a slightly higher level than expected. One thing that we were able to take away from last week was that further rate rises from the Federal Reserve as well as the European Central Bank are almost certain when they both meet in 2 weeks' time, however there is now rising concern that we may see further rate increases after that in September as well.     The bond market is certainly reflecting the fact that rates are likely to stay higher for longer after the yield curve steepened as 10-year yields outperformed 2-year yields on a week-on-week basis.   With earnings season set to get underway in earnest over the next week or so, there is increasing nervousness that after such a good first half of the year, that the second half of the year is likely to be much more challenging.   What last week's economic data also tells us is that while the economy in Europe could well be set to contract for the third successive quarter in succession, the US economy appears to be holding up reasonably well There is a fear however that central banks are on the cusp of a serious policy mistake when it comes to their determination to drive inflation lower. We already know that inflation has been slowing sharply over the last few months, and we also know that PPI inflation in China and Europe is now in negative territory.       This morning we saw that inflation in China slowed even further in June with headline CPI coming in at 0%, and PPI slipping from -4.6% in May to -5.4% That alone suggests that the rate hikes that have already been implemented over the past 15 months have had an effect, however such is the nature of monetary policy, and the way interest rate markets have changed over the last 20 years, with many more fixed rate loans, there is no way of telling how much more tightening has yet to come through.     This should make central bankers much more cautious, however it seems to be having the opposite effect, causing frustration that inflation isn't coming down quickly enough, due to resilient consumption patterns. With US CPI for June set to be released on Wednesday, and PPI on Thursday we are likely to see further evidence of this disinflationary trend, even while wages growth remains resilient. These are the key macro items for investors to mull over this week ahead of the Federal Reserve later this month, while in the UK tomorrow we have the latest wages and unemployment numbers for the 3-months to May, which are expected to show strong wages growth against a backdrop of a tight labour market.           EUR/USD – broke higher last week after finding solid support around the 1.0830/40 area. We need to see a move above the June highs at 1.1010/15 to target a move towards 1.1100, and the highs this year. A break below the lows last week opens the way for a potential move towards 1.0780.     GBP/USD – broke above resistance at the 1.2770/80 area putting it on course for a move towards the 1.3000 area, but needs to take the 1.2850 area and June highs first. Support comes in at the 1.2770/80 area, and below that at 1.2680.      EUR/GBP – continues to find support at the 0.8515/20 area and June lows. Also has resistance at the 0.8570/80 area. We also have resistance at the 50-day SMA which is now at 0.8635. Below 0.8500 targets 0.8460.     USD/JPY – fell below the 144.00 area triggering stops all the way to the 142.00 area, also falling below support at 142.50. Posted a weekly reversal suggesting the top is in and the risk of a return to the 139.80 area. We need to see a move back above 142.80 to stabilise and argue for a return to 144.00.       FTSE100 is expected to open 3 points lower at 7,254     DAX is expected to open unchanged at 15,603     CAC40 is expected to open 14 points lower at 7,098  

Chinese deflation The Chinese inflation came in unexpectedly soft in June. Consumer prices fell 0.2% m-o-m, as the decline in producer prices accelerated more than expected to 5.4% y-o-y. The Chinese efforts to boost economy and inflation are not working. That's maybe why the Chinese regulators chose to ease pressure on their tech giants. Last Friday, the regulators finally ended a yearlong inspection of Alibaba's Ant Group and said that the tech industry will see 'normalized supervision'. Alibaba shares jumped 8% in New York last Friday but would that be enough to bring investor confidence back is not sure yet. The morose Chinese inflation limited appetite in oil this morning in Asia, but the price of a barrel of crude rallied past the $73pb to the 100-DMA last Friday, as the fresh round of production cuts from Ryad and Moscow slowly but surely brought the oil bulls back to the battlefield as long-term supply worries started weighing on mood in the bears' camp. Trend and momentum indicators are now comfortably bullish, and hint that the rally could extend. The next natural target for the oil bulls is the 200-DMA, which stands near the $77pb level.  

US This week is all about inflation. Annual inflation will tumble as energy prices drop and due to base effects, but many traders will pay close attention to the core readings. CPI on a monthly basis is expected to increase by 0.3%, higher than May’s pace of 0.1%. The headline annual reading is expected to fall from 4.0% to 3.0%. The monthly core reading is expected to rise 0.3%, while the year-over-year reading softens to 5.0%. Expectations are for pricing pressures to edge higher going forward. The upcoming week is filled with Fed speakers and the Wednesday release of the Beige Book. On Monday, we hear from Barr on bank supervision, Daly talks about inflation and banking, and Mester discusses the economic and policy outlook. Wednesday contains appearances by Barkin, who talks about inflation, Kashkari discusses monetary policy, Bostic attends the Atlanta Fed payments event, and Mester speaks on FedNow. The recent flow of economic data may warrant steady hawkish Fed speak.

Soft US CPI is not enough.    The US dollar extended losses after breaking a long-term ascending channel base yesterday. The British pound rallied on yet another stronger than expected wages growth data released yesterday morning. Average weekly earnings excluding bonuses increased 7.3% in the three months to May. And although the unemployment rate ticked up to 4%, it was because more Brits started looking for jobs, and not because people lost the jobs they had.   But don't be jealous of Brits that get such a good jump in their pay because UK inflation is still too hot. The average mortgage rate rose to 6.6%, the highest since 2008, inflation in Britain is sitting at 8.7%, and according to truflation, prices grow at a speed that's faster than 11%. The thing is, the robust wages growth partly explains why the Bank of England (BoE) is having so much pain fighting inflation, and that's why yesterday's data fueled the expectation of another 50bp hike from the BoE at its next meeting. The BoE's policy rate is seen peaking at the 6.5/7% range by the Q1 of next year as predicted by many analysts. Cable hit 1.2970 level, the highest since last April, but whether this really could continue will depend on 1. where the US dollar will be headed after today's CPI data in the short run, and 2. where the UK economy is headed if the BoE hikes rates to 6.5/7% range in the long run. Because the BoE hikes will continue pressuring the British housing market, and growth, and that could limit Cable's topside potential following a kneejerk positive reaction.     Lower US CPI won't be enough to soften the Fed hawks' hand.  The consumer price index in the US is expected to have fallen to 3.1% from 4% printed a month earlier. But unfortunately, it won't be enough to prevent the Fed from further rate hikes, because the further fall in headline inflation to 3% is due to a favourable base effect on energy prices, while core inflation is expected to remain sticky at around the 5% mark - still more than twice the Federal Reserve's (Fed) 2% policy target.   Plus, the rebound in oil prices hints that the risk of an uptick in headline inflation is building stronger for the coming months. The barrel of American crude rallied past the 100-DMA yesterday and is flirting with the $75pb level this morning. Trend and momentum indicators remain positive, and we are not in overbought territory just yet, meaning that this rally could further develop. The next natural target for the oil bulls stands at the 200-DMA, at $77pb level. In percentage terms, we are talking about a 12% rally since the start of the month, and the rebound is a response to the further production restriction from Riyadh and Moscow that are determined to push oil prices to at least $80pb level, and also Beijing's stepping up efforts to boost the Chinese economy by fresh monetary and fiscal stimulus.   But despite the lower OPEC supply and news of fresh monetary and fiscal stimulus from China, US crude should see a solid resistance into $77/80 range as, yes, in one hand, OPEC+ is cutting supply to boost prices, and their supply cuts will dampen the global oil glut in H2 - even more so if China finally achieves a healthier recovery. But on the other hand, the Chinese recovery is not a won game just yet, while increased oil output outside the cartel helps keeping price pressure contained. American crude production is on track for a record year this year, and half of the new crude is coming from the US where companies like Devon Energy that deliver strong output thanks to improved efficiencies.     RBNZ stays pat, BoC to deliver a final 25bp hike  The Reserve Bank of New Zealand (RBNZ) kept its policy rate unchanged at 5.5%. Later today, the Bank of Canada (BoC) is expected to announce a final 25bp hike in this tightening cycle. The Fed however is seen hiking two more times as the strength of the US jobs data, combined with solid economic data, and little pain on US housing market thanks to life-long mortgages.   Therefore, it's interesting that the US dollar depreciates while there is nothing that hints at softening in the Fed's hawkish policy stance. That, and the fact that we will soon be flirting with oversold market conditions in the US dollar hint at a rebound in the greenback, if backed with robust core inflation and strong economic data.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  

In light of the latest data from the Eurozone, market participants are keen to gain insights into the future forecast for the euro (EUR). We turn to Roman Ziruk, Senior Analyst at Ebury, to provide valuable perspectives on the current economic landscape and the potential trajectory of the EUR. Despite a marginal downside surprise in core inflation figures for June, the Eurozone's core inflation remains persistently high. This, coupled with the tightness of the labor market and the European Central Bank's (ECB) hawkish stance, as reiterated by President Lagarde, supports the view that the bank's tightening cycle will be extended. Ziruk predicts that there will be at least a couple more interest rate increases and no rate cuts in the near future.  In this article, we delve into the factors supporting Roman Ziruk's outlook for the EUR and explore the potential implications for the Eurozone's economy and the EUR/USD exchange rate in the foreseeable future.   FXMAG.COM:  In light of the latest data from the Eurozone, what forecast can you make for the EUR? Roman Ziruk, Senior Market Analyst: Although core inflation in the Eurozone surprised marginally to the downside in June, it remains stubbornly high. This, combined with the tightness of the Eurozone’s labour market and the ECB’s hawkish stance, reiterated by President Lagarde at Sintra last week, supports our view that the bank’s tightening cycle will last longer, rates will be increased at least a couple more times and no rate cuts are in the offing anytime soon. Although some of the recent economic data, particularly the PMIs, have been disappointing, we maintain our view that the scale of the slowdown in the Eurozone need not be very significant, nor do we expect a full-year recession in 2023. Therefore, we continue to pencil in a gradual EUR/USD appreciation in the coming quarters to 1.12 at year-end and 1.15 at the end of 2024       Informacje zawarte w niniejszym dokumencie sÅ‚użą wyÅ‚Ä…cznie do celów informacyjnych. Nie stanowiÄ… one porady finansowej lub jakiejkolwiek innej porady, majÄ… charakter ogólny i nie sÄ… skierowane dla konkretnego adresata. Przed skorzystaniem z informacji w jakichkolwiek celach należy zasiÄ™gnąć niezależnej porady. Ebury nie ponosi odpowiedzialnoÅ›ci za konsekwencje dziaÅ‚aÅ„ podjÄ™tych na podstawie informacji zawartych w raporcie.   Ebury Partners Belgium NV / SA jest autoryzowanÄ… i regulowanÄ… przez Narodowy Bank Belgii instytucjÄ… pÅ‚atniczÄ… na mocy ustawy z dnia 11 marca 2018 r., zarejestrowanÄ… w Crossroads Bank for Enterprises pod numerem 0681.746.187.  

Rate cut not coming yet from PBOC FTSE 100 nearing some key levels   It’s been a disappointing start to the week in Europe but I’m not sure investors will be too downbeat as a result given the strong gains recorded over the last five sessions. The Chinese data didn’t help kick things off in a more positive manner, with GDP figures for the second quarter falling well short of expectations as retail sales also decelerated sharply, recording their lowest increase since late last year. Of course, the data remains noisy due to varying base effects but the overall theme is clear, domestic demand is underwhelming and external demand isn’t inspiring either. Stimulus is likely going to be needed in the second half of the year backed up by some monetary support but we may have to wait a little longer for that to be announced. The MLF was left unchanged today at 2.65% which means the same will probably be true of the one and five-year LPRs later in the week. A cut could have helped offset some of the data disappointment although, in the absence of targeted fiscal measures, it may have ultimately been akin to pushing on a piece of string so waiting probably makes more sense.   Is a significant breakout coming? The small declines in the FTSE at the start of the week come on the back of Friday’s reversal which produced a shooting star candlestick around the two lows from last month. Whether that is a bearish signal, a confirmation of sorts, or simply a sign of some profit-taking isn’t yet clear. But it clearly hasn’t built on that negative momentum today.     If it does turn higher again then the area around 7,550 could be interesting from the perspective of it being roughly the high from earlier this month and the area of the 200/233-day simple moving average band. It’s worth noting that these MA bands haven’t been great as areas of support and resistance over the last year or so, which is normal when the price is ultimately trending sideways, but if we do eventually see it trend higher or lower, it may react to them more. Below, the rising trend line – from March 2020 lows – could be interesting as the price appeared to respond to it last week. A break below here may be significant, especially if followed by a move below 7,200. Ultimately, a lot of this could depend on the economic data, the most notable of which this week comes Wednesday in the form of the UK CPI data.  

It's been a long time coming but inflation in the UK is finally on the decline and in a rare show of good news, it's falling at a faster pace than expected on both the headline and core levels.  We haven't been treated to many reports like this over the last couple of years, and even when we have any enthusiasm has quickly been extinguished. But this feels different. Without wanting to fall victim to the "this time it's different" mantra that often precedes a terrible turn of events, there is something more promising about this shift. It follows similar declines in the US and the eurozone in recent months, both of which were sharper than expected and at the headline and core level. Unless this is a blip across the board, which is possible, it may be a sign that inflation is on a path to more modest and sustainable levels.  Of course, there's still an awfully long way to go and the central bank is not going to declare victory on the back of one release. But those wild interest rate forecasts of 6.5%+ that we've been seeing may start to be pared back, perhaps quite significantly as it becomes clear that favourable base effects combined with lower energy and food inflation and the impact of past hikes start to have a substantial impact on the data.  The pound has fallen quite heavily on the back of the release which probably reflects those expectations now being pared back. I don't want to get too carried away but peak rate expectations may now be behind us which could make for a more hopeful second half of the year.  I say I don't want to get carried away but then, upon seeing the release, I was immediately reminded of the famous Office US "It's happening!" scene that is so often widely circulated on social media so perhaps I also, in the words of Michael Scott, need to stay calm.   Oil flat but recent developments have been positive Oil prices are a little flat early in the European session after bouncing back a little on Tuesday. Since breaking above the recent range highs late last week, oil prices have been a little choppy although importantly they have held above that prior range and, in the case of Brent crude, seen support around the previous highs. That could be viewed as a bullish technical signal, although that will naturally depend on a number of other factors including the economic data and what producers are doing. Both have been favourable for prices recently, helping Brent break back above $80 for the first time in almost three months.   Gold eyeing another move above $2,000?  Gold broke higher again on Tuesday after briefly paring gains late last week and early this. Lower yields and a weaker dollar are continuing to boost its appeal on the back of some more promising inflation data and lower interest rate expectations. The yellow metal broke above $1,960 yesterday before running into some resistance around $1,980. It's now closing in on $2,000 which is the next major barrier to the upside, a break of which may suggest traders have turned bullish on gold after two months of declines.   Is bitcoin looking vulnerable after yesterday's break?  Bitcoin is back above $30,000 today but looking vulnerable to another dip below. Broadly speaking, the cryptocurrency has been range-bound over the last month but it has drifted toward the lower end of this and the move below $30,000 yesterday may have made some nervous. If we do see a significant break lower, the next key area of support may be found around $28,000.

US The Fed is expected to resume raising rates at the July 26th FOMC meeting.  Fed funds futures see a 96% chance that the central bank will deliver a quarter-point rate rise, bringin the  target range to between 5.25% and 5.50%, almost a 22-year high. The Fed delivered 10 straight rate increases and then paused at the June FOMC meeting.  The Fed is going to raise rates on Wednesday and seems poised to be noncommittal with what they will do in September.  The economic data has been mixed (strong labor data/cooling pricing pressures) and that should support Powell’s case that they still could deliver a soft landing, a slowdown that avoids a recession.  This seems like it will be the last rate hike in the Fed’s tightening cycle, but we will have two more inflation reports before the Fed will need to commit that more rate hikes are no longer necessary. The Fed will steal the spotlight but there are several other important economic indicators and earnings that could move markets.  Monday’s flash PMI report should show both the manufacturing and service sectors continue to soften, with services still remaining in expansion territory. Tuesday’s Conference Board’s consumer confidence report could fuel expectations of a soft landing. Thursday’s first look at Q2 GDP is expected to show growth cooled from 2.0% to 1.8% (0.9%-2.1% consensus range) as consumer spending moderated.  Friday contains the release of personal income and spending data alongside the Fed’s preferred inflation and wage gauges. The Q2 Employment Cost Index (ECI) is expected to dip from 1.2% to 1.1%. The personal consumption expenditures price index is expected to cool both on a monthly and annual basis (M/M: 0.2%e v 0.3% prior;Y/Y: 4.2%e v 4.6% prior). Earnings will be massive this week as we get updates from 3M, AbbVie, Alphabet, Airbus, AstraZeneca, AT&T, Barclays, BASF, Biogen, BNP Paribas, Boeing, Boston Scientific, Bristol-Myers Squibb, Chevron, Chipotle Mexican Grill, Comcast, Exxon, Ford Motor, General Electric, General Motors, GSK, Hermes International, Honeywell International, Intel, Mastercard, McDonald’s, Meta Platforms, Microsoft, Nestle, PG&E, Procter & Gamble, Raytheon Technologies, Samsung Electronics, STMicroelectronics, Texas Instruments, Thermo Fisher Scientific, UniCredit, Unilever, Union Pacific, Verizon Communications, Visa, and Volkswagen

AUD is the biggest gainer (+0.22%) against the USD in today’s Asian morning session. The current rebound of the AUD/USD has taken shape right at the key 200-day moving now acting as support at 0.6700. Intermediate resistance for the AUD/USD stands at 0.6835. This is a follow-up analysis of our prior report, “AUD/USD Technical: Short-term bullish revival” published on 18 July 2023. Click here for a recap. Since the 20 July 2023 intraday high of 0.6847, the AUD/USD has declined by 132 pips to print a low of 0.6715 yesterday, 24 July in light of short-term bearish sentiment seen in China equities due to the continuation of bleak key economic data (Q2 GDP, retail sales, youth unemployment, housing prices) that indicates weak internal demand environment, and heightened risk of a deflationary spiral in China. Interestingly, the 132 pips slide has managed to find support on the key 200-day moving average and staged a bounce of 41 pips to print a current intraday high of 0.6756 in today’s Asian morning session. The Aussie dollar is the strongest currency against the USD with an intraday gain of +0.22% that surpassed the other majors, GBP (+0.13%), JPY (+0.13%), NZD (+0.11%), EUR (+0.08%), CHF (+0.05%), CAD (+0.02%) at this time of the writing during today, 25 July Asian morning session. Today’s outperformance of the AUD/USD has been reinforced by China’s top decision-making body, the Politburo which issued a statement of “hope” at the end of its meeting yesterday that vowed to implement counter-cyclical policy to boost consumption, more support for the property market, and ease local government debt.   The medium-term trend is still sideways   Fig 1: AUD/USD medium-term trend as of 25 Jul 2023 (Source: TradingView, click to enlarge chart) The medium-term trend of the AUD/USD is still trapped with a sideways range configuration between 0.6930 and 0.6580.   Held at key 200-day moving average with bullish short-term momentum   Fig 2: AUD/USD minor short-term trend as of 25 Jul 2023 (Source: TradingView, click to enlarge chart) In conjunction with the current rebound right at the 200-day moving average, the hourly RSI oscillator has traced out a series of “higher lows” after an exit from its oversold region and has yet to reach its overbought region. These observations suggest that short-term momentum has turned bullish. Watch the 0.6700 key medium-term pivotal support to maintain the bullish tone with intermediate resistance coming in at 0.6835 and a clearance above it sees 0.6890 next (also the 16 June 2023 swing high). On the flip side, failure to hold above 0.6700 negates the bullish tone to expose the next near-term support at 0.6630.

Fed could be the next big catalyst as markets prepare for one more hike A break of $2,000 could be a bullish development Gold appears to be pausing for breath ahead of the Fed meeting on Wednesday. Economic data recently has given the yellow metal a big lift, with the price coming close to testing $2,000 at one stage last week. We’ve seen some profit-taking since then which has seen it pull back toward $1,960 but it’s hard to read too much into these moves. Ultimately, the Fed will determine what happens next in gold. Any strong signal on this being the final hike, or shock decision not to, could be bullish for gold and even see $2,000 put to the test. A move above here could be viewed to be very bullish, both from the psychological and technical perspective, with it being the 61.8% Fibonacci retracement of the May highs to June lows.    

British pound extends losses UK manufacturing and services PMIs decline in July The British pound continues to lose ground. In the North American session, GBP/USD is trading at 1.2822, down 0.23%. The pound has been on a nasty slide, losing over 300 points since July 14th.   UK manufacturing and services PMIs ease in July The week started on a sour note, as the UK manufacturing and services PMIs both slowed in July. Manufacturing fell to 45.0, below the June reading of 46.5 and the consensus estimate of 46.1 points. The manufacturing sector has now declined for 12 straight months and today’s release marked the PMI’s lowest level this year. Services slipped to 51.5, down from 53.7 and shy of the consensus of 52.4 points. This marked a 6-month low and pointed to weaker growth in business activity, which has been a key driver of the economy. It’s a very light data calendar in the UK, with no other tier-1 releases this week. Still, it could be a busy week for GBP/USD, with the Federal Reserve decision on Wednesday and US GDP on Thursday.   Fed expected to hike on Wednesday The Federal Reserve meets on Wednesday and the money markets have priced in a 0.25% hike as a near certainty and are heavily leaning towards a pause in September. This stance may be out of sync with the Fed, as Jerome Powell and other members have voiced concern that inflation isn’t falling fast enough and that could be a hint at further rate hikes after July. With the economy performing well and the labour market remaining tight, an argument can be made that the Fed has a golden opportunity to keep tightening in order to push inflation back to the 2% target. There have been concerns about whether the Fed can guide the economy to a soft landing, but the economic data is looking good and the chances of a major recession are low.   GBP/USD Technical GBP/USD tested resistance at 1.2858 earlier. Next, there is resistance at 1.2932  There is support at 1.2757 and 1.2637  

ECB hikes rates by 25 basis points Signals the central bank may pause at the next meeting in September Euro slides as eurozone yields fall   The ECB raised rates for potentially the final time in the tightening cycle on Thursday, although it refused to give any indication of what will happen going forward. Instead, the central bank is insisting that decisions will be guided by the economic data and that interest rates will need to remain sufficiently restrictive for some time. This is consistent with what we heard from the Fed a day earlier and what most major central banks will be communicating soon enough if they aren’t already. We remain in a period of uncertainty on the economic data, despite the progress that has already been achieved and the further moves that are expected over the rest of the year. If the inflation data continues to improve as many expect, there’s every chance the ECB pauses in September and doesn’t then feel it necessary to hike further by October. There are, of course, an abundance of upside risks to the inflation data from the economy continuing to display significant resilience, as we’ve already seen this year, or fresh energy or food price shocks. These things and more could tempt the ECB to hike further later in the year.     Euro falls below 1.10 against the dollar The lack of commitment to further rate hikes from the ECB today weighed on the euro and saw eurozone yields decline. The single currency plunged against the dollar, slipping back below 1.10 after coming close to 1.1150 earlier in the day.       It would appear the ECB has failed to open the door to a pause without triggering too much excitement, as it would have preferred. President Lagarde was desperately trying to avoid doing so in the press conference, repeatedly referring back to previous comments rather than directly answering questions, and it seems in doing so, traders have instead opted to read between the lines. We may see efforts to correct this in the weeks ahead.  

Fed and ECB will have a big role to play in EURUSD moves over the next 24 hours Will both offer a final dovish hike and emphasize data dependency? EURUSD faces a big test around 1.10 after breaking out earlier this month EURUSD is trading a little choppy over the last couple of days with traders clearly heavily focused on the outcome of the Fed and ECB meetings. In both cases, a 25 basis point rate hike is heavily backed in the markets, but at the same time, the language that accompanies the decision and what comes next is less obvious. I think there’s every chance that in both cases, policymakers opt to accept that a pause at the next meeting may be appropriate while in no way closing the door on further hikes in the months ahead. In other words, data dependency will be heavily emphasized with the overall tone perhaps being a dovish hike with a slight hawkish twist. The last thing policymakers want is for investors to perceive this to be the end of the tightening process but that will be a very tough message to get across, particularly in the absence of fresh forecasts. The economic data has undoubtedly improved as far as inflation prospects are concerned while the economy is clearly weakening, furthering the case for a pause in September. Both of these factors will likely be emphasized when signaling that further hikes will depend on the data.   The pair has pulled back over the last week or so after finally breaking above 1.10 earlier this month. EURUSD Daily   Source – OANDA on Trading View A weaker dollar has stemmed from data in the US becoming more Fed-friendly – weaker inflation, softer economy – but this week the ECB will be equally as influential in determining whether the pair stays above 1.10 or slips back below. Of course, the Fed is up first so it will set the tone to begin with. A hawkish Fed could strengthen the dollar and put pressure on support around 1.10, the lower bound of the range – 1.10-1.11 – that provided so much resistance over the course of 2023. Anything deemed dovish could see the pair rally once more, in effect confirming the breakout earlier this month and potentially putting pressure on last week’s highs, maybe even beyond.  

The EUR/USD pair has been caught in turbulence amid conflicting fundamental signals, causing the price to move sideways. Market participants still need to unravel this tangle of contradictions to determine the price's direction. Currently, traders are driven by emotions, experiencing a rollercoaster-like ride. The verdict of the Federal Reserve and the US GDP The results of the Federal Reserve's July meeting were not in favor of the greenback. Bulls returned to the 1.1150 resistance level (the Tenkan-sen line on the 1D chart) and tested it. However, when it comes to the overall outcome, it would be more accurate to say otherwise: the market interpreted the results of the July meeting against the US currency, while the Fed's verdict can be viewed from different angles. The US central bank avoided specifics, especially regarding the future prospects of tightening monetary policy. According to Fed Chair Jerome Powell, everything will depend on what new economic data shows: the September meeting may end with either a rate hike or keeping rates unchanged. Such rhetoric disappointed dollar bulls, as recent inflation reports came out in the "red," reflecting a slowdown in inflation in the US. It is logical to assume that if July's inflation follows the trajectory of June's, the September rate hike will be in question. These conclusions put significant pressure on the greenback – the US dollar index hit a weekly low, declining towards the 100 level. However, the situation changed drastically. Dollar bulls once again saw a "light at the end of the tunnel" thanks to the latest US GDP report. The data significantly surpassed forecasts.   According to preliminary calculations, US GDP increased by 2.4% in the second quarter, with a growth forecast of 1.8%. It is worth mentioning that the first quarter's result was recently revised upwards: the initial estimate showed a 1.3% growth in the US economy, while the final data showed a different result of 2.0%. The Bureau of Economic Analysis report (US Department of Commerce agency) indicates that this growth was driven by increased consumer spending, government and local government spending, growth in non-residential fixed investment, private investment in equipment, and federal government spending. Consumer spending, which accounts for two-thirds of the economy, increased by 1.6% in the second quarter, while government spending increased by 2.6%. EUR/USD sellers are back in action In addition to the GDP report, dollar bulls were also pleasantly surprised by another indicator.   Durable Goods Orders in the US increased 4.7% in June, compared to forecasts of 1.3%. This reading followed the 2.0% increase recorded in May. Orders for durable goods excluding transportation also rose by 0.6% last month. This component of the report also showed a positive outcome, as most experts expected a more modest growth of 0.1%.   As a result, hawkish expectations regarding the Fed's future actions have increased in the market. According to the CME FedWatch Tool, the probability of a 25 basis points rate hike in September is nearly 30%, whereas after the announcement of the July meeting's outcome, this probability fluctuated in the range of 19-20%. Such an information background contributed to the "revival" of the greenback.   The US dollar index fully recovered all lost positions, rising to the middle of the 101 level. Consequently, the EUR/USD pair plummeted and hit two-week price lows.       The European Central Bank also played its role in this. Following the July meeting, the ECB raised interest rates by 25 basis points but did not announce further steps in this direction.   Similar to the Fed, the ECB indicated that one additional rate hike from the central bank would now depend on key economic data, primarily inflation. According to ECB President Christine Lagarde, the central bank has "turned off the autopilot" – decisions on interest rates will be made from meeting to meeting and will be based on "inflation forecasts, economic and financial data, and the underlying inflation dynamics."   It is worth noting that after the previous meeting, Lagarde had directly announced the rate hike at the July meeting. Conclusions The latest US reports, as well as the outcomes of the ECB's July meeting, "redrew" the fundamental picture for the EUR/USD pair. There is one more important piece of the puzzle remaining: the core PCE index, which will be published at the start of the US session on Friday, July 28th. However, for another upward reversal, this indicator must deviate significantly from the forecasted value (naturally, in a downward direction), with experts predicting a declining trend to 4.2% (following the May increase to 4.6%).   From a technical perspective, you can consider short positions on the pair after sellers overcome the support level of 1.0950 (Tenkan-sen line on the weekly chart). In such a case, the next bearish target for EUR/USD would be at 1.0850 – the upper band of the Kumo cloud on the 1D chart.  

In a recent interview with FXMAG.COM, we had the opportunity to speak with Michael Stark, an experienced analyst from Exness, about the current state and future prospects of the oil market. With oil prices experiencing notable fluctuations in recent times, the question on everyone's mind is how long can the oil price rise and what factors are likely to influence its trajectory. Stark begins by sharing his insights on the potential for an extended uptrend in oil prices, particularly with Brent crude. He highlights the importance of market sentiment and the avoidance of recession fears as key factors that could drive oil prices higher. Drawing attention to oil's unique characteristic of being able to trend for prolonged periods compared to other popular CFDs, Stark suggests that if the current uptrend is indeed a new main trend, it might carry on well into the fourth quarter.   FXMAG.COM:  How long can the oil price rise? Michael Stark:  It’d be quite possible to see an extended uptrend with Brent retesting $97 later this year if sentiment in markets remains generally positive and fears of recession don’t clearly return. Oil can often trend for quite a long time compared to other popular CFDs, so if this is indeed a new main uptrend it might continue into the fourth quarter. However, sentiment will almost certainly change to some degree when significant activity returns to markets in September. Negatives for crude fundamentally include weaker economic data from China in recent months combined with Russia’s avoidance of sanctions by exporting through Saudi Arabia, though the latter specifically and OPEC+ generally seem to be determined to keep prices high. Equally, January’s high around $88.40 might be an important resistance which could resist testing. The main goal as a trader of oil during seasonally low volume is usually to avoid entries at extremes while trying to use support, moving averages and others to determine when a retracement becomes short-term downtrend.  

As this week's macroeconomic readings unfold, providing insights into the state of the British economy, certain trends and challenges have emerged. The UK is facing a potential inflation rally, with average wages increasing by 6.9% over the three months ending in May, indicating a competitive labor market that can drive inflation higher. This pro-inflationary factor is closely monitored by the Bank of England, which stands ready to react if necessary. The central bank's ongoing efforts to raise interest rates are aimed at gaining control over inflationary pressures. However, the GDP data for May reflects a recessionary phase, with the economy contracting by 0.1% month-on-month. While this decline was not as severe as initially anticipated, the UK continues to grapple with inflation, logistic chain disruptions, and domestic challenges. Despite the current recessionary signals, there is optimism that the Bank of England's measures will yield positive results, leading to a decline in inflation and a normalization of economic processes. It is hoped that with time, negative statistics will gradually subside.   FXMAG.COM: What do this week's macroeconomic readings - wages, GDP, industrial production - tell us about the state of the British economy? Will the recession be deep? Will the BoE continue to raise rates   The UK faces a risk that the inflation rally will develop further. This week, statistical data has demonstrated that average wage over the three months ended in May increased by 6.9% against a rise of 6.7% earlier. There had been forecast an increase but a less expressed one. The growth of wages shows that the employment market is vigorous enough to compete over labour resources through raising payments. It is an apparent pro-inflationary factor. The Bank of England monitors this and will react if needed. The BoE's interest rate will be growing until inflation gets under control. The GDP data for May in the UK reflected a recession. The economy lost 0.1% m/m after a rise of 0.2% in April. The expectations had been gloomier, suggesting a decrease of 0.3%. The indications of a recession were not unexpected. The UK suffers greatly from inflation, logistic chain breaches, and domestic problems. It is doubtful whether the recession will be profound. Most probably, the Bank of England's effort will soon bring fruit, inflation will go down, and economic processes will start normalising. There might be a month or two more of negative statistics.     What does the industrial production reading from the Eurozone tell us about the state of the European economy and European industry? In May, industrial production in the Eurozone increased by 0.2% m/m, turning out inferior to the forecast. Calculated year by year, it dropped by 2.2% after a rise of 0.2% in April. It is very weak data. It was not unexpected, but the decrease in industrial production had been predicted to be less expressed. The statistics are comprised of extremely high purchase prices and increased salaries, and capacity maintenance expenses. At the same time, enterprises cannot count on future improvements and prefer to decrease production volumes, which allows for cutting down on estimated loss. Most probably, the picture of industrial production will be similar in June.     Visit RoboForex

US CPI expected to edge higher in July    By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw a decent rebound yesterday after the Italian government clarified the details around its windfall tax bombshell from earlier in the week. The gains were also helped by a belief that deflation in China could lead to the end of further rate hikes from central banks here in Europe as well as the US.     US markets on the other hand, underwent another negative session as nervousness crept in ahead of today's US inflation numbers, with Nasdaq 100 leading the falls, at the same time as US 2-year yields finished the day higher.  The slowdown in China does raise the risk that central banks might over play their hand when it comes to further rate hikes, while any indication that inflation might start to baseline and turn higher could well complicate matters further as the Federal Reserve decides as to whether it has done enough, or whether they need to hike again in September. This makes today's US CPI for July and tomorrow's PPI numbers extremely important in the decision-making process.     In the last 12 months we've seen US CPI fall from a peak of 9.1% in June last year, slowing to 3% in June, with the slowdown in prices being very much a one-way process. If we do see a move higher to 3.3% which is what is expected there is a concern that might prompt some concern that we've bottomed. Core CPI slowed to 4.8%, in June which was more encouraging, and it is here that the Fed may well choose to focus its attention. With the Federal Reserve having hiked rates by another 25bps in July, there is this sense that further rate hikes beyond July could be a big ask, especially with PPI inflation on the cusp of going negative, when the July numbers get releases tomorrow. That said anyone expecting a straight-line process when it comes to slowing inflation could find that further weakness towards 2% might not be such a straightforward process. Expectations for July are for headline CPI to tick higher to 3.3%, while core prices are expected to slow to 4.7%.      Any indication that we might be at a short-term base when it comes to headline inflation could prompt some concern that the Fed might think about another rate hike at its September meeting, with the next key focus likely to be on the annual Jackson Hole Symposium at the end of the month. US weekly jobless claims are expected to remain steady at around 230k.     EUR/USD – finding support just above the 50-day SMA, with resistance at the 1.1050 area which we need to break to have any chance of revisiting the July peaks at 1.1150. Support at the 1.0900 area.     GBP/USD – remains capped just below the 1.2800 area. We need to see a move back above the 1.2800 area to ensure this rally has legs. We have support at the 1.2620 area. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – continues to struggle near the 0.8650 area but we need to see a move below the 0.8580 area to signal a short-term top might be in and see a return to the 0.8530 area. Also have resistance at the 100-day SMA at 0.8680.     USD/JPY – continues to edge back towards last week's high just below the 144.00 area, having rebounded from the 141.50 area. While below the 144.00 area the risk is for a move towards the 140.70 area. Main resistance remains at the previous peaks at 145.00.     FTSE100 is expected to open 9 points lower at 7,578     DAX is expected to open 92 points higher at 15,944     CAC40 is expected to open 45 points higher at 7,367  

Higher yields push gold lower Could the US CPI be a game-changer? A break of June lows could be very bearish The second half of the summer hasn’t been kind to gold so far, with the yellow metal coming close to $2,000 once more before plunging back toward $1,900 where it spent most of late June and early July. Higher yields, particularly in the US, and a stronger dollar have been primarily responsible for this but there’s probably also an element of uncertainty in the economic data that’s making traders a little nervous. We’ve finally reached the end of the tightening cycles – or extremely close to it – and now we’re left wondering how long we’ll be stuck here. We’ve seen some significant improvement in some areas but not yet enough to convince policymakers that the case for rate hikes has passed, let alone that there is any case for easing again early next year. That narrative may change if we see some further improvement in the data, starting with the US CPI tomorrow, but for now, that nervousness is creeping back in.     For one, it would make the rotation on 20 July all the more significant and would confirm the rally that preceded it as a retracement, indicating the broader decline may still be in play. What’s more, a move below the 200/233-day simple moving average band – the lower end of which falls around $1,860 – could be viewed as another very bearish development.

UK economy expected to stall in Q2. By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets enjoyed their second successive day of gains yesterday, boosted by the announcement by China to end its ban on overseas travel groups to other countries has also helped boost travel, leisure, and the luxury sector. The gains were also helped by a lower-than-expected rise in US CPI of 3.2%, with core prices slipping back to 4.7%, which increased expectations that we could well have seen the last of the Fed rate hiking cycle, which in turn helped to push the S&P500 to its highest levels this week and on course to post its biggest daily gain since July.     Unfortunately, San Francisco Fed President Mary Daly had other ideas, commenting that the central bank has more work to do when it comes to further rate hikes, which pulled US yields off their lows of the day, pulling stock markets back to break even.   This failure to hang onto the gains of the day speaks to how nervous investors are when it comes to the outlook for inflation at a time, even though Daly isn't a voting member on the FOMC this year, and she's hardly likely to say anything else. Certainty hasn't been helped this week by data out of China which shows the economy there is in deflation, despite recent upward pressure on energy prices.     It also means that we can expect to see a lower open for markets in Europe with the main focus today being on the latest UK Q2 GDP numbers, as well as US PPI for July. Having eked out 0.1% growth in Q1 of this year, today's UK Q2 GDP numbers ought to show an improvement on the previous two quarters for the UK economy, yet for some reason most forecasts are for zero growth. That seems unduly pessimistic to me, although the public sector strike action is likely to have been a drag on economic activity.     Contrary to a lot of expectations economic activity has managed to hold up reasonably well, despite soaring inflation which has weighed on demand, and especially on the more discretionary areas of the UK economy. PMIs have held up well throughout the quarter even as they have weakened into the summer. Retail sales have been positive every month during Q2, rising by 0.5%, 0.1% and 0.7% respectively. Consumer spending has also been helped by lower fuel pump prices, and with unemployment levels still at relatively low levels and wage growth currently above 7%, today's Q2 GDP numbers could be as good as it gets for a while.     Despite the resilience shown by the consumer, expectations for today's Q2 are for a 0% growth which seems rather stingy when we saw 0.1% in Q1. This comes across as surprising given that Q2 has felt better from an economic point of view than the start of the year, with lower petrol prices helping to put more money in people's pockets despite higher bills in April. This raises the prospect of an upside surprise, however that might come with subsequent revisions.       Nonetheless, even as we look back at Q2, the outlook for Q3 is likely to become more challenging even with the benefit of a lower energy price cap, helping to offset interest rates now at their highest levels for over 15 years. With more and more fixed rate mortgages set to get refinanced in the coming months the second half of the year for the UK economy could well be a lot more challenging than the first half.     Yesterday US CPI came in slightly softer than expected even as July CPI edged up to 3.2% from 3% in June. Today's PPI numbers might show a similar story due to higher energy prices, but even here we've seen sharp falls in the last 12 months. A year ago, US PPI was at 11.3%, falling to 0.1% in June, with the move lower being very much one way. We could see a modest rebound to 0.7% in July. Core prices have been stickier, but they are still expected to soften further to 2.3% from 2.4%. 12 months ago, core PPI was at 8.2% and peaked in March last year at 9.6%.       EUR/USD – squeezed above the 1.1050 area yesterday, before failing again, and sliding back below the 1.1000 area. Despite the failure to break higher we are still finding support just above the 50-day SMA. Below 1.0900 targets the 1.0830 area.     GBP/USD – popped above the 1.2800 area yesterday and then slipped back. We need to see a sustained move back above the 1.2800 area to ensure this rally has legs. We have support at the 1.2620 area. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – pushed up to the 100-day SMA with resistance now at the 0.8670/80 area. Support comes in at the 0.8580 area with a break below targeting the 0.8530 area. Above the 100-day SMA targets the 0.8720 area.     USD/JPY – closing in on the June highs at the 145.00 area. This is the key barrier for a move back towards 147.50, on a break above the 145.20 level. Support now comes in at the 143.80 area.     FTSE100 is expected to open 42 points lower at 7,576     DAX is expected to open 70 points lower at 15,926     CAC40 is expected to open 30 points lower at 7,403

US inflation accelerates by 3.2% UK GDP expected to rise 0.1% in Q2 The British pound showed some strength earlier but reversed directions and lost ground after the US inflation report. In the North American session, GBP/USD is trading at 1.2725, up 0.05%. US headline CPI rises, core rate ticks lower The US inflation report was somewhat of a mix, but most important was that both headline and core inflation were within expectations. This meant that the reaction of the US dollar was muted following the inflation release. Headline CPI climbed to 3.2% y/y in July, above the June reading of 3.0% but shy of the consensus estimate of 3.0%. This marked the first time in 13 months that headline CPI accelerated, but the upswing isn’t all that significant, as it was due to base effects. Core CPI ticked lower to 4.7% y/y in July, down from 4.8% in June. The Fed will be encouraged by the fact that on a monthly basis, both headline and core CPI posted a very modest gain of 0.2%, matching the estimate and unchanged from June. Inflation has fallen sharply in recent months, but the Fed will find it more difficult to bring core inflation down to the 2% target. The sharp drop in energy prices has sent headline CPI lower, but the core rate excludes food and energy prices. Inflation is being driven by services and wages, which explains why core CPI is so much higher than headline CPI. The inflation report has cemented the Fed holding rates in September, barring a huge surprise. The odds of a pause have risen to 90%, up from 86% prior to the inflation report, according to the CME FedWatch tool. The Fed may well be done with the current rate-tightening cycle, but don’t expect to hear that from anyone at the Fed, which does not want the markets to become too complacent about inflation.   UK GDP expected to rise by 0.1% The UK will post preliminary GDP on Friday. The consensus estimate stands at 0.1% q/q for the second quarter. If GDP misses the estimate and falls into negative territory, investors could get nervous and send the pound lower. Conversely, if GDP beats the estimate, the pound could gain ground. The Bank of England will be watching carefully, as it digests key economic data ahead of the next meeting on September 21st. . GBP/USD Technical GBP/USD is testing resistance at 1.2747. The next resistance line is 1.2874  1.2622 and 1.2495 are providing support  

The week ahead features trade and inflation data from Japan, India and China. We'll also get a Philippine central bank decision and Australia’s unemployment data, which could influence India's move on rates later this month. Australia unemployment rate to increase slightly Australia’s unemployment rate came close to its all-time low of 3.4% last month, falling to 3.5%. Despite that, the Reserve Bank of Australia (RBA) kept rates unchanged last week as the inflation data was more favourable. Although labour data is an important input into the RBA’s reaction function, we think that the central bank will continue to be subordinate to the monthly inflation numbers, which must grapple with large electricity tariff hikes in July and then much less helpful base effects between August and October.     Japan to release GDP, trade and inflation data With modest improvement in net exports and a solid recovery in service activity, we expect second-quarter GDP growth to rise 0.6% quarter-on-quarter seasonally-adjusted (vs 0.7% in the first quarter). For inflation, we believe that private consumption has cooled moderately as the high prices in the second quarter put off consumption demand, though this is likely to be compensated by improved terms of trade as imports fell sharply due to falling global commodity prices. However, we should expect exports to record a contraction in July, particularly due to base effects. We believe Japan’s inflation should stay at the current level while core inflation is expected to accelerate further, as the previous Tokyo inflation outcome suggested. Philippine central bank to extend rate pause? The Philippines' central bank, Bangko Sentral ng Pilipinas (BSP), is likely to extend a pause, but persistent upside risks to the inflation outlook could give Governor Eli Remolona a reason to stay hawkish. Headline inflation has been trending lower and could be within target as early as September. This would be the main reason the BSP holds rates at 6.25%. However, with global grain and energy prices inching higher, a fresh round of upside risks to the inflation outlook has surfaced. Persistent upside risks will likely translate to the central bank remaining hawkish even if the BSP opts to extend its current pause. We expect the BSP to keep rates untouched but signal a strong willingness to tighten further should upside risks to the inflation outlook materialise. Inflation to surge in India India will release its July CPI next week, and we are expecting a steep climb to over 8%, breaching the upper end of the Reserve Bank of India's (RBI's) 2-6% target range. This is due to soaring food prices caused by the erratic monsoon rains: tomatoes experienced a whopping 200% month-on-month increase in July. But this should not bother the RBI too much as food price shocks like this come and go. The effect of food inflation has also spilled over to exports, where the Modi administration has announced an immediate ban on some non-basmati rice. As such, we are expecting a further decline in India’s export to -23.6%. Key data on industrial production and retail sales from China While China’s data has been disappointing lately, the summer season from July may usher in some better news. Data from China Railway show that there was a 14.2% increase in operating passenger trains compared to the same period in 2019. Flight numbers, on the other hand, experienced a slower recovery. They are currently running at about 48% relative to the same period in 2019, but this is still a 12% increase on a yearly and monthly basis. The rise in movement could provide a boost to consumption and strengthen retail sales. However, the effect is unlikely to spill over into industrial production, and we should continue to see weak growth here. Both the official and Caixin Manufacturing PMI released earlier this month showed that China’s recovery has yet to gain traction.   Key events in Asia next week    

EUR: Hard to find forces to defend the euro The calendar doesn't have much to offer in the eurozone today, resulting in a lack of impetus to defend the euro. The second-quarter GDP estimate and the headline industrial production number are unlikely to change the picture much and so the ball remains in the US court today. At least the 2y rates differential against the USD has flipped in support of the euro or at least should not push EUR/USD any further down. However, if the strong condition of the US economy is confirmed, it will be hard for EUR/USD to resist breaking 1.090. That should be the line in the sand today as well.

China's surprise cut won't be enough.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   China surprised by cutting its one-year medium-term lending facility (MLF) rates by 15bp to 2.50% today to give a jolt to its economy that has not only completely missed the expectation of a great post-Covid recovery, but that deals with deepening property crisis, morose consumer, and investor sentiment – which is worsened by Country Garden crisis and missed payments from the finance giant Zhongzhi Enterprises. Data-wise, things looked as worrying as we expected them to look when China released its latest set of economic data today. Growth in industrial production unexpectedly dipped to 3.7%, retail sales unexpectedly fell to 2.5%, unemployment worsened, while growth in fixed investments dropped further. Foreign investment in China fell to the lowest levels since 1998, and the 13F filings showed that Big Short's Michael Burry already exited Alibaba and JD.com, just months after increasing his exposure to these Chinese tech giants. People's Bank of China's (PBoC) surprise rate cut will hardly reverse appetite for Chinese investments as meaningful fiscal stimulus becomes necessary to stop halting.       The Hang Seng remains under pressure, the Chinese yuan fell to the lowest levels against the US dollar since last November, before the post-Covid reopening, and crude oil stagnates around the $82.50pb, close to where it was yesterday morning at around the same time. Tight supply and warnings of increased risk to shipping near the Strait of Hormuz, which is a strategic waterway for oil transit for exporters like Saudi Arabia and Iraq, certainly helped tempering the China-related selloff. But the demand side is weakening and that could stall the oil rally at the actual levels, forcing a return of the barrel of US crude toward the $80pb level, as worries regarding the Chinese recovery are real, and China will have to deploy further stimulus measures to fix things and bring investors back on their side of the table. If that's the case however, oil prices could take a lift.      Elsewhere, Argentina devaluated its currency by 18% to 350 per dollar and hiked its interest rates by 21 percentage points to 118% after populist Javier Milei won the presidential primary, while the dollar ruble traded past the 100 mark for the first time since Russia invaded Ukraine and the Indian rupee traded near record, as well. So all that helped the US dollar index shortly trade above its 200-DMA yesterday, a day before the release of the FOMC minutes which could hint that most Federal Reserve officials were certainly happy with the progress on inflation, but not yet convinced that the war against inflation is won just yet. And given the rebound in global energy and food prices, the Fed officials' careful approach to inflation looks like it makes sense. That's certainly why the US 2-year yield continued its advance toward the 5% mark yesterday, even though the latest survey from New York Fed showed that inflation expectations recorded a sharp drop to 3.6% for the next twelve months and fell to 2.9% for the next three years. The same survey showed that the mean unemployment expectation fell by 1 percentage point, giving support to goldilocks or to the soft landing scenario. Goldman now expects the Fed to cut rates in the Q2 of next year. It also said it expects core PCE to have fallen below 3% by that time.       Today, investors will focus on the US Empire manufacturing index and the retail sales data, and earnings from Home Depot will also hit the wire. While expectation for Empire manufacturing points at a negative number, consensus for July retail sales is a slight acceleration on a monthly basis. Any improvement on the US data is poised to further back the pricing of soft landing and give a further boost to both the US dollar and the US stocks.  The S&P500 recovered yesterday, as Nasdaq 100 advanced more than 1% with technology stocks leading the rebound. Nvidia was one of the best performers with a 7% jump after a Morgan Stanley analyst reiterated his $500 per share price target yesterday. But Tesla didn't benefit from the tech rally of yesterday and closed the session below $240 per share after cutting its car prices in China, yet again.    

Indonesia: Trade surplus narrows further Indonesia’s July trade report showed both exports and imports in contraction.   Trade surplus down to $1.3bn Indonesia’s July trade report showed both exports and imports down for another month. The market consensus expected a 19.2% year-on-year fall in exports and a 15.3% YoY decline in imports with the trade surplus projected to slip to $2.6bn. Exports fell almost in line with expectations, down by 18% YoY but imports declined at a less pronounced pace of 8.3% YoY. This resulted in the trade surplus narrowing further to $1.3bn, down from the $3.5bn projection and also lower than the June level.  The decline in exports was likely driven by the 46.1% decline in coal exports and the 19.3% YoY drop in palm oil. Imports saw a less pronounced decline for both oil & gas (-29.7% YoY) and non-oil, which was down 2.7% YoY compared to last month’s drop of 13.9% YoY.   Trade surplus continues to narrow   Narrowing trade surplus means less support for currency The continued narrowing of the trade surplus for Indonesia points to a fading key support for the rupiah, which enjoyed a boost in 2022 when the trade surplus hit a record high of $7.5bn. This development could be telling for the IDR, which has been under pressure of late and down roughly 1.5% for the month of August. Indonesia recently asked exporters to retain a portion of export receipts onshore to help improve dollar liquidity, a potential counter to the narrowing trade surplus.  Meanwhile, Bank Indonesia (BI) has held off on adjusting rates after a long pause. However, with interest rate differentials extremely tight (25bp) we could see a potential rate hike from BI if the Federal Reserve does indeed hike again given BI's thrust to ensure FX stability. 

The everything selloff By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The global selloff intensified yesterday, after the FOMC minutes released Wednesday highlighted that the Federal Reserve (Fed) continues to see significant risks to inflation. And if that's not enough, Atlanta Fed's GDPNow printed an eye-popping growth forecast of 5.8% for Q3 on Wednesday, up from 5% printed a day before. Atlanta Fed computes this number using the data available to them at a time t, therefore the number is not necessarily accurate, but it reflects the positive data released lately, and fuels worries that with such a strong growth, the US inflation could only make a U-turn and take a lift. Yesterday, the Philly Fed index printed a surprisingly strong number, as well. This is why, we continue to see the upside pressure in yields persist, in the US and around the world, though we saw some respite in the US 2-year yield that bounced lower from the 5% mark earlier in the week, and the 10-year yield spiked above 4.30% before falling back to 4.25% this morning.   But note that there is more to this story. Long story short, the US Treasury has been printing a lot of T bills lately, and fell well behind the government bond issuance, and the latter helped keeping US liquidity well contained since the US exited its debt ceiling crisis after which the Treasury started refilling its general account. That was supposed to pull liquidity away from the market. But in the meantime, the Fed was pushing liquidity into the system by reverse repo operations, allowing the money market funds to buy T bills and release cash. The problem is, nowadays, the percentage of T bills approaches the 20% level, which is a self-induced limit for the Treasury, and the Treasury will shift back to issuing bonds, instead of T bills. The latter will increase the amount of sovereign bonds in the system at a time the Fed is decreasing its balance sheet by QT, and the banks don't necessarily want to buy bonds either. So, the increasing supply, and the decreasing demand for US sovereigns will be one major force pushing the US yield curve higher. And if the strong economic data translates into higher inflation, the impact on yields will likely be higher. So, yes, the US 30-year yield is at the highest levels since 2011 and that looks appetizing, especially if the risk sentiment sours – due to multiple reasons ranging from geopolitical tensions to China worries – but the downside risks in the US sovereign bonds market prevails. And Bill Ackman said earlier this month that the 30-year yield could hit the 5% mark.  And the upside pressure in sovereign yields is true for other parts of the world as well, because obviously when the US coughs the world catches a cold. More precisely, higher US yields also translate into a stronger US dollar, and a stronger US dollar is inflationary for the rest of the world. If nothing, the energy and raw material prices that are negotiated in USD terms on international markets simply become more expensive when imports are reverted back to local currencies, and that, alone, is enough to push inflation higher in the rest of the world when the US dollar appreciates. The EURUSD fell to 1.0856, the AUDUSD slipped below 64 cents and the USDJPY spiked above 146.50. The correction is in play this morning and we could see the US dollar retreat further into the weekly closing bell, but the stronger dollar trend is clearly in play and it is worrying. Looking at yields elsewhere the US, the 10-year gilt yield has now surpassed the levels last seen during the Liz Truss induced disaster peak and is headed toward the 5% psychological mark while the German 10-year yield hit 2.70%, a level last seen in 2011 as well. Even the Japanese 10-year yield, which is controlled by the BoJ and should not exceed the 50bp benchmark by 'too much', goes up significantly.  As a result, the selloff in equities deepens. The S&P500 sank to 4370 yesterday and is getting ready to test the minor 23.6% Fibonacci retracement on October to July rally, and the base of that positive trend, while Nasdaq 100 is no more than 8 points from its own 23.6% retracement and already fell below the ascending trend base. The Stoxx600 slumped below the 200-DMA and is flirting with its own 23.6% retracement level, and the Japanese Nikkei, which was one of the rising stars of the year, and which recorded a rally past 30% since January, has fallen below its 23.6% retracement and is preparing to test the 100-DMA.   And note that this simultaneous selloff in stocks and bonds is a sign that the market liquidity is draining. Bitcoin, which is a gauge of market liquidity, slumped more than 7% yesterday and traded close to the $25K level. According to CoinGlass, $1 billion left cryptocurrencies over the past 24 hours and Bitcoin suffered almost half of the liquidations.   

Rates Spark: Dis-inversion in vogue If the Fed has peaked, then long tenor market rates would typically be falling – but they aren't, and we continue to point to the reduction in the rate cut discount as the rationale. Medium-term supply pressure pushes in the same direction. And so too do other lower-yielding core rates as they get pulled higher by the made in America bond bear market.   Dis-inversion set to continue as long tenors rates push on some more The dis-inversion of curves is an interesting outcome from the market rates movements of late. Longer tenor rates have been rising while shorter tenor rates have not being doing a lot. This is unusual at this stage of the cycle. Typically if the market sniffs a peak in official rates, then longer tenors rate tend to drift lower in anticipation of future cuts in official rates. Here, it seems the market is fine with the peak in rates narrative, as there has been no material build in the risk for a Fed hike in September, and so far the market is erring on the side of no more hikes. But the big change has been the discount for less rate cuts. This discount has continued to build in terms of fewer and fewer future rate cuts, and that continues to correlate with upward pressure on longer tenor rates.  We continue to view this dampening of the rate cut discount as the dominant driving force to higher Treasury yields, ultimately reflecting US macro robustness. The other ongoing feature is future supply of Treasuries. Bear in mind that the congressional budgetary office has the US debt/GDP ratio hitting 200% by 2050 on unchanged policies. That paints a picture of ongoing elevated fiscal deficits (currently in the 5% of GDP area or higher) and that typically would correlate with market rates being forced higher, all other things being equal. While that alone does not explain why the US 10yr snapped up to 4.3%, it is certainly a force that continues to push very much in the same direction.   USTs are leading the sell-off with spreads over Bunds widening   It’s also clear that the recent up-move in Treasury yields has been made in America. The Treasury – Bund spread has widened, illustrating that Treasuries are pulling Bund yields higher. The same holds true for the Treasury spread to Japanese Government Bonds (JGBs), supporting our view that the rise of the cap on 10yr JGBs was an ancillary development and not a driving force behind the up-move in Treasury yields – especially as spreads between Treasuries and JGBs have been re-widening of late.     Today's events and market view We may see some interim consolidation given that today's calendar does not hold data prone to further feeding the main narrative currently driving the market. The only notable release following this morning's UK retail sales is the final eurozone inflation reading for July. Looking into next week, however, the eurozone flash PMIs could further highlight the contrasting macro backdrops between the US and the eurozone. Only late next week will the focus shift back to Federal Reserve monetary policy, with the Jackson Hole conference starting on 24 August.  

US The main event for next week will be the Kansas City Fed’s Jackson Hole Symposium.  Fed Chair Powell’s speech will reiterate that more rate hikes might be needed and that rates should stay higher for longer.  With the recent surge with real yields, Fed Chair Powell can acknowledge that policy is restrictive and that future rate cuts could eventually be warranted as long as inflation has been defeated. The economic data starts on Tuesday with the July existing homes sales report, which should show signs of stabilizing.  Wednesday contains the flash PMIs, which could show manufacturing remains in contraction territory and softness with the service sector continues.  On Thursday, we will get both initial jobless claims and the preliminary look at durable goods, which is expected to show weakness in July. Friday contains the release of the final reading of the University of Michigan sentiment report, with most traders wanting to know if inflation expectations had any major revisions. Earnings for the week include results from Baidu, Lowe’s, Nvidia, and Snowflake,   Eurozone As the ECB is poised to continue delivering more rate hikes to combat inflation, the risks of a hard landing are growing.  There’s no shortage of economic releases next week but the one that stands out is the flash PMI readings. The manufacturing sector is clearly going to remain in contraction territory for all the key regions(Germany, France, eurozone), while the service sector steadily weakens, fighting to stay in expansion territory.  Traders will also pay attention to both the German IFO business climate report as that could show expectations might be stabilizing and what should be another soft consumer confidence report. Thin trading conditions in Europe could occur on Tuesday as some banks (France, Italy) are closed for Assumption Day.   UK Next week is mostly about the UK flash PMI survey, as the composite PMI collapse in July is expected to be followed by further weakness in August. The manufacturing PMI is expected to weaken further from 45.3 to 45.0, the service reading to drop from 51.5 to 50.8, while the composite drops from 50.8 to 50.3.   The UK economy is still expected to barely show growth in Q3, but the momentum is fading as the BOE’s rate hiking cycle starts to weigh on the economy.   Russia Following the plunge in the ruble and an emergency rate hike, the focus on Russia will shift back to the war in Ukraine and the BRICS summit.  Russia was having a growing influence in Africa, but that might get tested as President Putin will be absent given his indictment by the ICC. The economic calendar is light with two releases, industrial production data on Wednesday and money supply on Friday.   South Africa The one notable release will be the July inflation report.  Inflation is expected to stay in the SARB’s target range between 3-6%.  The annual headline reading is expected to drop from 5.4% to 4.9%, while the monthly reading rises from 0.2% to 1.0%.  The monthly core reading is also expected to see a rise from 0.4% to 0.6%.   Turkey With inflation out of control, the CBRT is expected to deliver its 3rd straight rise, bringing the 1-week report rate to 19.50%.  The consensus range is to see the rate rise from 17.5% to anywhere between 18.50% and 20.5%. The 19.0% level was a key level in the past as that triggered the sacking of Governor Agbal.   Switzerland Another quiet week with Money supply data released on Monday and export data on Tuesday.   China One sole key economic data to watch will be on Monday, the monetary policy decision on its one-year and five-year loan prime rates that commercial banks used as a benchmark to price corporate, household loans and housing mortgages respectively. After a surprise cut of 15 basis points (bps) on the one-year medium-term lending facility rate to 2.50% last Monday, its lowest level since late 2009 to defuse the potential contagion risk in China’s financial system triggered by a major trust fund that failed to make timely payments to holders of its wealth management products which are backed by unsold properties of indebted property developers; forecasts are now calling for a similar 15 bps cut on the one and five-year loan prime rates to bring it down to 3.4% and 4.05% respectively. Market participants will also be on the lookout for more detailed fiscal stimulus from China’s top policymakers after recent “morale-boosting piecemeal rhetoric measures” that have failed to break the negative feedback loop in the China stock market; the benchmark CSI 300 index has given up all its ex-post Politburo gains from 25 July after the top leadership group promised to implement “counter-cyclical” measures to defuse the deflationary risk spiral in China. For earnings report releases, a couple of major companies to take note of; Sunny Optical Technology (Tuesday), Country Garden Services (Tuesday), China Life Insurance (Thursday), NetEase (Thursday), Meituan (Friday).   India A quiet calendar with only foreign exchange reserves and fortnightly bank loan growth data out on Friday.   Australia Flash Manufacturing and Services PMIs for August will be out on Wednesday.   New Zealand Balance of Trade for July out on Monday is forecasted to shrink to a deficit of -NZ$0.4 billion from a surplus of NZ$9 million posted in June. If it turns out as expected, it will be its first trade deficit since March 2023 due to a weak external demand environment. Q2 retail sales will be out on Wednesday where its prior Q1 negative growth of -4.1% y/y is forecasted to narrow to -0.9% y/y.   Japan Two key data releases to monitor. Firstly, flash Manufacturing and Services PMIs for August out on Wednesday; manufacturing activities are forecasted to improve slightly to 49.9 from 49.6 printed in July while growth in the services sector is expected to come in almost unchanged at 53.6 versus 53.9 in July  Next up, the significant leading Tokyo area consumer inflation data for August out on Friday; both Tokyo core inflation (excluding fresh food) as well as its core-core inflation (excluding fresh food & energy) are forecasted to be unchanged at 3% y/y and 2.5% y/y respectively. Both inflation measures have remained elevated especially the core-core rate which has soared to a 31-year high. Market participants will be keeping a close watch on the USD/JPY as it rallied past a key resistance zone of 145.50/146.10 despite rising concerns on possible BoJ’s FX intervention to negate the current bout of JPY weakness.   Singapore Two key data to focus on. July’s consumer inflation out on Wednesday where the core inflation rate is expected to be almost unchanged at 4.1% y/y versus 4.2% y/y in June. On Friday, industrial production for July is forecasted to show an improvement; -2.5% y/y from -4/9% y/y printed in June. Despite this forecasted improvement, it is still ten consecutive months of negative growth which increases the risk of a recession for Singapore in Q3 due to a weak external demand environment.      

The Australian dollar’s slide continues Evergrande bankruptcy raises contagion fears It has been all red for the Australian dollar, as AUD/USD has closed lower for eight straight days and declined 230 basis points during that time. The downswing has continued on Friday, as AUD/USD is trading at 0.6390 in the European session, down 0.20%. There are no Australian or US releases today, so I expect a calm day for AUD/USD.   Evergrande collapse raises contagion fears Chinese economic releases have looked weak in recent weeks, with exports and imports in decline, a slump in domestic demand, and soft services and manufacturing data. The news from Evergrande, one of the country’s largest property developers, is one more headache that the Chinese economy could do without. Evergrande filed for bankruptcy in New York on Thursday. The company defaulted on its massive debt in 2021, which triggered a massive property crisis in China and damaged the country’s financial system. The bankruptcy has raised fears that China’s property sector problems could spread to the rest of the economy, which is experiencing deflation and is suffering from weak growth. There are growing concerns about the stability of the Chinese economy and the Evergrande bankruptcy has raised contagion fears, similar to when the company defaulted on its debt. Australia is particularly sensitive to economic developments in China, which is Australia’s largest trading partner. A slowdown in China has meant less demand for Australian exports, and that has contributed to the Australian dollar’s sharp slide, with the currency plunging a massive 4.93% in August.   In the US, there was unexpected good news from the manufacturing sector on Thursday. Manufacturing has been in the doldrums worldwide, as high inflation and weak demand have taken a heavy toll. The US is no exception, but Philly Fed Manufacturing sparkled in August with a reading of +12, up sharply from -13.5 in July and blowing past the consensus estimate of -10 points.   AUD/USD Technical AUD/USD is testing support at 0.6402. This is followed by support at 0.6319 0.6449 and 0.6532 are the next resistance lines    

AUD/USD close to 9-month lows China fails to cut 5-year LPR   The Australian dollar is steady at the start of the new trading week. In the European session, AUD/USD is unchanged at 0.6404. It’s a very quiet week for Australian releases, with no tier-1 releases. On Wednesday, Australia releases services and manufacturing PMIs for August. Services and manufacturing both contracted in July, with readings below the 50.0 level. The Aussie has hit a rough patch and has reeled off five straight losing weeks against the US dollar, sliding over 400 basis points in that period. The economic picture in China continues to deteriorate, and this has been a major reason for the Australian dollar’s sharp deterioration. China is Australia’s number one trading partner, and when China sneezes there’s a good chance Australia will catch a cold. China’s economic data has been pointing downward and the world’s second-largest economy is experiencing deflation. Last week, Evergrande, a huge Chinese property developer, filed for bankruptcy in New York, raising fears of contagion to other parts of the economy. The People’s Bank of China (PBOC) responded to the economic slowdown with a surprise cut to the one-year medium-term lending rate. The central bank was expected to follow up with cuts to the one-year and five-year loan prime rates (LPR). On Monday, the PBOC trimmed its one-year LPR from 3.55% to 3.45%, but surprisingly, did not lower the 5-year LPR, a key lending rate that affects mortgages. Lower lending rates are intended to boost credit demand, but the central bank’s lukewarm move is unlikely to provide much of a boost to China’s ailing economy. That does not bode well for the struggling Australian dollar, and if China’s economy continues to show signs of weakening, I would expect the Australian dollar to continue losing ground.   AUD/USD Technical AUD/USD is putting pressure on resistance at 0.6431. Next, there is resistance at 0.6496 There is support at 0.6339 and 0.6274  

06:00BST Tuesday 22nd August 2023 UK public sector borrowing set to slow in July   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     We saw a lacklustre start to the week yesterday, European markets just about managing to eke out a small gain, although the FTSE100 finished the day slightly below the flat line, closing lower for the 7th day in a row.    The retreat from the intraday highs appeared to be driven by a rise in yields with both UK and German yields seeing strong gains towards their highs of last week. The move higher in yields also saw US 10-year and 30-year yields hit their highest levels since 2007, but unlike in Europe the rise in yields didn't act as a brake on US markets, which managed solid gains led by the Nasdaq 100. US chipmaker Nvidia was a notable outperformer looking to revisit its record highs of earlier this month ahead of its Q2 earnings which are due to be released tomorrow. As we look ahead to today's European open the strong finish in the US looks set to translate into a similarly positive start here in a couple of hours' time, however it's difficult to escape the feeling that stock markets are starting to look increasingly vulnerable.     Economic uncertainty in China, stagnation or weak growth in Europe and the UK, the only positives appear to be coming from the US where the economy is looking reasonably resilient, hence the rise in yields there. It's slightly harder to explain why yields in the UK and Europe are rising aside from the fact that rates are likely to stay higher for longer.     On the economic data front the only data of note is the latest July public sector borrowing numbers for the UK, which are expected to see a fall to £3.9bn from £17.1bn in May. With total debt now at levels of 100% of GDP the rise in rates is extraordinarily painful given how much of its existing debt is linked to inflation and the retail price index. Having to pay out over £100bn a year in interest is money that might have been better spent elsewhere. It's just a pity that the government didn't take greater advantage of the low-rate environment we saw less than 2 years ago, as had been suggested from a number of quarters at the time. We also have the latest CBO industrial orders for August which are expected to slip back to -12 from -9 in July.     In the US we have July existing home sales which are expected to decline for the second month in a row, by -0.2%. We also have comments from the following Federal Reserve policymakers. Chicago Fed President Austan Goolsbee who leans towards the dovish side will be speaking at an event on youth unemployment alongside the more hawkish Fed governor Michelle Bowman.     We also have Richmond Fed President Thomas Barkin whose most recent comments suggest he sees the prospect of a soft landing for the US economy, although he is not a voting member this year.     EUR/USD – finding support just above the 1.0830 area. Still feels range bound with resistance at the 1.1030 area. Below 1.0830 targets the 200-day SMA.     GBP/USD – continues to look supported while above the twin support areas at 1.2610/20. We need to see a move through the 1.2800 area, to signal potential towards 1.3000. A break below 1.2600 targets 1.2400.       EUR/GBP – continues to find support for now at the 0.8520/30 area. A move below 0.8500 could see 0.8480. Above the 100-day SMA at 0.8580 targets the 0.8720 area.     USD/JPY – looks to be retesting the August highs on the way towards the 147.50 area. Below the 144.80 area, targets a move back to the 143.10 area.     FTSE100 is expected to open 6 points higher at 7,264     DAX is expected to open 48 points higher at 15,651     CAC40 is expected to open 30 points higher at 7,228  

The Japanese yen faced considerable losses on Monday as USD/JPY surged to 146.23 during the North American session, marking a 0.57% increase for the day. The US dollar's strength has propelled it dangerously close to pushing the yen below the critical 146 line, a scenario witnessed last week when the robust US dollar drove the struggling yen to a nine-month low. Once synonymous with deflation, the Japanese economy has undergone a significant transformation in the era of high global inflation. With Japan's inflation hovering slightly above 3%, a level that many major central banks would eagerly welcome, the landscape has shifted. Notably, inflation remains relatively high by Japanese standards, as both headline and core inflation have consistently outpaced the Bank of Japan's (BoJ) 2% target. Japan's inflation data is closely scrutinized as the prospect of elevated inflation sparks speculations that the BoJ might need to tighten its lenient policy stance. Although the central bank has maintained that the high inflation is transitory, it's worth remembering that other central banks have made similar claims only to backtrack later. The Federal Reserve (Fed) and the European Central Bank (ECB) come to mind as examples. In the previous week, July's Consumer Price Index (CPI) remained steady at 3.3% year-on-year, while Core CPI experienced a slight dip to 3.1% year-on-year from the previous 3.3%. Looking ahead, Tuesday brings the release of BoJ Core CPI, the central bank's favored inflation metric, which is projected to decrease to 2.7% for July, down from June's 3.0%.   USD/JPY pushes above 146 line Bank of Japan’s Core CPI is expected to ease to 2.7% The Japanese yen has posted significant losses on Monday. USD/JPY is trading at 146.23 in the North American session, up 0.57% on the day. The US dollar has looked sharp and is within a whisker of pushing the yen below the 146 line, as was the case last week when the strong US dollar pushed the ailing yen to a nine-month low. The Japanese economy was once synonymous with deflation, but that has changed in the era of high global inflation. Japan’s inflation is slightly above 3%, a level that other major central banks would take in a heartbeat. Still, inflation is relatively high by Japanese standards and both headline and core inflation have persistently been above the Bank of Japan’s 2% target. Japan’s inflation reports are carefully monitored as higher inflation has raised speculation that the BoJ will have to tighten its loose policy. The central bank has insisted that high inflation is transient, but the BoJ wouldn’t be the first bank to make that claim and then backtrack with its tail between its legs. Remember the Fed and the ECB? Last week, July’s CPI remained unchanged at 3.3% y/y. Core CPI dropped to 3.1% y/y, down from 3.3%. On Tuesday, Japan releases BoJ Core CPI, the central bank’s preferred inflation gauge, which is expected to dip to 2.7% in July, down from 3.0% in June. China’s economic troubles have sent the Chinese yuan sharply lower, with the Chinese currency falling about 5% this year against the US dollar. A weak yuan makes Chinese exports more attractive, but this is at the expense of other exporters including Japan. As a result, there is pressure in Japan to lower the value of the yen in order to compete with Chinese exports.   USD/JPY Technical USD/JPY pushed above resistance at 145.54 earlier today. The next resistance line is 146.41 There is support at 144.51 and 143.64    

GBP: Volatile pricing ahead of PMIs Bank of England rate expectations have been quite volatile since the upside surprise in wages and CPI last week. The miss in retail sales on Friday saw peak Bank rate expectations as measured in the Sonia rate drop more than 10bp. Markets are currently looking at 5.95-6.0%, but today’s PMI release in the UK may well move pricing again. Consensus is expecting some slowdown in both manufacturing (already in contraction territory) and services (to 51.0). The Bank of England will also look at the details of the survey searching for evidence that price pressures are abating. EUR/GBP can make another attempt at breaking 0.8500 today, although the sustainability of sub-0.8500 levels is questionable unless markets price in more rate hikes in the UK or price out tightening in the eurozone.

New inflation methodology offers hope for BoE 1.28 could be major resistance point for GBPUSD A break of 1.26 could be bearish signal   Recent UK economic data has been a mixed bag, with wages rising at a much-accelerated rate but inflation decelerating as expected. While the Bank of England will be relieved at the latter, the former will remain a concern as wage growth even near those levels is not consistent with inflation returning sustainably to target over the medium term. The ONS released new figures overnight that appeared to suggest core inflation is not rising as fast as the CPI data suggests. The reportedly more sophisticated methodology concluded that core prices rose 6.8% last month, down from 7% the previous month and 7.3% the month before. The official reading for July was slightly higher at 6.9% but down from only 7.1% in May. So not only is the new methodology showing core inflation lower last month but the pace of decline is much faster. That will give the BoE hope that price pressures are easing and they’re expected to do so much more over the rest of the year.     GBPUSD Daily     It’s not clear whether this will prove to be a resumption of the uptrend or merely a bearish consolidation. It is currently nearing 1.28, the area around which it has previously run into resistance this month and around the 38.2% Fibonacci retracement level. Another rebound off here could be viewed as another bearish signal, which may suggest we’re currently seeing a bearish consolidation, while a move above could be more promising for the pound. If the pair does rebound lower then the area just above 1.26 will be key, given this is where it has recently seen strong support. It is also where the 55/89-day simple moving average band has continued to support the price in recent months.

NZD/USD posts strong gains on Tuesday New Zealand retail sales are expected to decline by 2.6%   The New Zealand dollar has posted strong gains on Tuesday. In the European session, NZD/USD is trading at 0.5959, up 0.55%. On the data calendar, New Zealand retail sales are expected to decline by 2.6% q/q in the second quarter, compared to -1.4% in Q1. The New Zealand dollar has gone on a dreadful slide since mid-July, falling as much as 500 basis points during that spell. The current downswing has been driven by weak global demand and jitters over China’s economy, which is showing alarming signs of deterioration. Chinese releases have been pointing downward recently. Exports and imports have fallen, manufacturing activity is weak and the world’s second-largest economy is experiencing deflation. Last week, Evergrande, a huge Chinese property developer, filed for bankruptcy in the United States, raising fears of contagion to other parts of the economy. It wasn’t long ago that the Chinese ‘miracle’ was being touted as an economic powerhouse on the global stage, but now the world’s second-largest economy is in deep trouble and is dragging down global growth. An interesting silver lining is that deflation in China could help lower inflation worldwide, which would be good news for the Fed, ECB and other central banks that are battling to push inflation lower. The People’s Bank of China (PBOC) has responded in recent days to the economic slowdown with some cuts to lending rates, but surprisingly, has not trimmed the five-year loan prime rate, which has a major impact on mortgages. The PBOC’s lukewarm move to the economic crisis could mean China’s economy will continue to sputter, and that is bad news for the New Zealand dollar, as China is by far New Zealand’s largest trading partner. If Chinese releases continue to head lower, we can expect the New Zealand dollar to continue losing ground.   NZD/USD Technical NZD/USD has pushed above resistance at 0.5941 and is putting pressure on resistance at 0.5978. There is support at 0.5885 and close by at 0.5848  

  Yesterday, the EUR/USD currency pair rose to its moving average line but almost immediately rebounded and began a stronger decline. This decline eloquently demonstrated who currently dominates the market. Traders shouldn't be misled by the movement toward and potentially beyond the moving average – this line is close to the price (due to low volatility) and can touch it almost daily. However, as we can see, the first attempt to rise above the moving average failed. Importantly, this cannot be blamed on strong macroeconomic data for the dollar or the fundamental backdrop. Technically, nothing has changed. The pair updated its local minimum yesterday, meaning the downward trend remains.   Thus, expecting the European currency to fall is the most logical under the current circumstances. As we have repeatedly stated, there have been no reasons for the euro to grow for a long time. The ECB increasingly signals a potential pause in tightening, and some experts do not anticipate more than one rate hike in 2023. This means the ECB rate will remain much lower than the Federal Reserve. Demand for the dollar will increase since, at present, one can earn much more from bank deposits and treasury bonds in the US than from similar instruments in the European Union. Additionally, inflation in the EU is higher, while it has already dropped to 3.2% in the US. Besides, it should be noted that the Federal Reserve can also raise its rate again.   It has far better opportunities for tightening than the European Union. However, we mentioned several months ago that the ECB is constrained in its monetary moves as it needs to consider the interests of all 27 member countries, some of which are economically weak and cannot withstand overly strict monetary policies. Lagarde is unlikely to protect the euro from falling. At this time, the macroeconomic background is irrelevant. It might lift the euro, but we advocate continuing the pair's decline. On Friday, speeches from Christine Lagarde and Jerome Powell are scheduled. If we are mistaken in our assessment of rate changes in the US and EU, the chairpersons of both central banks can convey the true information to the market. However, the symposium in Jackson Hole is not where Lagarde and Powell will be candid and make sensational announcements. However, a few hints might suffice for the market. The Fed's position is now even less critical than the ECB. If the Fed's rate doesn't increase in September, it will in November. On the other hand, if the ECB pauses in September, it will find itself in a much less favorable position since its rate is significantly lower than the Fed. Hence, ultra-hawkish rhetoric is required from Lagarde for the European currency to start growing again. On the 24-hour TF (Time Frame), the price has settled below the Ichimoku cloud, but this isn't the case. We are looking at the Senkou Span B line at the 1.0862 level, and there needs to be a clear and confident consolidation below this level. Nonetheless, we also didn't witness a strong upward recoil after this level was tested, meaning the quote decline might continue at a moderate pace.     The average volatility of the EUR/USD currency pair over the last five trading days as of August 23 is 64 points and is characterized as "average." Consequently, we expect the pair to move between the levels of 1.0794 and 1.0922 on Wednesday. A reversal of the Heiken Ashi indicator upwards will indicate a new upward correction phase. Near Support Levels: S1 – 1.0803 S2 – 1.0742 S3 – 1.0681   Near Resistance Levels: R1 – 1.0864 R2 – 1.0925 R3 – 1.0986   Trading Recommendations: The EUR/USD pair currently maintains a downward trend. For now, staying in short positions with targets at 1.0803 and 1.0794 is advisable until the Heiken Ashi indicator turns upwards. Long positions can be considered if the price consolidates above the moving average, with targets at 1.0986 and 1.1047.   Illustration Explanations: Linear regression channels help determine the current trend. The current trend is strong if both are pointing in the same direction. Moving average line (settings 20.0, smoothed) determines the short-term trend and the direction in which trading should proceed. Murray levels are target levels for movements and corrections. Volatility levels (red lines) are the probable price channel in which the pair will operate over the next day, based on current volatility indicators. CCI Indicator – Its entry into the oversold area (below -250) or the overbought area (above +250) indicates an impending trend reversal in the opposite direction.  

The price of gold rebounded and recovered after yesterday's minor sell-off. It's trading at 1,901 at the time of writing and it seems determined to hit new highs if the Dollar Index drops deeper. You knew from yesterday's analysis that Gold announced a potential reversal. Today, the services and manufacturing figures should move the rate. The Eurozone, German, and UK data should bring action in the European session. Later, the US Flash Manufacturing PMI is expected at 48.9 points versus 49.0 points in the previous reporting period, while Flash Services PMI could be reported at 52.1 points in August and below 52.3 points in July. Furthermore, the US New Home Sales and the Canadian retail sales data could have an impact as well. Poor economic data should lift XAU/USD. In my opinion, only better-than-expected US data could force the price to drop again.   XAU/USD retested the ascending pitchfork's lower median line (LML) and now it has reached the 1,903 static resistance again. As long as it stays above the LML, Gold could extend its upwards movement. Still, only a valid breakout through 1,903 activates further growth. XAU/USD Outlook! A bullish closure above 1,903 could be seen as a buying signal as XAU/USD may approach and reach new highs.      

05:40BST Thursday 24th August 2023 Positive start expected after Nvidia knocks it out of the park   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     Despite a raft of disappointing economic data from France, Germany and the UK which saw services activity slide into recession territory, European equity markets managed to finish the day higher yesterday. Rather perversely markets took these data misses as evidence that rate hikes were starting to work and that further rate hikes were likely to be unnecessary, sending bond yields sharply into reverse, as markets started to price an increased probability of recession. Yesterday's economic data will certainly offer food for thought for central bankers as they get set to assemble today at Jackson Hole for the start of the annual symposium, ahead of interest rate meetings next month where they are likely to decide whether to raise rates further to combat sticky inflation. If yesterday's data is in any way reflective of a direction of travel, then we could see a Q3 contraction of 0.2%. Of course, one needs to be careful in reading too much into one month of weak PMIs, especially in August when a lot of industry tends to shutdown or pare back economic activity, however the weakness in services was a surprise given that the summer holidays tend to see that area of the economy perform well.     US markets also underwent a strong session led by the Nasdaq 100 in anticipation of a strong set of numbers from Nvidia with the bar set high for a strong set of Q2 numbers. Back in Q1 when Nvidia set out its revenue guidance for Q2 there was astonishment at the extent of the upgrade to $11bn. This was a huge increase on its Q2 numbers of previous years, or any other quarter, with the upgrade being driven by expectations of a big increase in sales of data centre chips, along with investments in Artificial Intelligence.       Last night Nvidia crushed these estimates with revenues of $13.5bn, datacentre revenue alone accounting for $10.3bn of that total, a 171% increase from a year ago. For comparison, in Q1 datacentre revenue accounted for $4.3bn. Gross margins also beat expectations, coming in at 71.2% as profits crushed forecasts at $2.70 a share. Nvidia went on to project Q3 revenues of $16bn, plus or minus 2%. The company also approved an extra $25bn in share buybacks, with the shares soaring above this week's record highs in after-hours trading, with the big test being whether we'll see those gains sustained when US markets reopen later today.     On the back of last night's positive finish, as well as the exuberance generated by the belief that interest rate hike pauses are coming next month, European markets look set to open higher later this morning. The focus today is on the latest set of weekly jobless claims numbers which are set to remain unchanged at 239k, as well as July durable goods orders, excluding transportation, which are forecast to see a rise of 0.2%, a modest slowdown from June's 0.5% gain.      EUR/USD – bounced off the 200-day SMA at 1.0800 with support just below that at trend line support from the March lows at 1.0750. Still feels range bound with resistance at the 1.1030 area.     GBP/USD – the 1.2600 area continues to hold with resistance still at the 1.2800 area and 50-day SMA. A break below 1.2600 targets 1.2400.        EUR/GBP – briefly hit an 11-month low at 0.8490 before rebounding sinking towards support at the 0.8520/30 area. A move below 0.8500 could see 0.8480. Above the 100-day SMA at 0.8580 targets the 0.8720 area.     USD/JPY – the failure to push above the 146.50 area has seen a pullback below the 145.00 level. This raises the prospect of a move towards the 50-day SMA at 142.70 area.     FTSE100 is expected to open 24 points higher at 7,344     DAX is expected to open 70 points higher at 15,798     CAC40 is expected to open 36 points higher at 7,282  

In a world where economic indicators and market movements can shift with the blink of an eye, staying updated on the latest offerings and promotions within the financial sector is crucial. Today, we delve into one such noteworthy development that has emerged on the horizon, enticing individuals to explore a blend of banking and insurance services. As markets ebb and flow, being vigilant about trends and opportunities can lead to financial benefits. Let's explore this exciting promotion that brings together the worlds of banking and insurance to offer a unique proposition for consumers.     By Michael Hewson (Chief Market Analyst at CMC Markets UK) US non-farm payrolls (Aug) – 01/09 – the July jobs report saw another modest slowdown in jobs growth, as well as providing downward revisions to previous months. 187k jobs were added, just slightly above March's revised 165k, although the unemployment rate fell to 3.5%, from 3.6%. While the official BLS numbers have been showing signs of slowing the ADP report has looked much more resilient, adding 324k in July on top of the 455k in June. This resilience is also coming against a backdrop of sticky wages, which in the private sector are over double headline CPI, while on the BLS measure average hourly earnings remained steady at 4.4%. This week's August payrolls are set to see paint another picture of a resilient but slowing jobs market with expectations of 160k jobs added, with unemployment remaining steady at 3.5%. It's also worth keeping an eye on vacancy rates and the job opening numbers which fell to just below 9.6m in June. These have consistently remained well above the pre-Covid levels of 7.5m and have remained so since the start of 2021. This perhaps explain why the US central bank is keen not to rule out further rate hikes, lest inflation starts to become more embedded.                          US Core PCE Deflator (Jul) – 31/08 – while the odds continue to favour a Fed pause when the central bank meets in September, markets are still concerned that we might still see another rate hike later in the year. The stickiness of core inflation does appear to be causing some concern that we might see US rates go higher with a notable movement in longer term rates, which are now causing the US yield curve to steepen further. The June Core PCE Deflator numbers did see a sharp fall from 4.6% in May to 4.1% in June, while the deflator fell to 3% from 3.8%. This week's July inflation numbers could prompt further concern about sticky inflation if we get sizeable ticks higher in the monthly as well as annual headline numbers. When we got the CPI numbers earlier in August, we saw evidence that prices might struggle to move much lower, after headline CPI edged higher to 3.2%. We can expect to see a similar move in this week's numbers with a move to 3.3% in the deflator and to 4.3% in the core deflator.       US Q2 GDP – 30/08 – the second iteration of US Q2 GDP is expected to underline the resilience of the US economy in the second quarter with a modest improvement to 2.5% from 2.4%, despite a slowdown in personal consumption from 4.2% in Q1 to 1.6%. More importantly the core PCE price index saw quarterly prices slow from 4.9% in Q1 to 3.8%. The resilience in the Q2 numbers was driven by a rebuilding of inventory levels which declined in Q1. Private domestic investment also rose 5.7%, while an increase in defence spending saw a rise of 2.5%.             UK Mortgage Approvals/ Consumer Credit (Jul) – 30/08 – while we have started to see evidence of a pickup in mortgage approvals after June approvals rose to 54.7k, this resilience may well be down to a rush to lock in fixed rates before they go even higher. Net consumer credit was also resilient in June, jumping to £1.7bn and a 5 year high, raising concerns that consumers were going further into debt to fund lifestyles more suited to a low interest rate environment. While unemployment remains close to historically low levels this shouldn't be too much of a concern, however if it starts to edge higher, we could start to see slowdown in both, as previous interest rate increases start to bite in earnest.            EU flash CPI (Aug) – 31/08 – due to increasing concerns over deflationary pressures, recent thinking on further ECB rate hikes has been shifting to a possible pause when the central bank next meets in September. Since the start of the year the ECB has doubled rates to 4%, however anxiety is growing given the performance of the German economy which is on the cusp of three consecutive negative quarters. On the PPI measure the economy is in deflation, while manufacturing activity has fallen off a cliff. Despite this headline CPI is still at 5.3%, while core prices are higher at 5.5%, just below their record highs of 5.7%. This week's August CPI may well not be the best guide for further weakness in price trends given that Europe tends to vacation during August, however concerns are increasing that the ECB is going too fast and a pause might be a useful exercise.     Best Buy Q2 24 – 29/08 – we generally hear a lot about the strength of otherwise of the US consumer through the prism of Target or Walmart, electronics retailer Best Buy also offers a useful insight into the US consumer's psyche, and since its May Q1 numbers the shares have performed reasonably well. In May the retailer posted Q1 earnings of $1.15c a share, modestly beating forecasts even as revenues fell slightly short at $9.47bn. Despite the revenue miss the retailer reiterated its full year forecast of revenues of $43.8bn and $45.2bn. For Q2 revenues are expected to come in at $9.52bn, with same store sales expected to see a decline of -6.35%, as consumers rein in spending on bigger ticket items like domestic appliances and consumer electronics. The company has been cutting headcount, laying off hundreds in April as it looks to maintain and improve its margins. Profits are expected to come in at $1.08c a share.        HP Q3 23 – 29/08 – when HP reported its Q2 numbers the shares saw some modest selling, however the declines didn't last long, with the shares briefly pushing up to 11-month highs in July. When the company reported in Q1, they projected revenues of $13.03bn, well below the levels of the same period in 2022. Yesterday's numbers saw a 22% decline to $12.91bn with a drop in PC sales accounting for the bulk of the drop, declining 29% to $8.18bn. Profits, on the other hand did beat forecasts, at $0.80c a share, while adjusted operating margins also came in ahead of target. HP went on to narrow its full year EPS profit forecast by 10c either side, to between $3.30c and $3.50c a share. For Q3 revenues are expected to fall to $13.36bn, with PC revenue expected to slip back to $8.79bn. Profits are expected to fall 20% to $0.84c a share.         Salesforce Q2 24 – 30/08 – Salesforce shares have been on a slow road to recovery after hitting their lowest levels since March 2020, back in December last year, with the shares coming close to retracing 60% of the decline from the record highs of 2021. When the company reported back in June, the shares initially slipped back after full year guidance was left unchanged. When the company reported in Q4, the outlook for Q1 revenues was estimated at $8.16bn to $8.18bn, which was comfortably achieved with $8.25bn, while profits also beat, coming in at $1.69c a share. For Q2 the company raised its revenue outlook to $8.51bn to $8.53bn, however they decided to keep full year revenue guidance unchanged at a minimum of $34.5bn. This was a decent increase from 2023's $31.35bn, but was greeted rather underwhelmingly, however got an additional lift in July when the company said it was raising prices. Profits are expected to come in at $1.90c a share. Since June, market consensus on full year revenues has shifted higher to $34.66bn. Under normal circumstances this should prompt a similar upgrade from senior management.   Broadcom Q3 23 – 31/08 – just prior to publishing its Q2 numbers Broadcom shares hit record highs after announcing a multibillion-dollar deal with Apple for 5G radio frequency components for the iPhone. The shares have continued to make progress since that announcement on expectations that it will be able to benefit on the move towards AI. Q2 revenues rose almost 8% to $8.73bn, while profits came in at $10.32c a share, both of which were in line with expectations. For Q3 the company expects to see revenues of $8.85bn, while market consensus on profits is expected to match the numbers for Q2, helping to lift the shares higher on the day. It still has to complete the deal with VMWare which is currently facing regulatory scrutiny, and which has now been approved by the UK's CMA.

Here, get more stimulus!  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve (Fed) Chair Jerome Powell's Jackson Hole speech was boring, wasn't it? Powell repeated that inflation risks remain to the upside despite recent easing and pointed at resilient US growth and tight US jobs market, and reiterated the Fed's will to keep the interest rates at restrictive levels for longer. The US 2-year pushed above 5%, as Powell's comments kept the idea of another 25bp hike on the table before the year end, but the rate hike will probably be skipped in September meeting and could be announced in the November meeting instead, according to activity on Fed funds futures. The US 10-year yield is steady between the 4.20/4.30%. The S&P500 gained a meagre 0.8% last week, yet managed to close the week above the 4400 mark and above its ascending trend base building since last October, while Nasdaq 100 gained 2.3% over the week, although Nvidia's stunning results failed to keep the share price above the $500 mark, even though that level was hit after the results were announced last week. And the disappointing jump in Nvidia despite beating its $11bn sales forecast and despite boosting its sales forecast for this quarter to $16bn, was a sign that the AI rally is now close to exhaustion.   What's up this week?  This week will be busy with some important economic data from the US. We will watch JOLTS job openings tomorrow, Australian and German CPIs and US ADP and GDP reports on Wednesday, to see if the US economy continues to be strong, and the jobs market continues to be tight. On Thursday, Chinese PMI numbers, the Eurozone's CPI estimate and the US core PCE will hit the wire, and on Friday, we will watch the US jobs report and ISM numbers. Note that the US dollar index pushed to the highest levels since May after Powell's Jackson Hole speech. The EURUSD is now trading a touch below its 200-DMA, even though the European Central Bank (ECB) chief Lagarde repeated that the ECB will push the rates as high as needed. Yet, the worsening business climate, and expectations in Germany somehow prevent the euro bulls from getting back to the market lightheartedly, while the yen shorts are comforted by the Bank of Japan (BoJ) governor's relaxed view on price growth – which remains slower than the BoJ's goal, but the possibility of a direct FX intervention to limit the USDJPY's upside potential keeps the yen shorts reasonably on the sidelines, despite the temptation to sell the heck out of the yen with the BoJ's incredible policy divergence versus the rest of the developed nations.   Here, get more stimulus!  The week started upbeat in China and in Hong Kong, after the government announced measures to boost appetite for Chinese equities. Beijing halved the stamp duty on stock trades, while Hong Kong said it plans a task force to boost liquidity. The CSI 300 rallied more than 2% and HSI jumped more than 1.5%. But gains remain vulnerable as data released yesterday showed that Chinese company profits fell 6.7% last month from a year earlier. That's lower than 8.3% printed in June, but note that for the first seven months of 2023, profits declined 15.5%, and that is highly disquieting given the slowing economic growth and rising deflation risks, along with the default risks for some of the country's biggest companies. Evergrande, for example, posted a $4.5 billion loss in the H1.  Therefore, energy traders remain little impressed with China stimulus measures. The barrel of US crude trades around the $80pb level, yet the failure to break below a major Fibonacci support last week – major 38.2% Fibonacci retracement on the latest rally, keeps oil bulls timidly in charge of the market despite the weak China sentiment. Oil trading volumes show an unusual fall since July when compared to volumes traded in the past two years. That's partly due to weakening demand fears and falling gasoline inventories, but also due to tightening oil markets as a result of lower OPEC supply. We know that the demand will advance toward fresh records despite weak Chinese demand. We also know that OPEC will keep supply limited to push prices higher. Consequently, we are in a structurally positive price setting, although any excessive rally in oil prices would further fuel inflation expectations, rate hike expectations and keep the topside limited in the medium run.    

Investors becoming wary about the economic outlook Supply cuts remain supportive Head and shoulders neckline provides support Oil prices recovered a little toward the back end of the week after coming under some pressure this month. Supply cuts from OPEC+ continue to support the market but uncertainty over the global economic outlook – sluggish recovery in China, possible recession in the US and Europe – are weighing a little.  Recent economic data has not been encouraging and central banks are maintaining their hawkish positioning which could compound that pressure further going into the end of the year. But with supply cuts continuing to be extended, particularly the voluntary monthly reductions from Saudi Arabia and Russia, the market is being supported, perhaps in a new higher trading range above $80 in Brent.     A major area of support Brent crude ran into support over the last couple of days in a very interesting area, around $82.50, a break of which could have sent a very bearish signal.   This area coincides with support from earlier this month as well as the 200/233-day simple moving average band which it only broke back above a month ago for the first time since August last year. A rebound off here could be viewed as confirmation of the initial breakout. A move below would not only have sent a bearish signal, it would also have triggered the break of the neckline of a suspected head and shoulder pattern which could have been quite significant.     

US Now that we heard from Fed Chair Powell at the Kansas City Fed’s Jackson Hole Symposium, the focus shifts back to the data. This week is filled with data that will outline how quickly the economy is weakening. Consumer data will show personal income growth is not keeping up with spending, while confidence holds steady. The Fed’s favorite inflation reading is also expected to show subdued growth is holding steady on a monthly basis. Friday’s NFP report will show private sector hiring is cooling.    Over the weekend, the spotlight will be on US-China relations.  US Commerce Secretary Gina Raimondo will meet with Chinese officials, striving to lower tensions between the world’s two largest economies.  The week will also be filled with Fed speak.  On Monday and Tuesday, Barr speaks about banking services. On Thursday, we hear from both Bostic and Collins, while Friday contains appearances by Bostic, a couple of hours before the NFP report, and Mester on inflation later in the morning.   Eurozone Next week is data-heavy but there are a few releases that stand out. The most notable is the HICP flash estimate for the eurozone on Thursday which is expected to drop slightly at the headline and core levels. There will be individual country releases in the days running up to this which may signal whether Thursday’s data will likely beat or fall short of expectations. ECB accounts are also released on Thursday which will be of interest considering markets now view the rate decision at the next meeting as a coin toss between 25 basis points and no change.    UK  The week starts with a bank holiday and it doesn’t get much more exciting from there. There are a few tier-three data releases and Huw Pill from the Bank of England will make appearances on Thursday and Friday. Russia A selection of economic data is on offer next week including unemployment on Wednesday, GDP on Thursday, and the manufacturing PMI on Friday.  South Africa No major events next week with PPI on Thursday the only notable release. It follows CPI data this past week which fell to 4.8%, well within the SARB 3-6% target range, following a much lower 0.9% monthly reading in July.  Turkey The CBRT surprised markets last week by hiking rates far more aggressively than expected, taking the repo rate to 25%, up from 17.5%. The move may cost people at the central bank their jobs if history is anything to go by, with President Erdogan openly no fan of higher rates. That said, he did employ these people shortly after his election victory so perhaps with that behind him, he may be more open to it while remaining vocally against. This week offers very little, with GDP on Thursday the only release of note. Switzerland Inflation data on Friday is expected to show prices rising 1.5% on an annual basis, slightly lower than in July and well below the SNB 2% target. The central bank hasn’t appeared satisfied though and markets are fully pricing in a hike in September, with 32% chance of it being 50 basis points. The manufacturing PMI will also be released on Friday, with retail sales on Thursday, and the KoF economic barometer and economic expectations on Wednesday. China Only three key economic releases to monitor for the coming week. First up, the NBS manufacturing and services PMIs for August will be out on Thursday. Another contractionary print of 49.5 is expected for the manufacturing sector, almost unchanged from July’s reading of 49.5. If it turns out as expected, it will be the fifth consecutive month of negative growth for manufacturing activities as China grapples with a weak external environment and domestic financial contagion risk that has been triggered by debt-laden property developers. Secondly, the NBS services PMI for August is forecasted to remain surprisingly resilient at 51, almost unchanged from 51.5 in July. The services sector is still in an expansionary mode albeit at a slower pace that is likely being supported by domestic tourism. Thirdly, the private sector-focused Caixin manufacturing PMI for August which consists of small and medium enterprises will be released on Friday, 1 September. Consensus is still expecting a contractionary reading of 49.5, almost unchanged from July’s print of 49.2. If it turns out as expected, it will be the second consecutive month of negative growth. A slew of key earnings releases to take note of starting this Saturday, 26 August will be China Merchants Bank, and Bank of Communications followed by; BYD (Monday, 28 August), Ping An Insurance, NIO, Country Garden (Tuesday, 29 August), Agricultural Bank of China (Wednesday, 30 August), ICBC, Bank of China, China Minsheng Bank (Thursday, 31 August). Also, market participants will be on the lookout for fiscal stimulus measures to defuse the $23 trillion debt bomb owed by local governments, financial affiliates, and property developers. On Friday, 25 August, China policymakers unveiled a further easing of its home mortgage policies that scrap a rule that disqualifies first-time homebuyers who had a mortgage that is fully repaid from being considered a first-time buyer in major cities in an attempt to boost up residential property transactions.  India Two key data to focus on. Q2 GDP on Thursday where the consensus is expecting a further economic growth expansion to 7% y/y in Q2, a further acceleration from 6.1% y/y recorded in Q1. Lastly, the manufacturing PMI for August will be released on Friday where it is being forecasted to come in at 57, almost unchanged from the July reading of 57.7 which will indicate a 26th straight month of growth expansion for manufacturing activities. Australia Retail sales for July will be out on Monday, with a recovery to 0.3% m/m from -0.8% m/m in June. On Wednesday, the important monthly CPI indicator for July will be out and the consensus forecast is another month of cooling to 5.2% from 5.4% in June. If it turns out as expected, RBA may have more reasons to justify its current pause at 4.1% for two consecutive meetings. Its next monetary policy meeting will be on 5 September, and as of 24 August, the ASX 30-day interbank cash rate futures have priced in a 12% chance of a rate cut to 3.85% (25 bps cut).  New Zealand A quiet week with the only focus on the ANZ business confidence indicator for August on Thursday followed by ANZ consumer confidence for August on Friday. Japan The action comes mid-week. Consumer confidence for August is released on Wednesday and is expected to be almost the same at 37.2 versus July’s 37.1. On Thursday, we will have retail sales and industrial production for July. Growth in retail sales is expected to slip slightly to 5.4% y/y from 5.9% in June. Meanwhile, industrial production is expected to contract to -1.4% m/m from 2.4% m/m in June, and -0.7% y/y is forecasted from 0% y/y recorded in June. Singapore The sole key data to monitor will be the producer prices index for July out on Tuesday with another month of negative growth forecasted at -9% y/y, a slower pace of contraction from -14.3% recorded in June. It would be the 7th consecutive month of decline.

SEK: Growth picture slightly less grim Sweden released better-than-expected GDP and retail sales data this morning, which are supporting the krona in early European trading. The Swedish economy contracted by 0.8% in the second quarter, less than the 1.3% consensus and quite a big revision from the preliminary -1.5% figure published last month. Retail sales for July surprisingly grew (by 1.0% month-on-month). The growth picture clearly remains rather alarming when compared to other major economies, but the krona has already been pricing in a considerable amount of domestic economic underperformance (as well as real-estate-related risks). There are other important data releases to keep an eye on this week in Sweden: wage figures and the economic tendency survey tomorrow, as well as some manufacturing surveys later in the week. Another potentially big risk event: Riksbank’s member Anna Breman, one of the dovish dissenters at the April meeting, will participate in a panel discussion about inflation tomorrow morning.   EUR/SEK may face some upward pressure from the euro side if we are right about core inflation data boosting chances of a September ECB hike. Otherwise, some modestly improving external environment and better-than-expected Swedish data can help EUR/SEK trade a bit off from the highs for now.

The value of the net short dollar position fell by $2 billion to -$14.3 billion over the reporting week, according to CFTC data. Most currencies had minor changes, except for the Japanese yen, which is rapidly being sold off. Furthermore, futures for most commodity currencies, as well as for oil, copper, and gold, went through a bearish correction. This points to growing concerns about a global recession. At the same time, it indicates that the US dollar is currently the market's main favorite, and that it is logical for the dollar to strengthen.   Federal Reserve Chairman Jerome Powell's speech in Jackson Hole did not provide any new information. Powell stuck to his stance, reiterating the message that the US central bank is prepared to continue raising the funds rate if necessary, and that this policy will remain restrictive until there's compelling evidence that inflation is approaching the Bank's 2% inflation target. Powell also remarked that the current restrictive policy will put downward pressure on economic activity, hiring and inflation.   However, he warned that if the economy continues to grow above trend, it could put further progress on inflation at risk and could warrant further tightening of monetary policy. Overall, Powell's speech essentially reaffirmed that the Fed still relies on data and will act cautiously. This week, the market will focus on the US non-farm employment figures, the US ISM Manufacturing Index, China's PMI, and eurozone inflation for August. EUR/USD European Central Bank President Christine Lagarde also spoke in Jackson Hole. Her speech mainly focused on structural changes affecting monetary policy, but without any hints of changing the current ECB strategy. The eurozone inflation report for August will be released on Thursday, where it is expected that inflation will fall from 5.3% to 5.1%, and core inflation will drop from 5.5% to 5.3%. Since the ECB heavily relies on data, this report might lead to a surge in volatility if the figures significantly deviate from forecasts. The net long position for the euro decreased by 0.3 billion over the reporting week, standing at 21.5 billion. Positioning remains firmly bullish. At the same time, the price is still below the long-term average, and there are almost no signs of an upward reversal.   A week earlier, we expected a test of the support level at 1.0830; the euro fell even lower to the channel's lower band at 1.0767. From a technical standpoint, an attempt to build a bullish correction seems likely, with the resistance area being at 1.1010/50. At the same time, we see a downtrend in the long-term period, so the option of a shallow correction followed by an attempt to break down from the correction channel seems plausible, in this case we can expect the euro to move towards the previous local low of 1.0634.   GBP/USD GfK's long-running Consumer Confidence Index increased five points to -25 in August. All five measures were up in comparison to last month's announcement. Even though the overall figure remains sharply negative, hopes for an improvement in household finances are returning to the positive territory.   The Major Purchase Index is up eight points, which is a good thing, as the advance is potentially better news for retailers. However, it simultaneously indicates that inflation deceleration remains uncertain, as a sharp rise in demand fuels price growth and contradicts the Bank of England's plans to reduce consumer demand. Potentially, the situation favors the growth of the UK economy, but it also supports fears that the BoE will raise rates to a higher level than the market expects.   The pound has a chance to revive its growth as soon as the market re-evaluates interest rate forecasts. The net long position for GBP increased by 0.6 billion to 4.7 billion over the reporting week. Speculative positioning is firmly bullish, but the price is also falling. The main reason for such an imbalance is the situation in the debt market, where UST yields have considerably stronger prospects than British bond yields.   In the previous review, we assumed that the likelihood of a bullish correction has increased, but the long-term trend remains bearish. As of Monday morning, this forecast remains valid. The moderate decline that started in July increases the chances of a technical correction, but fundamental markers indicate that the pound will depreciate further. If a correction develops, we see a resistance area at 1.2680/90, where sell-offs may resume. The long-term target shifts lower to the support area at 1.2290/2310.  

Euro slips below 1.08 but recovers German GfK consumer climate falls US consumer confidence and job openings decelerate The euro fell below the 1.08 line on Tuesday after a weak German consumer confidence report but has recovered in the North American session after soft US data. EUR/USD is currently trading at 1.0840, up 0.20%. Germany is the eurozone’s largest economy and is considered the powerhouse of the bloc. That has changed dramatically as the German economy is looking more like a dead weight than a locomotive. With the economy sputtering, it’s no surprise that German business and consumer confidence is in the doldrums. Germany’s GfK Consumer Climate is forecasting a reading of  -25.5 for September, down from the revised downward figure of -24.6 in August and below the consensus estimate of -24.3. This was the lowest reading since May, with consumers pointing to high inflation and concern about potential unemployment as key reasons for concern. Last week, German Ifo Business Climate fell in August for a fourth straight month to 85.7, down from an upwardly revised 87.4 and shy of the market consensus of 86.7 points.   German CPI expected to fall to 6.0% Germany will release the July inflation report on Wednesday. Inflation is currently at 6.2% and is expected to dip to 6.0%, considerably higher than eurozone inflation which is at 5.3%. The ECB is committed to bringing inflation back to the 2% target but it’s unclear if the central bank will raise rates for an eighth straight time or take a pause and monitor how the economy is performing. The benchmark rate is relatively low at 3.75%, but the eurozone and German economies aren’t in the best shape and higher interest rates would raise the likelihood of a recession. In the US, it was a bad day at the office.  The Conference Board Consumer Confidence Index fell sharply to 106.1 in July, compared to 116.0 in August. JOLTS Jobs Openings slowed to 8.82 million in July, down from 9.16 million in June and well off the estimate of 9.46 million. The data is further evidence that the US economy is slowing as high rates continue to filter through the economy.   EUR/USD Technical EUR/USD is testing support at 1.0830. The next support line is 1.0731 There is resistance at 1.0896 and 1.0996    

JOLTS job openings slip to 8.827m (9.465m expected, 9.165m previously) Consumer confidence also falls but the survey is volatile Is last week’s breakout stalling?   As we near the end of the summer, activity will start to pick up again and that may begin this week in the build-up to Friday’s jobs report. With Jackson Hole behind us, and not really living up to the usual hype, the focus now switches to the September central bank meetings and the key data releases that could sway them one way or another as policymakers ask themselves whether they’ve already done enough. From the Fed’s perspective, the week is off to a promising start with the JOLTS job opening report much softer than expected, alongside downward revisions to the previous month. The Fed needs to see a softer labor market to be confident that price pressures aren’t just abating but substantially and sustainably and this report is a move in the right direction. Job openings are now back at levels last seen in the summer of 2021 and not too far from where they were pre-pandemic. Further softness over the next few months looks very plausible which could contribute to a cooler labor market and sustainably lower wage growth. The CB consumer confidence number also suggests households are still wary, although the survey can be quite volatile and correlated with factors such as stock markets and gas prices, as we’ve seen the last couple of months alone.   Breakout to gather pace? Cable had been threatening to break lower throughout August and it finally happened at the end of last week, with the price moving below 1.26 and closing below the 55/89-day simple moving average band.       That could be viewed as a very bearish moving coming soon after a brief 38.2% retracement – July highs to early and mid-August lows – and a repeated test of that support. While it has consolidated a little higher since, that US data did briefly push it lower once more although it has since pared those moves. What’s interesting is the momentum indicators at the bottom as while the pair hasn’t accelerated lower following the breakout in a significant way, the MACD and stochastic look fairly healthy. There’s a lot of economic data this week though from the US that could sway this one way or another.      

China PMIs remain downbeat A further slowdown in the service sector recovery coupled with a slight moderation in manufacturing contraction does not amount to any meaningful improvement to the overall economic backdrop.   Mixed news - but no real improvement in total The latest official PMI data were not uniformly bad. The manufacturing index actually rose slightly, to 49.7, and this is the third consecutive increase since the May trough of 48.8. But it remains below the 50-level that is associated with expansion, and so merely represents a moderation in the rate of decline. That may be of some comfort to those of a sunny disposition.  The non-manufacturing series, which had reflected the bulk of the post-re-opening recovery, fell further in August. The index of 51.0 was a little lower than the forecast figures (51.2) but it is at least still slightly above contraction territory.   China official PMIs (50 = threshold for expansion / contraction)   Brighter signs in manufacturing Looking at the components underlying both series and starting with the manufacturing series: the latest data show an improvement in production to a point which actually points to expansion. That has to be tempered by the forward-looking elements of orders. Here, the data is mixed. Total orders have improved to hit the 50 threshold signalling that contraction has ended. This must be mainly domestic orders, as the export orders series remains bombed out. But that at least provides some encouragement about the near-term outlook.    Manufacturing PMI components   Outlook for service sector remains negative The forward-looking elements of the service sector PMI index remain in contraction territory, unlike their manufacturing counterparts, and that suggests that the headline index has probably not yet troughed and will fall further. A glimmer of hope may be in the export series, which, while clearly continuing to signal contraction, did fractionally rise this month.  Overall, though, both series seem to be converging on a point close to 50 consistent with an economy that is neither expanding nor contracting. Things could be worse. But markets are not likely to take too much comfort from this set of data.      Non-manufacturing PMI sub-components

EUR: Focus on the eurozone August CPI Flash August CPI data for the eurozone is released at 11:00 am CET today and is expected to show a gradual decline in both headline and core YoY readings to 5.1% and 5.3%, from 5.3% and 5.5% respectively. However, the decline is proving gradual and we are actually starting to see expectations of one more rate hike from the European Central Bank firm up a little. These peak at around 21bp of tightening priced in for January next year. Our macro team feels that the chances of a September rate hike are under-priced (now a 43% probability) meaning that EUR/USD could get a little support from the ECB story over the coming weeks. Today, also look out for a 09:00 am CET speech from ECB hawk Isabel Schnabel, speaking at a conference on 'Inflation: Drivers and Dynamics'. We will also see the ECB minutes for the July policy meeting released at 1:30 pm CET. EUR/USD has turned a little more bid over the last few days as US jobs data has softened the front end of the US yield curve and sticky inflation has kept EUR short-dated interest rates supported. Our short-term Financial Fair Value model sees EUR/USD fairly priced near 1.0900 - suggesting a probably range-bound session into tomorrow's US NFP release. Elsewhere, we note that Switzerland is planning some new large-scale Anti Money Laundering measures for 2024. This may be a slow-burn story, but one which may ultimately weigh on the Swiss franc in 2024.

JPY: Where is the alarm? USD/JPY has quietly drifted into the 145-150 intervention zone without triggering many alarm bells in Tokyo. One difference between now and the intervention period last September and October is that FX conditions are much more orderly. For example, one month USD/JPY implied volatility is trading near 9% today versus levels in the 14-15% region during Japanese FX intervention last year.  At the same time, there is no sense of a 'sell Japan' mentality emerging, and Japanese authorities may actually tolerate a softer yen given the deflationary forces emerging from China and the weak export markets in Asia and Europe. Unless we see some financial shock that triggers an unwind of the carry trade, it looks as though USD/JPY can hang around this 145/150 region longer than we had originally forecast. A decisive turn lower may have to wait until the late September and October period when more evidence of a US slowdown should have emerged and speculation will be growing over a Bank of Japan policy change at the meeting in late October.

ADP posts 177,000 new jobs but traders not convinced US Q2 GDP revised lower to 2.1% (2.4% previously) USD pares six week gains after weaker figures this week   The recovery in equity markets appears to have stalled on Wednesday as traders likely eye the big economic releases later in the week. The ADP and revised GDP numbers may attract some attention but they were never likely to have too great an impact. The ADP report has long been ignored as a reliable precursor to the NFP report on Friday and at times it’s frankly been wildly off. That it’s come in at a reasonable 177,000 doesn’t offer any real insight in terms of Friday’s payrolls, with the focus instead remaining on them in relation to yesterday’s JOLTS data which saw a marked decline. If we see a trend of weaker hiring and fewer job openings then the Fed will be more at ease ending the tightening cycle. Today’s data was never likely to be overly impactful with tomorrow’s inflation, income, and spending figures, prior to Friday’s payrolls, always the primary focus. That could well set the tone for September ahead of some major central bank meetings.   EURUSD has been buoyed by the recent economic data, with the figures indicating that the higher for longer narrative may be less intense than feared.   EURUSD Daily       The pair has now rallied for three days and is closing on an interesting level around 1.10 where it may run into some resistance from the 55/89-day simple moving average band. It’s also a notable psychological level. There are also some interesting Fib levels around here if this is merely a corrective move following the sell-off of the last six weeks.

Poland set to cut interest rates in September despite double-digit inflation Even though latest figures show Poland's inflation is still in double digits, we think the country's central bank will start its easing cycle in September. CPI fell to 10.1% in August from 10.8% in July, Year-on-Year. It reflects lower food and energy prices. Core inflation's drop came in third place; we estimate that fell to 10% from 10.6%.   Polish headline CPI inflation fell from 10.8% YoY to 10.1% YoY in August, marginally above expectations (ING 10.0% YoY and consensus 9.9% YoY; the forecast range was 9.7 to 10.6%). Food price dynamics subtracted 0.8pp from the CPI, energy carriers 0.3pp and core inflation only 0.3pp. In contrast, fuel prices rose in August and added 0.6pp to the headline figure. The release of double-digit CPI means that one of the conditions for easing, which the National Bank of Poland Governor mentioned, has not been met. However, we still believe the MPC will cut rates in September. Here's why:  We are on the path to single-digit inflation in September; the data will be published after the September MPC meeting. The CPI path in 2H23 should be either close to or slightly lower than the NBP's July projection. The MPC should consider this as a disinflation scenario materialising.  The pace of GDP growth in 2Q23 was lower than the NBP's projection, and data on economic activity in Poland and Europe suggests pushing back the economic rebound instead to 4Q23, so the state of the economy in the second half of this year will still be weak. In the short term, monetary easing is supported by strong disinflationary trends in global supply chains, resulting in a large drop in companies' inflation expectations, and these trends are still stronger than the rebound in oil and wheat prices. So, we expect the NBP to cut rates by 50-75 basis points this year, and the easing cycle may well continue into 2024. However, the inflation picture in Poland is not unequivocally positive. Poland's core inflation rate is declining significantly slower than elsewhere in the region; a roughly 20% increase in the minimum wage is expected in 2024, and a sizeable fiscal loosening is planned. Once the favourable impact of falling external prices ends, it's going to be difficult to bring inflation back to target on a sustained basis. 

Bank of England The Bank of England looks poised to hike rates again in September, but November is less certain. Private sector wage growth is at a cycle high and looks unlikely to slow dramatically by the end of the year, and certainly not before November. Meanwhile, services inflation has risen higher again. And while we think the impact of lower gas prices should start to show through here with a lag, progress is likely to be limited by the time of the November meeting. That said, the wider economy is showing signs of slowing amid higher interest rates, and the jobs market is also noticeably cooling. We’re likely to see more evidence of this over the next couple of months. We’re erring on the side of a pause in November, but we don’t rule out another hike. Bigger picture, the BoE is clear that it wants to keep rates high for a prolonged period. We’ve pencilled in the first cut for the second quarter of next year but we acknowledge that may end up being delayed.  

The third quarter may still be saved by tourism in the eurozone, but the latest data points to a more pronounced slowdown in the coming months. Inflation is falling, but a last interest rate hike in September is not yet off the table. The European Central Bank will be hesitant to loosen significantly in 2024, limiting the scope for a bond market rally.   Business sentiment in contraction territory In spite of heatwaves and wildfires, the tourist season seems to have been strong in Europe. It has continued to support growth in the third quarter following a better-than-expected growth figure in the second quarter. However, with the end of the summer in sight, we're now beginning to see a more sobering economic outlook emerge. The composite PMI survey for August was certainly a cold shower, falling to the lowest level in 33 months at 47 points. While the figure has already been in contraction territory in industry for some time, it has now fallen below the boom-or-bust level in the services sector. Deteriorating order books weighed on confidence in both the manufacturing and the services sector, which also explains why there were job losses in manufacturing while hiring plans in the services sector were put on a slow burner. This will probably stop the decline in unemployment in the eurozone. Disappointing external demand A softer labour market might lead to higher savings rates, thereby countering the positive impact on consumption of rising purchasing power. At the same time, the much-anticipated export boost is unlikely to materialise as the US economy eventually starts to cool while the Chinese recovery continues to disappoint. Finally, with a rapidly cooling housing market on the back of tighter monetary policy, the construction sector is also likely to see a slowdown. All of this explains why we still don’t buy the European Central Bank's story that economic recovery will strengthen on the back of falling inflation, rising incomes and improving supply conditions. We expect the winter quarters to see close to 0% growth, resulting in 0.6% annual GDP growth for both this year and next year.   Cooling housing market is likely to weigh on construction activity   Inflation is coming down, slowly While inflation is clearly trending down, the pace might still leave the ECB uncomfortable. Industrial goods prices have started to fall, but services prices are still growing monthly above 4% in annualised terms. Negotiated wage growth seems to have reached a plateau just below 4.5%. Still, given the slow productivity growth (with the decline in hours worked as one of the important drags), final demand will have to be very weak to prevent higher wages from feeding into higher prices. We expect headline inflation to hit 2% by the end of 2024, but over the coming months, core inflation remains likely to hover around 5%. As the recent trend in underlying inflation is one of the key determinants of monetary policy, this would lead to an additional rate hike.   Loan growth is close to stalling The ECB's job is almost done With credit growth now close to a standstill and money growth negative, there remains little doubt that monetary policy is already sufficiently restrictive and that the monetary transmission mechanism is working. On top of that, the median consumer inflation expectation for the period three years ahead fell back to 2.3% in June. So, it looks as though the job is nearly done. For now, we're still pencilling in a final 25 basis point hike for the ECB's September meeting – but it's a very close call. A pause would likely mean the end of the tightening cycle, as the faltering recovery will make it harder to continue raising rates afterwards. While we see the first rate cut by the summer of 2024, we can't imagine the central bank loosening aggressively next year. In her speech at Jackson Hole, President Christine Lagarde mentioned a number of structural changes that make the medium-term inflation outlook more uncertain, and we think that the ECB will keep short rates relatively high for some time to come. That will probably limit the potential for the bond market to rally strongly in the wake of the expected economic stagnation later this year.    

US spending surges, but it’s not sustainable US consumer spending is on track to drive third quarter GDP growth of perhaps 3-3.5%. However, this is not sustainable. American consumers are running down savings and using their credit cards to finance a large proportion of this. With financial stresses becoming more apparent and student loan repayments restarting, a correction is coming.   Inflation pressures are moderating Today’s main data release is the July personal income and spending report and it contains plenty of interesting and highly useful information. Firstly, it includes the Federal Reserve’s favoured measure of inflation, the core Personal  Consumer Expenditure deflator, which is a broader measure of  prices than the CPI measure that is more widely known. It rose 0.2% month-on-month for the second consecutive month, which is what we want to see as, over time, that sort of figure will get annual inflation trending down to 2% quite happily.   Services PCE deflator (YoY%)   The slight negative is the core services ex housing, which the Fed is watching carefully due to if being more influenced by labour input costs. It posted a 0.46% MoM increase after a 0.3% gain in June so we are not seeing much of a slowdown in the year-on-year rate yet as the chart above shows. With unemployment at just 3.5% a tight jobs market could keep wage pressures elevated and mean inflation stays higher for longer so we could hear some hawkishness from some Fed officials on the back of this. Nonetheless, the market is seemingly shrugging this off right now given signs of slackening in the labour market from the latest job openings data and the Challenger job lay-off series.

Consumer spending is strong, but is unlikely to be sustainable We then turn to personal spending, which was strong, rising 0.8% MoM nominally and 0.6% MoM in real terms. This gives a really strong platform for third quarter GDP growth, which we are currently estimating to come in at an annualised rate of somewhere between 3% and 3.5%. However, the key question is how sustainable this is – we don't think it is. The robust jobs market certainly provides a strong base, but wage growth has been tracking below the rate of inflation. Note incomes rose just 0.2% MoM in July. Maybe it is that confidence of job security that is encouraging households to seek to maintain their lifestyles amidst a cost-of-living crisis, via running down savings accrued during the pandemic and supplementing this with credit card borrowing. The problem is savings are finite and the banks are tightening lending standards significantly. Credit card borrowing costs are the highest since records began in 1972 so there is going to be a lot of pain out there. The chart below shows the monthly flows of excess savings since the start of the pandemic. Fiscal support (stimulus checks and expanded unemployment benefits) more than offset falling income resulting from job losses in 2020. Meanwhile, less spending versus the baseline due to Covid constraints further boosted the accumulation of savings.   Contributions of monthly changes in income and spending to the flow of savings ($bn)     Then through 2021 spending picked up, but then through 2022-2023 the nominal pick-up in incomes has been less than the increase in spending. Consequently we have seen savings flows reverse and now we are running them down each and every month, which is not sustainable over the long term.    Stock of excess savings peaked at $2.2tn, but we have been aggressively running this down ($tn)   Excess savings will soon be exhausted and financial pressures will intensify Based on this data, the $2.2tn of excess savings accumulated during the pandemic, $1.3tn has already been spent. At the current run-rate it will all be gone by the end of the second quarter of 2024 and for low and middle incomes that point will come far sooner. With banks far more reluctant to provide unsecured consumer credit, based on the Federal Reserve’s Senior Loan Officer Opinion survey, the clear threat is that many struggling households may soon find their credit cards are being maxed out and they can’t obtain more credit. With student loan repayments restarting, we expect consumer spending to slow meaningfully from late fourth quarter onwards and turn negative in early 2024.

05:55BST Friday 1st September 2023 A soft US payrolls report could seal a Fed pause later this month   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     After 6 days of gains, the FTSE100 ended the month on a sour note bringing the curtain down on a negative month for European markets, as sentiment soured somewhat on concerns over the outlook for interest rates, and the China recovery story.     US markets also ended a similarly negative month on a downbeat note, although we have seen a shift in some of the negative sentiment in the past few days due to softer than expected US economic data which has brought yields lower and encouraged the idea that this month's Fed meeting will see US policymakers vote to keep rates on hold. This week we've seen the number of job openings for July slow to their weakest levels since March 2021, a sharp slowdown in August consumer confidence, a weaker than expected ADP payrolls report, and a downgrade to US Q2 GDP.     US continuing claims also rose sharply to a 6-week high, suggesting that recent rate hikes were starting to exert pressure on the US economy and a tight labour market. If today's non-farm payrolls report shows a similarly modest slowdown in the rate of jobs growth, then there is a very real sense that we could see further gains in stock markets, as bets increase that the Federal Reserve may well be done when it comes to further rate hikes. At the very least it could go some way to signalling a pause as the US central bank looks to assess the effects recent rate hikes are having on the US economy.     In July we saw another modest slowdown in jobs growth, along with downward revisions to previous months. 187k jobs were added, just slightly above March's revised 165k, although the unemployment rate fell to 3.5%, from 3.6%.     While the official BLS numbers have been showing signs of slowing, up until this week's 177k, the ADP report had proven to be much more resilient, adding 371k in July on top of the 455k in June. The resilience in the US labour market is also coming against a backdrop of sticky wages, which in the private sector are over double headline CPI, while on the BLS measure average hourly earnings remained steady at 4.4% and are expected to stay around this level.       Today's August payrolls are set to see paint another picture of a resilient but slowing jobs market with expectations of 170k jobs added, with unemployment remaining steady at 3.5%, although it is important to remember that whatever today's jobs numbers tell us, vacancies in the US are still well above pre-Covid levels on a participation rate which is also lower at 62.6%.     After the payroll numbers we also have the latest ISM manufacturing report which is expected to continue to show that this part of the US economy is in contraction territory for the 10th month in a row. Before today's US payrolls report, we'll also get confirmation of the dire state of the manufacturing sector in Europe with the final August PMIs from Spain, Italy, France and Germany, with expectations of 48.8, 45.7, 46.4 and 39.1 respectively.     UK manufacturing PMI similarly is also expected to be confirmed at 42.5 and the lowest level since June 2020. Weak numbers here, along with similarly weak services numbers next week will also go a good way to ensuring that the ECB and perhaps even the Bank of England err on the side of a pause when they also meet later this month.     The bar to a pause for the Bank of England appears to be a much higher one, however yesterday's comments from Chief Economist Huw Pill would appear to suggest that the MPC is already leaning towards the idea that monetary policy in the UK is already restrictive. In a speech made in South Africa he said that he preferred to see a rate profile along the lines of a "Table Mountain" approach, in other words keeping them at current levels, or even a little higher for a lengthy period of time. The contents of the speech appeared to suggest that while inflation levels remained elevated, there was an acknowledgement that a lot of the recent rate hikes hadn't yet been felt, raising the risk of overtightening, and that monetary policy was already sufficiently restrictive. This would appear to suggest that a consensus is growing that the Bank of England could be close to the end of its rate hiking cycle, with perhaps one more at most set to be delivered in September.     There also appears to be an increasing debate over the sustainability of the current 2% inflation target as being too low given current levels of inflation, with arguments being made for increasing it to 3% or 4%. The 2% target has been a key anchor of central bank monetary policy over the last 30-40 years, and while it has served a useful purpose in anchoring inflation expectations some are arguing that trying to return it to 2% could do more harm than good.     That may well be true, but there is also the argument that in moving the goalposts on the current inflation target now sends the message that central banks are going soft in getting inflation under control, and that rather than return it to target over a longer period, it's easier to move the goalposts.     This comes across as unwise particularly in terms of timing. The time to have moved the inflation target was when inflation was below or at 2%, not while it is miles above it. Optics are everything particularly when inflation is well above target, with central banks needing to send the message that inflation remains their number one priority, and not water down their long-term commitment to it because it's too hard. The time to discuss a change of a target is when that target has been met and not before. Once that happens in perhaps 1-2 years' time the discussion on an inflation target, or an inflation window of between 1.5% to 3.5% can begin.       EUR/USD – the retreat off the 1.0950 area this week has seen the euro slip back with the 1.0780 trend line support from the March lows coming back into view. We need to push through resistance at the 1.1030 area, to signal a return to the highs this year. Below 1.0750 targets 1.0630.     GBP/USD – pushed up the 1.2750 area earlier this week but has failed to follow through. We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.         EUR/GBP – having failed at the 0.8620/30 area earlier this week has seen the euro slip below the 0.8570/80 area. While the 50-day SMA caps the bias is for a retest of the lows.     USD/JPY – the 147.50 area remains a key resistance and remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.50/60.     FTSE100 is expected to open 16 points higher at 7,455     DAX is expected to open 50 points higher at 15,997     CAC40 is expected to open 21 points higher at 7,335

FX Daily: Peso too strong, renminbi too weak, dollar just right FX markets await today's release of the August US jobs report to see if we've reached any tipping point in the labour market. Probably not. And it is still a little too early to expect the dollar to embark on a sustained downtrend. Elsewhere, policymakers in emerging markets are addressing currencies that are too weak (China) and too strong (Mexico).   USD: The market seems to be bracing for soft nonfarm payrolls data Today's focus will be the August nonfarm payrolls jobs release. The consensus expects around a +170k increase on headline jobs gains, although the "whisper" numbers are seemingly nearer the +150k mark. Importantly, very few expect much change in the 3.5% unemployment rate. This remains on its cycle lows, continues to support strong US consumption, and keeps the Fed on its hawkish guard. We will also see the release of average hourly earnings for August, which are expected to moderate to 0.3% month-on-month from 0.4%. As ING's US economist James Knightley notes in recent releases on the US economy and yesterday's US data, there are reasons to believe that strong US consumption cannot roll over into the fourth quarter and that a recession is more likely delayed than avoided. But this looks like a story for the fourth quarter. Unless we see some kind of sharp spike higher in unemployment today, we would expect investors to remain comfortable holding their 5.3% yielding dollars into the long US weekend. That is not to say the dollar needs to rally much, just that the incentives to sell are not here at present. If the dollar is at some kind of comfortable level, policy tweaks in the emerging market space over the last 24 hours show Beijing trying to fight renminbi weakness and Mexico City trying to fight peso strength (more on that below). We suspect these will be long, drawn-out battles with the market. DXY can probably stay bid towards the top of a 103-104 range.

Metals – Fresh stimulus from China for the property sector Base metals prices extended this week’s gains this morning as healthy economic data and fresh stimulus measures in China buoyed sentiment. Caixin manufacturing PMI in China increased to 51 in August compared to 49.2 in July; the market was expecting the PMI to remain around 49. This is the strongest manufacturing PMI number since February. Meanwhile, Beijing has announced fresh stimulus measures aimed at supporting the property sector. The People’s Bank of China has lowered the minimum downpayment for mortgages for both first-time buyers (from 30% to 20%) and second-time buyers (from 40% to 30%) while the minimum interest premium charged over the Loan Prime Rate has also been reduced. China is also allowing customers and banks to renegotiate interest rates on existing housing loans which could reduce interest expenses for borrowers. LME continues to witness an inflow of copper into exchange warehouses. LME copper stocks increased by another 3,675 tonnes yesterday, taking the total inventory to a year-to-date high of 102.9kt. Meanwhile, cancelled warrants for copper remain near zero levels, hinting that there may not be any inventory withdrawals from LME in the short term and total stocks could continue to climb over the coming weeks. Europe witnessed an inflow of 2,700 tonnes yesterday whilst 950 tonnes were added in the Americas and 25 tonnes in Asia. Gold prices have held steady at around US$1,940/oz as the latest economic data from the US eased some pressure on the Federal Reserve to continue with rate hikes. The core PCE (Personal Consumption Expenditure) deflator in the US increased at a flat 0.2% month-on-month in July, the second consecutive month at 0.2% which should help the Fed in getting inflation back on track to around 2%. On the other hand, data from Europe was not that supportive with core CPI falling gradually from 5.5% to 5.3% and CPI estimates remaining flat at 5.3%. The focus is now turning to today’s US non-farm jobs report which is expected to show a smaller rise in payrolls in August.

Flash HICP in August 5.3% (5.1% expected, 5.3% in July) Flash core HICP in August 5.3% (5.3% expected, 5.5% in July) Key moving average provides resistance once again   Eurozone economic indicators this morning have been something of a mixed bag, although traders seem enthused on the back of them rather than disappointed. We’ve seen regional data over the last couple of days which gave us some indication of how today’s HICP report would look and a drop in the core reading in line with expectations combined with no decrease in the headline seemed to make sense. Unemployment, meanwhile, remained at a record low despite an increase in the number of those unemployed. Perhaps there’s some relief that the headline HICP rate didn’t tick a little higher while the core did decline which combined with expectations for the coming months gives the ECB plenty to debate. Another hike in September still strikes me as more likely than not but on the back of this release, markets are swinging the other way, pricing in a near 70% chance of no increase.   ECB Probability   That’s helped the euro to slide more than 0.5% against the dollar this morning – similar against the yen and a little less against the pound while regional markets are seemingly unmoved and continue to trade relatively flat.   Further bearish technical signals following the eurozone data While the fall against the pound was a little less significant, it has enabled it to once again rotate lower off the 55/89-day simple moving average band, reinforcing the bearish narrative in the pair. EURGBP Daily   Source – OANDA on Trading View It’s run into resistance on a number of occasions around the upper end of this band, with the 100 DMA (blue) arguably being a more accurate resistance zone over the summer. Regardless, that still leaves a picture of lower peaks and relatively steady support around 0.85. While that may simply be consolidation, the lower peaks arguably give it a slight bearish bias, a significant break of 0.85 obviously being needed to confirm that.    

Swiss retail sales decline by 2.3% Swiss inflation expected to dip to 1.5% US unemployment claims drop to 228,000 US PCE Price Index rises by 3.3%     The Swiss franc has lost ground on Thursday. In the North American session, USD/CHF is trading at 0.8835, up 0.59%. Thursday’s Swiss retail sales for July looked awful, falling 2.3% m/m. This follows a revised gain of 1.5% in June. Market attention has now shifted to Swiss inflation, which will be released on Friday. Swiss inflation dropped to 1.6% in July, the lowest level since July 2022. The downtrend is expected to continue in August with a consensus estimate of 1.5%. Policy makers at the Swiss National Bank have to be pleased with the inflation rate. Switzerland boasts the lowest inflation rate in the developed world and both headline and core inflation are comfortably nestled in the central bank’s inflation target range of 0%-2%. Still, the SNB remains wary about inflation, with concerns that increases in rents and electricity prices could push inflation back up to 2%. Food inflation remains high and rose from 5.1% to 5.3% in July. Unlike other major central banks, the SNB meets quarterly, which magnifies the significance of each rate decision. At the June meeting, the central bank raised rates to 1.75% from 1.50% and hinted that further hikes were coming. The SNB has projected inflation will hit 2.2% in 2023 and 2024, above its target. That means the SNB expects to have to continue raising rates, although, as is the case with many other central banks, the peak rate appears to be close at hand. In the US, unemployment claims dropped to 228,000 last week, down from a revised 232,000 and below the estimate of 236,000. All eyes will be on Friday’s job report, with nonfarm payrolls expected to dip to 170,000, down from 187,000.   The Fed’s favourite inflation gauge, the PCE Price Index, increased in July by 0.2% for a second straight month, lower than the estimate of 0.3%. On an annualized basis, the PCE Price Index climbed 3.3% in July, up from 3.0% in June. Service prices rose by 0.4% in July, up from 0.3% from the previous month. The numbers indicate that the Fed’s battle with inflation is far from over, and the final phase of pushing inflation down to 2% may prove the most difficult. . USD/CHF Technical USD/CHF is testing resistance at 0.8827. Above, there is resistance at 0.8895 0.8779 and 0.8711 are providing support

The euro is lower on Thursday, after a 3-day rally which pushed the currency 1% higher. In the European session, EUR/USD is trading at 1.0861, down 0.57%.   Eurozone CPI steady, core CPI falls Eurozone inflation was a mixed bag in August. Headline inflation was unchanged at 5.3%, missing the consensus estimate of a drop to 5.1%. There was better news from Core CPI, which dropped from 5.5% to 5.3%, matching the estimate. The ECB will be pleased with the decline in core inflation, which excludes food and energy and provides a more accurate estimate of underlying press pressures. Many central banks, including the Federal Reserve, have taken pauses in the current rate-tightening cycle, but the ECB has raised rates 13 straight times. Will we see a pause at the September 14th meeting? The answer is far from clear. Inflation remains above 5%, more than twice the ECB’s target of 2%. The central bank is determined to bring inflation back down to target, but that would require further rate hikes and the weak eurozone economy could fall into a recession as a result. ECB member Robert Holzmann said today’s inflation report indicated that inflation remained persistent and admitted that the latest inflation numbers pose a “conundrum” for the ECB. The markets aren’t clear on what to expect from the ECB, with the odds of a pause at 67% and a 25-basis point hike at 33%. ECB President Lagarde hasn’t provided much guidance, perhaps because she’s as uncertain as everybody else about the September rate decision.   Germany’s numbers continue to point downwards, as the eurozone’s locomotive has become an economic burden. The latest release, July retail sales, declined by 2.2% y/y, sharply lower than the revised -0.9% reading in June and below the consensus estimate of -1.2%. . EUR/USD Technical EUR/USD is testing support at 1.0831. Below, there is support at 1.0780 1.0896 and 1.0996 are the next resistance lines

US The month started with a bang with the US jobs report but the following week is looking a little more subdued, starting with the bank holiday on Monday. Economic data is largely made up of revisions and tier-three releases. The exceptions being the ISM services PMI on Wednesday and jobless claims on Thursday. That said, revised productivity and unit labor costs on Thursday will also attract attention given the Fed’s obsession with input cost, wages in particular. We’ll also hear from a variety of Fed policymakers including Susan Collins on Wednesday (Beige Book also released), Patrick Harker, John Williams, and Raphael Bostic on Thursday, and Bostic again on Friday.  Eurozone Next week is littered with tier-three events despite the large number of releases in that time. Final inflation, GDP and PMIs, regional retail sales figures and surveys, and trade figures make up the bulk of next week’s reports. Not inconsequential, per se, but not typically big market events unless the PMI and CPI reports bring massive revisions. We will hear from some ECB policymakers earlier in the week which will probably be the highlight, including Christine Lagarde, Fabio Panetta, Philip Lane, and Isabel Schnabel. UK  Next week offers very little on the data front but the Monetary Policy Report Hearing in front of the Treasury Select Committee on Wednesday is usually one to watch. While the committee’s views are typically quite polished by that point, the questioning is intense and can provide a more in-depth understanding of where the MPC stands on interest rates.  Russia Inflation in Russia is on the rise again and is expected to hit 5.1% on an annual basis in August, up from 4.3% in July. That is why the CBR has started raising rates aggressively again – raised to 12% from 8.5% on 15 August. Even so, the ruble is not performing well and isn’t too far from the August highs just before the superhike. We’ll hear from Deputy Governor Zabotkin on Tuesday, a few days before the CPI release. South Africa Further signs of disinflation in the PPI figures on Thursday will have been welcomed by the SARB but they won’t yet be declaring the job done despite the substantial progress to date. The focus next week will be on GDP figures on Tuesday, with 0.2% quarterly growth expected, and 1.3% annual. The whole economy PMI will be released earlier the same day. Turkey CPI inflation figures will be eyed next week, with annual price growth seen hitting 55.9%, up from 47.8% in July. The CBRT is all too aware of the risks, hence the surprisingly large rate hike – from 17.5% to 25% – last month. The currency rebounded strongly after the decision but it has been drifting lower since, falling back near the pre-meeting levels. There’s more work to be done. Switzerland Another relatively quiet week for the Swiss, with GDP on Monday – seen posting a modest 0.1% quarterly growth – and unemployment on Thursday, which is expected to remain unchanged. Neither is likely to sway the SNB when it comes to its next meeting on 21 September, with markets now favoring no change and a 30% chance of a 25 basis point hike. China Two key data to focus on for the coming week; the non-government compiled Caixin Services PMI for August out on Tuesday which is expected at 54, almost unchanged from July’s reading of 54.1. If it turns out as expected, it will mark the eighth consecutive month of expansion in China’s services sector which indicates resilience despite the recent spate of deflationary pressures and contagion risk from the fallout of major indebted property developers that failed to make timely coupon payments on their respective bonds obligations. Next up will be the balance of trade data for August on Thursday with export growth anticipated to decline at a slower pace of 10% y/y from -14.5% y/y recorded in July. Imports are expected to contract further by 11% y/y from -12.4% y/y in July.   Interestingly, several key leading economic data announced last week have indicated the recent doldrums in China will start to stabilize and potentially turn a corner. The NBS manufacturing PMI for August came in better than expected at 49.7 (consensus 49.4), and above July’s reading of 49.3 which makes it three consecutive months of improvement, albeit still in contraction.   In addition, two sub-components of August’s NBS manufacturing PMI; new orders and production are now in expansionary mode with both rising to hit their highest level since March 2023 at 50.2 and 51.9 respectively. Also, the Caixin manufacturing PMI for August has painted a more vibrant picture with a move back into expansion at 51 from 49.2 in July, and above the consensus of 49.3; its strongest pace of growth since February 2023. Hence, it seems that the current piecemeal fiscal stimulus measures have started to trickle down positively into China’s economy. India The services PMI for August will be released on Tuesday where the consensus is expecting a slight dip in expansion to 61 from 62.3 in July, its highest growth in over 13 years. Capping off the week will be August’s bank loan growth out on Friday. Australia The all-important RBA monetary policy decision will be released on Tuesday. A third consecutive month of no change in the policy cash rate is expected, at 4.1%, as the recently released monthly CPI indicator has slowed to 4.9% y/y from 5.4% y/y, its slowest pace of increase since February 2022 and below consensus of 5.2% y/y. Interestingly, the ASX 30-day interbank cash rate futures on the September 2023 contract have indicated a 14% chance of a 25-basis point cut on the cash rate to 3.85% for this coming Tuesday’s RBA meeting based on data as of 31 August 2023. That’s a slight increase in odds from a 12% chance of a 25-bps rate cut inferred a week ago. On Wednesday, Q2 GDP growth will be out where consensus is expecting it to come in at 1.7% y/y, a growth slowdown from 2.3% y/y recorded in Q1. To wrap up the week, the balance of trade for July will be out on Thursday where the consensus is expecting the trade surplus to narrow to A$10.5 billion from a three-month high of A$11.32 billion recorded in June.  New Zealand Two data to watch, Q2 terms of trade on Monday and the global dairy trade price index on Tuesday. Japan A quiet week ahead with the preliminary leading economic index out on Thursday and the finalized Q2 GDP to be released on Friday. The preliminary figure indicated growth of 6% on an annualized basis that surpassed Q1’s GDP of 3.7% and consensus expectations of 3.1%; its steepest pace of increase since Q4 2020 and a third consecutive quarter of annualized economic expansion. Singapore Retail sales for July will be out on Tuesday with another month of lackluster growth expected at 0.9% y/y from 1.1% y/y in June; its softest growth since July 2021 as the Singapore economy grappled with a weak external environment. On a monthly basis, a slower pace of contraction is expected for July at -0.1% m/m versus -0.8% m/m in June.  

RBA expected to pause US nonfarm payrolls rise slightly to 187,000 The Australian dollar has started the week with slight gains. In Monday’s European session, AUD/USD is trading at 0.6464, up 0.21%.   RBA expected to pause The Reserve Bank of Australia is expected to hold interest rates at 4.10% when it meets on Tuesday and a rate hike would be a huge surprise. The central bank has paused for two straight meetings and the odds of a third pause stand at 86%, according to the ASX RBA rate tracker. The most important factor in RBA rate policy is of course inflation. In July, CPI fell to 4.9% y/y, down from 5.4% y/y and better than the consensus of 5.2% y/y. Inflation is moving in the right direction and has dropped to its lowest level since February 2022. A third straight pause from the RBA will likely raise expectations that the current rate-tightening cycle is done but I don’t believe we’re at that point just yet. This is Governor Lowe’s final meeting and he is expected to keep the door open to further rate hikes. Incoming Governor Bullock stated last week that the RBA “may still need to raise rates again”, adding that the Bank will make its rate decisions based on the data. The RBA isn’t anywhere near declaring victory over inflation and has projected that inflation will not fall back within the 2%-3% inflation target until late 2025.   The week wrapped up with the US employment report for August. The Fed will be pleased as nonfarm payrolls remained below 200,00 for a third straight month, rising from a revised 157,000 to 187,000. Wage growth fell to 0.2% in August, down from 0.4% in July and below the consensus of 0.3%. The data cements a rate hold at the September 20th meeting, barring a huge surprise from the CPI report a week prior to the rate meeting. . AUD/USD Technical AUD/USD is testing resistance at 0.6458. Above, there is resistance at 0.6516 There is support at 0.6395 and 0.6337    

Rates Spark: Close calls EUR rates have drifted higher, contemplating the chances of further ECB tightening. Returning US markets today could extend the momentum of the late Friday sell-off while busy issuance could add to the upward pressure. Eventually data decides for how long 10Y UST yields can be supported in the 4 to 4.25% area, with eyes this week on tomorrow's ISM services.   With the US out for Labor Day, EUR rates drifted higher at the start of the week with the usually more policy-sensitive belly of the curve in the lead. European rates' main focus remains the ECB, given the proximity of the next meeting and given that it's the final chance officials have to communicate their policy preferences ahead of the quiet period. ECB President Lagarde’s speech yesterday yielded little concrete information regarding the ECB's  next steps –  even though the speech centred around the importance of communication. She did remark that “action speaks louder than words”. While she was arguably talking more about what the ECB has already achieved, hiking rates by 425bp over a relatively short time span of 12 months, the comment surely resonates with the ECB’s hawks' current thinking about the upcoming decision. Over the weekend the ECB’s Wunsch already opined that "a bit more" tightening was necessary. Bundesbank’s Nagel delved into more technical matters around the ECB’s decision to end the remuneration of banks' minimum reserves. He argued that more should be done on reserves – if via not rates, it seems some hawks are ready to consider other options for tightening financial conditions. Important inputs to the upcoming decision are measures of expected inflation. Market based measures, such as the 5y5y forward inflation swap, have recently come off their peaks but remain mired in relatively elevated territory. The aforementioned 5y5y forward is still close to 2.6%. As ECB's Schnabel noted in last week's speech this is also a reflection of growing uncertainty surrounding the longer inflation outlook and could in turn reflect slowly eroding credibility of the ECB’s commitment to get inflation to 2%. Today the ECB will release its consumer survey which has seen 3y median inflation expectations already drop from 3% at their peak to 2.3% as of June. That is also ready close to 2%, but before the turmoil of 2022 median expectations were usually even closer to 2%. The June survey results also pointed to a more pronounced tail in the distribution, towards higher inflation outcomes.   The last ECB hike had little traction further out the curve

The previous trading week was filled with important events and reports. When looking at the range and movements of both instruments, one might wonder: why was it so subdued? It was reasonable to expect stronger movements and market reactions. To briefly recap, key reports from the United States turned out weaker than market expectations. Even the stronger ones left a peculiar impression. GDP grew by 2.1% in the second quarter, not the expected 2.4%. The ADP report showed fewer new jobs than expected. Nonfarm Payrolls reported more jobs, but the previous month's figure was revised downward. The ISM Manufacturing Index increased but remained below the 50.0 mark. The unemployment rate rose to 3.8%, which few had anticipated.     Based on all these reports, one might have assumed that it was time to build a corrective upward wave, but on Thursday and Friday, the market raised demand for the US dollar, so both instruments ended the week near their recent lows. So what can we expect this week?   On Monday, the most interesting event will be European Central Bank President Christine Lagarde's speech. On Tuesday, another speech by Lagarde, as well as Services PMIs of the European Union, Germany, and the United Kingdom. We can also expect speeches by other members of the ECB Governing Council. I advise you to monitor the information related to Lagarde's speeches. If she softens her stance, it can have a negative impact on the euro's positions. Wednesday will begin with a report on retail trade in the EU and end with the US ISM Services PMI. We can consider the ISM report as the main item of the week, although the ISM Manufacturing PMI that was released on Friday did not stir much market reaction. It is likely that the index will remain above the 52.7 mark, which is unlikely to trigger a market reaction. On Thursday, you should pay attention to the final estimate of GDP in the second quarter for the European Union. If it comes in below 0.3% quarter-on-quarter, the market may reduce demand for the euro. The US will release its weekly report on initial jobless claims. On Friday, Germany will publish its inflation report for August, and that's about it. There are hardly any important events and reports this week. Based on the conducted analysis, I came to the conclusion that the upward wave pattern is complete. I still believe that targets in the 1.0500-1.0600 range are feasible, and I recommend selling the instrument with these targets in mind. I will continue to sell the instrument with targets located near the levels of 1.0637 and 1.0483. A successful attempt to break through the 1.0788 level will indicate the market's readiness to sell further, and then we can expect the aforementioned targets, which I have been talking about for several weeks and months.     The wave pattern of the GBP/USD pair suggests a decline within the downtrend. There is a risk of completing the current downward wave if it is d, and not wave 1. In this case, the construction of wave 5 might begin from the current marks. But in my opinion, we are currently witnessing the construction of the first wave of a new segment. Therefore, the most that we can expect from this is the construction of wave "2" or "b". I still recommend selling with targets located near the level of 1.2442, which corresponds to 100.0% according to Fibonacci  

Australia: GDP holding up better than expected 2Q23 GDP was stronger than expected, and revisions to past data also show the economy has slowed less than was previously assumed.   Most of the surprise is in the back series Australia's 2Q23 GDP data came in stronger than we had expected, with the year-on-year growth rate coming in at 2.1%, not the 1.5% rate we had pencilled in. The quarter-on-quarter growth was also a bit stronger at 0.4% (ING f 0.2%), but it was revisions to the back data that made most of the difference to the annual growth rate.   GDP expanded by 0.1pp more than originally recorded in each of the three previous quarters, which combined with the 0.4% QoQ 2Q23 figure (the same as 1Q23), helped lift the annual growth rate back above 2%.  So far, so good. But when you dig into what was driving growth in the last quarter, things don't look quite so good.     Contributions to QoQ GDP growth (pp)   Weak domestic absorption The first point to note is that domestic demand ex inventories look very weak in these figures. Private investment and private consumption each only contributed about 0.1pp to the 0.4% GDP total. Government consumption was actually a drag on growth in the second quarter.  Lifting the headline GDP total was a big positive swing in the net export position, mainly a positive boost from exports, with only a small offsetting drag from imports. This export surge coupled with steadier imports (often inputs into the production process), was almost certainly behind the sizeable decline in inventories that prevented overall growth from coming in much stronger.  Exports will struggle to put in such a strong performance again in 3Q23, though we might well see some increase in imports to help fill the hole left by the 2Q23 inventory depletion. These offsetting flows will cancel out to some extent next quarter and any difference in magnitude between the two series will probably provide the bulk of any surprise to next quarter's numbers. As a result, we should probably keep our attention focused on the steadier domestic demand (ex-inventory) figures, otherwise known as domestic absorption.     Nothing much here for the RBA There is nothing much in these numbers for the Reserve Bank of Australia to chew on. The revised data do suggest that the economy is in a slightly stronger position than was assumed before their publication, and that could keep thoughts of a final rate hike later in 4Q23 from being extinguished completely. But the weak domestic absorption figures don't chime in particularly with the "stronger than expected" thesis, so in total, this probably has little bearing on future RBA rate decisions, or, for that matter the AUD, which didn't respond much immediately after the numbers were released, but has drifted slightly higher subsequently. 

Rates Spark: Dis-inversion from the back end We rationalise why US longer tenor rates are rising – basically, the curve is inverted and getting used to discounting structurally higher rates. If so, reversion to a normal curve must mean dis-inversion from the back end. When something breaks, that will change. But for now, it's more of the same: upward pressure on long yields.   The US curve can't stay inverted forever. So if rates don't get cut, long rates must rise There are many theories swirling around as to why the US 10yr yield did an about-turn on Friday, post-payrolls. It had initially lurched towards 4%. But in a flash, it was heading back towards 4.25%. We rationalise this based on two factors. First, the curve remains very inverted, with longer tenor yields anticipating falls in official rates in the future. That’s a normal state of affairs. But as long as the economy continues to motor along, the wisdom of having many rate cuts at all is being questioned by the market. Less future rate cuts raise the implied floor being set by the Fed funds strip. That floor continues to edge higher. That’s the second (and related) rationale. Friday’s payroll report was not one that suggested anything had broken. Rather, it hinted at more of the same ahead. There are lots of stories floating around about the rise in the oil price and heavy primary corporate issuance, but we’re not convinced they are the dominant drivers. They certainly push in the same direction, but that's all – contributory rather than driving. Until activity actually stalls, there is no imminent reason for the Federal Reserve to consider rate cuts, and as that story persists, the floor for market rates is edging higher and becoming more structural at higher levels. In that environment, the only way for the curve to dis-invert is from longer maturity yields coming under rising pressure as shorter-tenor ones just hold pat. Something will break eventually, but so far it hasn’t. The path of least resistance therefore remains one for a test higher in longer tenor market rates.   Accommodating structurally higher rates as the Fed stays pat   Today's events and market views Rates are drifting higher and a busy primary market is a technical factor – though usually fleeting – that has added to the upward pressure. But it is the data that has provided markets with the waymarks, although first impressions can prove deceptive.  Today’s key data is the ISM services which is expected to soften marginally, suggesting the sector is losing momentum towards the fourth quarter. For now, it would not meaningfully alter the overall situation. Susan Collins, president of the Boston Fed, is scheduled to speak on the economy and policy. Later tonight, the Fed will also release its Beige Book with anecdotal information on current conditions in the Fed districts. In the eurozone, we will get retail sales data for July. Yesterday, the European Central Bank’s surveyed consumer inflation expectations saw a slight uptick, but this was balanced by downwardly revised final PMIs – the net impact on market pricing for the September ECB meeting was marginal. No ECB speakers are scheduled for today. In government bond primary markets, Germany taps its 10Y benchmark for €5bn. The Bank of Canada will decide on monetary policy today with no change widely expected after the economy surprisingly contracted in the second quarter.  

CAD: An unsurprising pause by the Bank of Canada today USD/CAD printed the highest level since March yesterday, briefly breaking above the 1.3660 April high following another round of USD strengthening and generalised softness in pro-cyclical currencies. We don’t expect today’s Bank of Canada meeting to be a turning point for the loonie, as policymakers should take into account the recent weakness in growth and the cooling labour market and opt for a pause – here is our full preview. The dovish move in market expectations has already happened and markets are expecting no change today, while a modest 9bp is left in the CAD OIS curve before year-end. This means that the downside risks for CAD from today’s pause should be limited, also because the BoC will likely want to avoid categorically closing the door to more tightening just yet. The rise in USD/CAD in the past month has not been mirrored by a divergence in the USD/CAD short-term divergence of similar magnitude, and the pair is currently 2.5% overvalued according to our short-term fair value model. While a turn in US activity data likely remains necessary to pull the trigger on a USD correction and close the mis-valuation gap, we think that further USD/CAD gains will prove increasingly unsustainable. A retracement to the 1.3460 200-day MA is our preferred bias for September.

Eurozone retail sales dip further than expected in July Retail sales dropped by -0.2% in July, slightly worse than expected. While this marks a poor start to the third quarter, it does look like the declining trend in sales from recent years is starting to moderate.   The decline in eurozone retail sales was mainly driven by northern economies such as Germany, the Netherlands, Belgium and Ireland, which all posted quite significant drops in retail trade in July. France and Spain actually saw improving sales volumes, and Italy has yet to publish data so far. Overall, today’s data point fits the lacklustre trend in retail sales seen since mid-2021. Since then, we have seen a correction in consumption where services regained consumption share as economies reopened. This came at the expense of goods consumption, which had seen overspending in the early pandemic period. Still, it appears as though we’re seeing an easing of the correcting trend in retail sales. In recent months, it looks like sales have been bottoming out somewhat. This could indicate that the post-pandemic consumption shock is settling and that the improvement in real wages provides some support for the sector battling declining volumes. While it’s still early to draw definitive conclusions, this would be favourable for retail and goods production.

A period of policy stasis wouldn't go amiss from central banks this month By Michael Hewson (Chief Market Analyst at CMC Markets UK) For all of August and most of the summer, attention has been fixed on this month's central bank rate meetings for clues as to how close we are to the end of the current central bank rate hiking cycle, as we look towards year end.     The Federal Reserve would like to have you think it will raise rates again before the end of this year, while the Bank of England is currently priced for the possibility of another two rate increases due to much higher core inflation. This week we saw the Reserve Bank of Australia, as well as the Bank of Canada, kick off an important 3 weeks for central bank policy meetings, with investors set to hang on to every nuance of this month's meetings to determine the next move when it comes to interest rates.     The RBA kicked things off on Tuesday by keeping rates unchanged at 4.1%, while maintaining its guidance that inflation remains elevated, and the central bank will do whatever is required to return inflation to target. The central bank also maintained its forecast that inflation is unlikely to return to target of between 2% and 3% by late 2025. The Bank of Canada also mirrored this narrative in keeping its own central rate unchanged at 5%, while pledging to act further if required.     As we look towards next week's ECB meeting, opinion is split on whether the governing council will follow this narrative, or whether they will go for one more rate hike of 25bps. The hawks on the governing council appear committed to such a move, with the likes of Bundesbank President Joachim Nagel, as well as Isabel Schnabel, along with the likes of Pierre Wunsch of the Belgian Central Bank, and Klaas Knot of the Netherlands central bank. The hawkish nature of German central bankers may come across as surprising given the state of the German economy, which is currently on its knees, as shown by this week's horrific factory orders data for July, and the further deterioration in last month's PMIs as services followed manufacturing into contraction territory.     This pathology comes from Germany's historical fear of inflation and is unlikely to change given that German CPI is currently at 6.3%, although it is fallen from its peaks. Even so, when faced with such awful economic data across the entire economy, one must question what might prompt a little bit of self-reflection on the part of the inflation hawks. On the more dovish side we have the likes of the National Bank of Greece's Stournaras, and Italy's Visco pushing for restraint. ECB President Christine Lagarde's comments at the July press conference were particularly telling when she undermined the central message of optionality in keeping the ECB's options open when it comes to a September hike, and being data dependant, by concluding that she doesn't think that the ECB has more ground to cover when it comes to further hikes.     If this week's data are any guide perhaps wiser heads will prevail with a pause seemingly the most likely outcome next week. Lagarde's recent tone suggests that given the nature of recent economic data the ECB could well be done when it comes to rate hikes, and that the next move could well be a rate cut, if the data continues to look ugly, although when that might happen is anybody's guess.      Assuming we get no change next week from the ECB, then it's more than likely that we could see the Federal Reserve go down the same route with another pause to their own rate hiking cycle, if recent comments from Fed governor Christopher Waller are any guide, although recent strong economic data might suggest the Fed might need to move in November, especially after this week's strong ISM services numbers. US policymakers do have one more rate hike in their forward guidance with a terminal rate of 5.6% by year end, with markets currently pricing that for November, assuming it happens at all. If we get no change from the ECB, as well as the Federal Reserve, that will likely take the pressure off the Bank of England to hike again, even though market pricing is for at least one or possibly two more hikes this year.     The dynamics here are especially interesting given the pricing on the number of UK rate hikes over the summer has been much higher than other central banks. We've already seen pricing on that shift considerably where we were over a month ago when the market was pricing the eye-watering notion of a terminal rate of over 6%. This never seemed remotely credible given the inevitable consequences for financial stability and the housing market of such rate moves. Inevitably this pricing has started to come in and could come in some more given recent comments from senior Bank of England officials. In the last 2 weeks we've heard from Bank of England Deputy Governor Ben Broadbent, as well as Chief Economist Huw Pill arguing that monetary policy is already restrictive enough, and with 14 consecutive rate hikes behind them that would suggest a pause is well overdue.     This appears to be the direction Governor Andrew Bailey is leaning as well if his comments this week to MPs are any guide. This suggests that senior Bank of England officials are softening the market up for a rate pause this month, an outcome markets seem reluctant to price. The biggest challenge for the bank is communicating this shift to markets without tanking the pound. Based on previous experience that might be a tall order, however given what's happening right now a pause would be the right move to make, and then reassess in November when they update their economic projections.  As far as the data is concerned the argument for a pause outweigh the risks of hiking further, however the fear is they may decide to hike again as they attempt to compensate for being late into the hiking cycle.     Certainly, a period of policy stasis from central banks wouldn't go amiss right now, even allowing for the risks of rising oil prices which threaten to make inflation a lot stickier than it could be. That said it's hard to see how more rate hikes would help a consumer being squeezed by higher energy prices, as both factors suck demand out of the economy.   Even though markets aren't currently pricing a series of rate pauses this month, that's what we might get, especially when you look at what is driving the current sticky nature of price inflation. We've already found out that the UK isn't the international outlier when it comes to GDP, after the recent recalculations from the ONS, and the only reason inflation here is higher than elsewhere is because of the ridiculous energy price cap, which has served to keep core inflation higher than it should be and could well continue to do so with oil prices on the rise again.     With the Swiss National Bank and the Bank of Japan also set to meet in the same week as the Fed and the Bank of England, the next few weeks may have the potential to spring a few surprises, with perhaps central banks adopting policy stasis as a default position given the uncertainty around how much of a lag there is when it comes to recent increases in interest rates.      While central banks received a lot of criticism for being asleep at the wheel when it came to recognising that inflation wasn't as transitory as they thought, they are now running the risk of overcompensating in the other direction, and hiking too aggressively to combat a problem which already appears to be dissipating.     The only outlier to that is the Bank of Japan which could tweak its policy settings further when it comes to YCC, as it looks to combat a problem of an ever-weakening currency and high core inflation. This could be an area where we might see further volatility given that USD/JPY is once again approaching the 150.00 area.  

EUR: Trying to survive above 1.0700 into the ECB Our economics team has published its latest preview of next week’s European Central Bank meeting. It's a close call, but we think policymakers will deliver one last 25bp rate hike. As things stand now, markets disagree with this view, pricing in a mere 9bp for September and 15bp to the peak. This means that there will be room for a sizeable rebound in the euro if we are right about the ECB. We had warned EUR/USD would likely be vulnerable into the ECB meeting, and we are indeed seeing more USD strength keeping the pair pressured. It would already be a positive sign for EUR/USD bulls to see the 1.0700 support hold for another session, possibly indicating that could be the bottom into next week’s risk events. The eurozone calendar includes the final read of the second quarter GDP, as well as a number of ECB speakers, who however should refrain from discussing monetary policy given the quiet period before the ECB meeting kicked off today.

Hungarian industry shows summer upturn Industrial production has often been heavily volatile during the summer months in Hungary. This year was no different as we saw a surprise uptick in industrial production in July. However, we need more evidence to see this as a true turning point.   Hungarian industry delivered a significant positive surprise in July, with output volume rising by 2.8% month-on-month (MoM) adjusted for seasonal and calendar effects. As a result, the yearly change in output showed a significant improvement from June, coming in at -2.5% (adjusted for calendar effects). Given that survey-based soft indicators (Manufacturing PMI, different confidence indices of industry) have been predicting a further contraction in industrial production in recent months, we look forward to a detailed assessment by the Statistical Office of the reasons for the positive surprise. For the time being, it is safe to say that these soft indicators continue to fail to capture shorter-term fluctuations in the sector's performance.   Manufacturing PMI and industrial production trends   While we await the detailed data, the preliminary release suggests that there is nothing new to see here. There was no significant change in the structure of industrial production. While most sub-sectors contributed to the decline in output, the exceptions remain the manufacture of electrical equipment (EV batteries) and car manufacturing. The only question that remains is whether the export-oriented sectors have been able to recover much better from the possible first summer shutdowns, or whether the other sectors have already experienced some sort of early recovery. Knowing that the performance of industry during the summer seasons has been extremely volatile recently with a lot of variation in the summer shutdown periods, it is really hard to say whether the July upturn is real or just a false hope generated by unreliable seasonal adjustmen   Performance of Hungarian industry   For the time being, we need more evidence to believe that the July surprise is a positive turning point. All the more so because we haven't yet seen any significant positive changes in other segments of the Hungarian economy that would support the theory of improving domestic demand and industrial production in sectors linked to the domestic market. Looking ahead, we expect this dichotomy between external and domestic demand to persist in the short term, making industrial performance a tale of two halves. Export-oriented sectors can boost industrial production in the short term through capacity-enhancing investment. The latest Eurostat survey shows that manufacturers expect capacity utilisation to improve somewhat in the third quarter, from 75.7% to 76%. However, this is still far from the peak of around 86%. This suggests that the positive impact of exports may be starting to fade as new export orders become more subdued globally and the one-off boost from capacity expansion fades.     Production level and quarterly performance of industry   On a more positive note, towards the end of the year industrial companies may be able to renegotiate their energy contracts at a much more favourable market price. This could significantly reduce their costs and lead to a resumption of production in sectors that are now underperforming due to cost-side pressures. In addition, as inflation moderates and domestic purchasing power recovers towards the end of the year, domestic industrial production could receive some positive impetus not only from the supply side but also from the demand side, offsetting the initial weakening of industrial exports. For 2023 as a whole, however, we still expect the performance of industry to be negative, i.e. below last year's total output. This also means that, barring a significant surprise from industry in the remainder of the year, agriculture will be the only sector able to meaningfully mitigate the expected decline in GDP this year.    

CAD: Jobs prints are volatile, but BoC should be done anyway Canadian jobs figures for the month of August will be released today. The headline employment number has been quite volatile, with the past four months having seen two very strong prints (April and June) and two sub-zero ones (May and July). However, the unemployment rate has ticked up in each of the past four months, from 5.0 in April to the current 5.5%. The consensus numbers are 17.5k and 5.6% for today. Outside of the initial reaction for CAD, the implications of today’s figures beyond the very near term should not be very significant, barring a very strong read. As discussed in our Bank of Canada meeting review note, we think rates have peaked in Canada, in particular following the dismal 2Q GDP reading (-0.2% quarterly, annualised). USD/CAD is expensive, trading around 2.3% above its near-term fair value, according to our calculations, but any decisive turn lower remains tied to a turn in US activity data rather than domestic inputs on the Canadian side. 

BoE hints at balanced debate at the next meeting Employment survey points to further weakness GBPUSD nearing major support zone   A big couple of weeks are in store for the Bank of England and figures today may support the case for a more balanced debate on 21st September, as policymakers hinted this week. Inflation is by no means under control but it is falling fast and, if the BoE is to be believed, it is expected to fall markedly over the remainder of the year. If the MPC is going to be confident of inflation returning sustainably to 2%, the labor market will likely be key to it so there’ll likely be a much greater focus on it going forward. We’re already seeing some progress on this front but much more is likely needed. Today’s survey from KPMG and REC suggests more weakness is on the horizon. Permanent placements, availability, and salaries are all promising from a BoE perspective and may contribute to some lively debate in a couple of weeks. Of course, surveys alone won’t be enough to convince them. The UK jobs report next week could offer another helping hand and put the decision on the 21st much more in the balance. Markets are currently convinced that another hike is coming but that may change if unemployment ticks higher again and wages soften.   GBPUSD continues to slide toward key SMA band The pound has continued to fall this week, aided by the comments from the BoE and perhaps today’s survey.   GBPUSD Daily Source – OANDA on Trading View After breaking below the August lows earlier this week, shortly after running into resistance from the 55/89-day simple moving average band, the pair is continuing to edge closer to the 200/233-day SMA band. This falls around 1.23-1.24 and also coincides with the lows from the second quarter of this year. A break below here could be a very bearish development, especially if aided by a weaker UK jobs report or stronger US inflation release.  

Tesla fuels market rally By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank    Tesla jumped 10% yesterday and reversed morose mood due to the Apple-led selloff. Tesla shares flirted with the $275 per share on Monday, thanks to Morgan Stanley analysts who said that its Dojo supercomputer may add as much as $500bn to its market value, as it would mean a faster adoption of robotaxis and network services. As a result, MS raised its price target from $250 to $400 a share.   Tesla rally helped the S&P500 make a return above its 50-DMA, as Nasdaq 100 jumped more than 1%. Apple recorded a second day of steady trading after shedding almost $200bn in market value last week because of Chinese bans on its devices in government offices, and Qualcomm, which was impacted by the waves of the same quake, recovered nearly 4%, after Apple announced an extension to its chip deal with the company for 3 more years. Making chips in house to power Apple devices would take longer than thought.   Speaking of chips and their makers, ARM which prepares to announce its IPO price tomorrow, has been oversubscribed by 10 times already and bankers will stop taking orders by today. The promising demand could also encourage an upward revision to the IPO price, and we could eventually see the kind of market debut that we like!    Today, at 10am local time, Apple will show off its new products to reverse the Chinese-muddied headlines to its favour before the crucial holiday selling season. The Chinese ban of Apple devices in government offices sounds more terrible than it really is, as the real impact on sales will likely remain limited at around 1%.   In the bonds market, the US 2-year yield is steady around the 5% mark before tomorrow's much-expected US inflation data. The major fear is a stronger-than-expected uptick in headline inflation, or lower-than-expected easing in core inflation. The Federal Reserve (Fed) is torn between further tightening or wait-and-see as focus shifts to melting US savings, which fell significantly faster than the rest of the DM, and which could explain the resilience in US spending and growth, but which also warns that the US consumers are now running out of money, and they will have to stop spending. So, are we finally going to have that Wile E Coyote moment? Janet Yellen doesn't think so, she is on the contrary confident that the US will manage a soft landing, that the Fed will break inflation's back without pushing economy into recession. Wishful thinking?   But everyone comes to agree on the fact that the Eurozone is not looking good. The EU Commission itself cut the outlook for the euro-area economy. It now expects GDP to rise only 0.8% this year, and not 1.1% as it forecasted earlier, as Germany will probably contract 0.4% this year. The slowing euro-area economy has already softened the European Central Bank (ECB) doves' hands over the past weeks. Consequently, the EURUSD gained marginally yesterday despite the fresh EU commission outlook cut and should continue gently drifting higher into Thursday's ECB meeting. There is no clarity regarding what the ECB will decide this week. The economy is slowing but inflation will unlikely to continue its journey south, giving the ECB a reason to opt for a 'hawkish' pause, or a 'normal' 25bp hike. 

ECB cheat sheet: Is a hike hawkish enough? Markets are torn. Will the ECB hike this week or not? We think it will, but we look at how different scenarios can impact rates and FX. Even in our base case, we suspect that convincing markets that this is not the peak will be very hard, and dovish dissenters may get in the way. The upside for EUR rates and the euro may not be that big and above all, quite short-lived.       As discussed in our economics team’s European Central Bank meeting preview, we narrowly favour a rate hike this week. The consensus of economists is slightly tilted towards a hold, and markets also see a greater chance of no change (60%). In the chart above, we analyse four different scenarios, including our base case, and the projected impact on EUR/USD and 10-year bunds. We expect to see a more fragmented than usual Governing Council at this meeting. Whichever direction the ECB decides to take, the debate will likely be fiercer than in previous meetings, as lingering core inflationary pressure is being counterbalanced by evidence of rapidly worsening economic conditions in the euro area. Accordingly, expect the overall messaging by the ECB to be influenced not only by the written communication but also by: a) how much President Christine Lagarde manages to conceal growing division and disharmony within the Governing Council during the press conference and; b) any post-meeting “leaks” to the media, which could be used by dissenters to influence the market impact.        

ECB may be a lifeline not a trampoline for EUR/USD September’s ECB meeting will be a binary risk event for the euro. Our baseline scenario sees a rate hike, which would translate into a stronger euro in the aftermath of the announcement, as market pricing is leaning in favour of a hold. But with EUR/USD having been on a steady bearish path since the 1.12 July peak, the real question is whether a hike would invert the trend. The short answer is probably not, but there are some important considerations to make. First of all, it’s worth explaining why we think the FX impact of an ECB hike will be short-lived. One key reason is pricing: markets have doubted the ability of the ECB to hike this week (9bp priced in), but are still factoring in a total of 17bp of tightening to the peak by year-end. Arguably, the ECB hawks won’t have much interest in delivering one hike this week and striking a dovish tone, as the effective tightening via rates would be limited, so they should accompany a hike with openness to do more. However, with economic conditions deteriorating fast in the eurozone and dovish dissent within the ECB growing, it will be hard to convince markets to price in any additional tightening. When we look at the 2-year swap rate spread between the euro and the dollar, an important driver of currency fluctuations, we can tell that it has recently approached the -125bp support level (five central bank “lengths” between the Federal Reserve and ECB). Let’s remember that the swap rate tells us the expected average rate for the next two years, so includes expectations for the final moves in the tightening cycle (if any) and rate cuts. What has really driven the recent widening of the spread in favour of the dollar has not been any repricing higher in Fed rate hike expectations, but a downsizing of easing bets in the US for next year.   EUR/USD and short-term swap spread     With rate hike cycles coming to an end, swap rates are increasingly sensitive to expectations about the timing and pace of easing cycles. Those expectations are, however, far less controllable by central bank communication, and much more dependent on data. But can the ECB at least show signs of a united hawkish front and convincingly push back against rate cut speculation? (The first ECB cut is priced in for July 2024). If it can, then you have a trampoline for a sustainable EUR/USD rebound, otherwise – and we really think this will be the case – the best President Lagarde can do for the euro is to offer a lifeline. One way the ECB could, however, end up having a longer-lasting FX impact is via an acceleration in quantitative tightening. However, that obviously comes with non-negligible risks to peripheral spreads, and policymakers may want to tread quite carefully in that sense.   After the short-term impact, EUR/USD should revert to being driven primarily by the dollar leg, or in other words by Fed rate expectations and US data. We still expect a turn higher in the pair, but patience is the name of the game for EUR/USD bulls like us, and more downside corrections even after a potential ECB hawkish surprise are a very tangible risk.

GBP: Wage data not as hawkish as it looks The UK has just released wage and employment data. On the face of it, an as-expected 7.8% three-month/year-on-year rise in ex-bonus weekly earnings in July makes the case for the Bank of England to remain hawkish. But here is what our UK economist, James Smith, thinks of the data.    The UK wage numbers are actually more dovish than they look at first glance. At the headline level, regular pay growth stayed at 7.8% on a 3M/YoY basis- - no surprises there. But drill down and if you strip out the public sector, private sector pay barely increased in level terms between June and July. And if we look at the altnerative wage measure based on payrolls, that actually fell in level terms for the second consecutive month. It is only one data point, admittedly, and several upside surprises preceded it. But with unemployment notching higher, the labour market data doesn't scream a need to keep hiking rates much further. We think it right not to chase EUR/GBP too much lower on this data (it is currently reversing from a brief dip to 0.8570) and what could prove a mildly hawkish ECB on Thursday warns of EUR/GBP breaking above 0.8600 later this week.

Ueda hints that BoJ could raise rates How seriously should we take the comments amid intervention speculation? Divergences suggest traders becoming nervous A relatively quiet start to the week from an economic data perspective but we’re still seeing some decent moves in the markets this morning, particularly in the Japanese yen. The yen has jumped this morning on the back of comments from Bank of Japan Governor, Kazuo Ueda, who hinted that interest rates may not be negative for much longer. Ueda reportedly claimed that if they become confident that prices and wages will keep rising sustainably, which could be as early as year-end, then an end to negative interest rates could be one option on the table. The focus for so long has been on the central bank’s yield curve control policy but perhaps these comments suggest abandoning that will not be the first major move. Of course, at a time of so much speculation around currency intervention and a rapidly weakening yen, you have to wonder what the real motivation behind these comments is and how seriously to take them. Only time will tell but for now, they’ve managed to give the yen a boost.     Are we seeing signs of nerves? The dollar has run into resistance repeatedly over the last week around 148 against the yen which suggests there’s some apprehension around these levels.   Source – OANDA on Trading View   We are very much in the territory where interventions have occurred in the past which may explain those nerves and Ueda’s comments gave traders further reason to fear action that could significantly boost the yen. You can see from the MACD in particular that recent rallies have not been matched by increasing momentum and that divergence may support the idea of nerves creeping in. A move below 145 would be interesting, with the area around here having been notable support recently and resistance back in late June and early July. It’s also around where the Ministry of Finance intervened last September. Traders have not been fully deterred by verbal intervention in the past though and if we do see another move to the upside, it will be interesting to see whether it’s matched by momentum or a deepening divergence.    

British pound posts strong gains UK to release employment report on Tuesday The British pound has started the week with strong gains. In the North American session, GBP/USD is trading at 1.2537, up 0.61%. The pound has been on a nasty slide, falling as much as 300 basis points since August 31st. The volatility could continue for the pound on Tuesday, with the release of key employment data. The labour market is showing signs of slowing down and the economy is expected to have shed 185,000 jobs in the three months to July on top of the loss of 66,000 a month earlier. If the consensus is within expectations, it would mark a massive job loss and would support the BoE taking a pause at next week’s rate meeting. At the same time, wage growth remains high, which is driving inflation. Average earnings including bonuses are expected to remain unchanged at 8.2% in the three months to July. The June reading was the highest since July 2021, as employers are in urgent need of workers. The Bank of England has been non-committal about what it will do at next week’s meeting, although Governor Bailey said last week that the BoE was “much nearer” to ending the current tightening cycle. Bailey also said that the BoE might have to raise rates further due to persistently high inflation. Inflation has been falling but has been stickier than expected.  Bailey may be trying to calm the markets with the message that rate hikes could end soon, while keeping further increases on the table, given that inflation remains above the Bank’s 2% target.   GBP/USD Technical GBP/USD is testing resistance at 1.2519. Above, there is resistance at 1.2592  There is support at 1.2441 and 1.2395      

The upswing in oil prices made CAD the G10 outperformer in yesterday’s session. USDCAD has room on the downside after the recent run higher but EUR and JPY have more to lose with oil prices rising which brings EURCAD into focus. Also, bets for an ECB rate hike have picked up after a recent Reuters report suggesting inflation forecasts may be adjusted higher, but boost to EUR could remain limited with stagflation concerns rising. CAD: Crude oil prices bring upside in Canadian dollar Crude oil prices extended its gains yesterday after the OPEC monthly report showed the oil market is going to be a lot tighter than initially thought. In its latest monthly outlook, the oil group said the market may experience a shortfall of 3.3mb/d in the fourth quarter of the year. This came in above expectations, and would make it one of the largest deficits in more than a decade. The oil market could get even tighter if the economic data starts to improve for China after a host of stimulus measures announced over the last several weeks. This has led to some analysts expecting $100 oil could be a possibility, despite scope for this artificially created tightness to soften from October when refinery demand for crude oil slows due to maintenance. Still, focus is likely to stay on crude oil for now as 10-month highs have been reached, and this is prompting a recovery in CAD. USDCAD retreated from last week’s highs of 1.3695 to test the short-term support at 0.236 retracement of 1.3553. The price of oil directly influences CAD as oil is one of Canada's major exports. Meanwhile, despite the central bank leaving its interest rate on hold at 5% at the last meeting, a stronger-than-expected jobs report on Friday has boosted the odds of another rate hike later in the year. Headline job gains came in at +39.9k for August vs. expectations of +20k with wages also firmer than expected. While possibility of more rate hikes may be low given Q2 GDP growth was negative, the wage pressures may also prevent the BOC from turning outright dovish anytime soon. This could open up the room for a recovery in CAD after the recent weakness, both from aa run higher in oil prices. Canadian economy also could benefit due to the resilience of the US economy. Meanwhile, USDCAD has rallied from lows of 1.3093 in mid-July to 1.3695 last week so correction may be due. However, worth noting that higher oil prices could also bump up the US inflation outlook once again while strengthening the economic outlook as US is also a net energy exporter. This could mean that King Dollar could continue to reign, and that could restrain oil for now. EUR and JPY could come under pressure with the increase in oil prices for being primarily energy importers.   Market Takeaway: USDCAD has room to retrace recent gains if oil prices continue to surge, but US CPI today could be key. EURCAD may be a more direct oil play as Canada benefits with higher oil prices while Europe stands to lose.  

I previously mentioned that all the interesting events will start on Wednesday. Tuesday also had some interesting reports, particularly the UK unemployment or wage data. However, if these reports did influence market sentiment, they did it in a very strange way, and their values are quite difficult to interpret. For example, how can we characterize high wage growth? Is it good for the Brits or not? If wages are rising, it means inflation could start rising again (Bank of England Governor Andrew Bailey also mentioned this). Then the BoE might raise rates several more times, which are not currently taken into account in prices. But does the market believe in this, and is the BoE capable of easily and simply raising rates "several more times"? I doubt it. From this perspective, it seems that rising wages, like rising inflation, will no longer affect the central bank's actions.     The UK will release important GDP and industrial production data on Wednesday. It is estimated that in July, GDP will contract by 0.2-0.3% MoM, and industrial output will fall by 0.6-0.8%. Such reports are unlikely to support demand for the British currency. Unless the actual values turn out to be higher. However, it is very difficult to expect positive economic data from the British economy right now. The BoE's interest rate continues to rise, which means that financial conditions are deteriorating. At the same time, inflation remains high. It's a complex equation that will be very difficult for the BoE to solve. The US inflation report is much more important and it's also quite complex.   If we assume that inflation rose again in August, how might this affect the Fed's decision next week? There are reasons to believe that it won't have much impact. There are also grounds to believe that the rate might increase, although previously, the FOMC made decisions to raise rates once every two meetings. But two consecutive accelerations in inflation could persuade the monetary policy committee of the US central bank otherwise. Based on everything mentioned, there are many questions but no answers yet. I fear that the currency market may become quite active Wednesday and Thursday, but both instruments may frequently change their direction. In my opinion, it's best to use the Fibonacci level at 100.0% for the British pound as a reference point.   A successful breakthrough could pull down both instruments again. Based on the conducted analysis, I came to the conclusion that the upward wave pattern is complete. I still believe that targets in the 1.0500-1.0600 range are quite feasible. Therefore, I will continue to sell the instrument with targets located near the levels of 1.0636 and 1.0483. A successful attempt to break through the 1.0788 level will indicate the market's readiness to sell further, and then we can expect to reach the targets I've been discussing for several weeks and months.   The wave pattern of the GBP/USD pair suggests a decline within the downtrend. There is a risk of completing the current downward wave if it is d, and not wave 1. In this case, the construction of wave 5 might start from the current marks. But in my opinion, we are currently witnessing the first wave of a new segment. Therefore, the most that we can expect from this is the construction of wave "2" or "b". An unsuccessful attempt to break the 1.2444 level, corresponding to 100.0% on the Fibonacci scale, may indicate the market's readiness to build an upward wave.  

ECB decides, ARM goes public!  Yesterday's US CPI report was mixed, worse-than-expected and far from soothing. The headline inflation ticked from 3.2% to 3.7%, higher than the 3.6% expected by analysts, and core inflation came in at 4.3%, in line with expectations. But on a monthly basis, both headline and core inflation numbers were slightly higher than expected. The spike in energy prices was to blame for the rise in the headline figure. In fact, gasoline prices rose by more than 11% in August, and that accounted for more than half of the overall monthly rise in inflation. The only good news was that core inflation in the past three months ran at a 2.4% annual rate, the lowest since March 2021, and just at a spitting distance from the Federal Reserve's (Fed) 2% inflation target. That's maybe why the market reaction to a higher-than-expected set of monthly and yearly CPI metrics didn't see a bad market reaction? The US 2-year yield was shortly above the 5% level yesterday but fell after the data, activity on Fed funds futures now gives 97% chance for a pause at next week's FOMC meeting, but the probability of a pause in November is slightly less than before the data, at 56%. In summary, yesterday's CPI data tilted the expectation for a November hike slightly higher, without however changing the consensus of a no rate hike for the moment.     ECB expectations tilt toward rate hike  Not earlier than the beginning of this week, the expectation for today's European Central Bank (ECB) meeting was a no rate hike. Today, just a few hours before the meeting, the pricing is pointing at a 25bp hike as the most likely scenario; money markets are pricing in a 68% chance for a 25bp hike.   But the data remains morose. Released yesterday, the euro area industrial production figures were looking rather bad, with a more than 1% slump on a monthly basis, and a 2% slump on a yearly basis. That's also why the higher ECB rate hike expectations couldn't really boost appetite in the EURUSD, the pair sees resistance at the 1.0765/1.070 range. If the ECB raises the rates today, the EURUSD could make a move toward the 200-DMA, 1.0825, and the Stoxx 600 could slip below the 445, a double bottom.   While there is a decent downside potential in European stocks, the upside potential in the EURUSD is limited by the weakness of the economic data. In fact, the gap between the US and German 10-year yield has been narrowing since about 3 weeks, but the EURUSD barely benefited from it, on the contrary, the EURUSD weakened more than 1% during the same period. Apparently, the morose economic outlook brings investors to think that, even if the ECB hikes today, it will certainly be the last one, and that in less than a year from now, we will be talking about the first rate cut in Europe due to economic weakness.   Across the Channel, the picture is not sunnier, obviously. The latest data revealed that the British economy shrank at the fastest speed in seven months in July. Strikes and the lack of sun were responsible for the gloomy data. You would think that slower economy could at least mean a softer UK inflation – a silver lining?. But no. Because data released earlier this week showed that the UJ unemployment rose, yet wages grew at a record high, the record starting from 2001. The Brits earned 8.5% more on the year, which is good news for their struggle to keep up with the cost of living crisis, but clearly bad news for the Bank of England (BoE), which is trying so hard to abate inflation, but in vain. They abate economic growth instead. Cable is testing the 200-DMA to the downside this week, for similar reasons to the euro. BoE rate hike expectations are strongly here, but growth outlook looks so gloomy that not many traders are willing to try a long sterling position.   Now, for all central bankers, those who want to raise rates and those who don't want, the headache is the same. Oil prices are rising, and that's muddying the future inflation expectations. The US is in a better position than the rest of world because, at least, they don't have to worry about currency depreciation to make things worse. But the barrel of US crude came close to the $90pb level yesterday. Happily, the latest EIA data showed a 4-mio build in the US inventories last week, which certainly helped not boost the bull's run further. US crude is now at the overbought market territory. The $90pb level is a psychological resistance and global economic data hints at slow activity ahead of us. The mix calls for at least a minor correction at the current levels.  In equities, all eyes are on ARM that will go public today. The company set its IPO price to $51 a share. It's at the top end of the proposed price range, but still lower than the valuation of $64bn when Softbank bought out a stake from Vision Fund.     By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  

Economic data, news & events ■ UK: Monthly GDP contracted by 0.5% mom in July, reversing the rise of 0.5% in the prior month. The main downward contribution came from services, where output fell 0.5% mom in July. Within services, the largest downward contribution came from healthcare activity, where industrial action increased. But there were also falls in industrial production and construction in July. Monthly GDP has been particularly volatile recently due to: 1. an additional bank holiday in May; 2. exceptionally warm weather in June, which boosted hospitality, tourism and construction; and 3. Industrial strike action. Looking instead at the less volatile 3M/3M growth rate, GDP rose 0.2% in July, unchanged from June. We continue to expect the economy to enter a recession around the turn of the year. ■ EU: Today, European Commission President von der Leyen will deliver her speech on the State of the Union 2023 during the European Parliament plenary session in Strasbourg. She is expected to outline the main priorities and flagship initiatives for the year to come, based on the EU’s achievements of the past years (9:00 CET). ■ Eurozone: We forecast a 0.7% mom decline in industrial output for July, following a contraction of 1% qoq in 2Q23. The expected contraction will have come about in a difficult environment for the industrial sector, which faces weak global demand for goods and fading support from backlogs of orders. The latest surveys of industrial activity do not point to a turnaround any time soon. The manufacturing PMI and its gauges of output and new orders remain stuck far below the expansion threshold (11:00 CET). ■ US: Headline monthly CPI inflation likely jumped to 0.6% mom in August, from 0.2% mom in July. In yearly terms, CPI inflation likely rose to 3.6%, from 3.2%. Such an acceleration was likely entirely driven by energy prices, as we estimate that gasoline prices rose by around 10% mom in seasonally adjusted terms and utility (piped) gas prices probably followed wholesale prices higher. Core inflation, on the other hand, is likely to come in at 0.2% mom for a third consecutive month, taking the yoy rate down to 4.4% from 4.7% in the prior month. We expect the disinflation process continued in housing, while inflation for core-goods and for non-housing core services (referred to as supercore) likely continued to moderate (14:30 CET).

EGB curves bear-flattened yesterday, with investors adjusting their positions ahead of upcoming macro events. Gilts were the stars of the day, with their yields declining after July jobs data confirmed a softening of the labor market, while USTs were little changed. European stocks edged moderately lower. Brent rose by 1.5% to USD 92/bbl   Caution has prevailed overnight, as highlighted by the weak performance of Asian stocks as well as US and European stock futures. While USTs are little changed, Bund futures have edged lower following a Reuters report that the ECB might raise its inflation projection for next year to above 3%. EGBs are set to open the trading session under pressure. In FX, EUR-USD has risen towards the 1.0750 area and USD-JPY has reached 147.40. EGB issuance activity will be quite lively today, with Italy, Germany and Portugal selling a total of EUR 13bn. Focus will be on the new 7Y BTP, the fourth and last new benchmark to be issued by Italy in 3Q23. With respect to the macro data, investor focus will be on US CPI data. The inflation report precedes the FOMC meeting by a week and will probably affect the Fed’s decision and, to a lesser extent, the updated economic projections that will be published next Wednesday. August CPI data are expected to show a mixed picture, with headline inflation likely having increased due to higher energy prices (in August, the average oil price was 6% higher than in July), while core inflation probably softened further. If data come in line with our estimates and consensus, the impact on fixed-income securities will probably be negligible as there seems to be consensus among analysts. Although market-based inflation expectations have already risen due to higher energy prices, especially at shorter tenors, their increase has been limited and breakeven rates have remained within the trading ranges of the last three months. Since 10 August, when July CPI data were published, the 10Y UST yield has risen by 20bp, with the real yield component, now close to 2%, contributing almost 100%. This move shows that inflation expectations remain anchored and that the re-acceleration of headline inflation in August is not seen as a major concern for investors or the Fed. On the other hand, the fresh increase in real yields seems to suggest that investors are continuing to reduce their expectations of a recession in the US and a rapid shift towards a looser monetary policy by the Fed. We see credit starting on a more cautious tone today ahead of the release of US CPI data in the afternoon and higher oil prices are weighing on equity markets. The sentiment on the Swedish residential property market declined again in September with more respondents in the monthly SBAB house price survey now seeing prices falling. The market expectation of a further rate hike by the Swedish central bank indicates expectations that further rising borrowing costs and inflation will lead to accommodation becoming less affordable. Swedish residential property prices are around 10% below their peak in March 2022 and market commentators see overall price declines of 20% as possible. For Swedish banks we see a further decline as still manageable given that average LTVs are in the 50-60% rang   Today and tomorrow are set to be two crucial days for the FX market US CPI inflation for August is the key release early this afternoon, but the USD reaction might prove to be complicated. This is because the US data will likely be mixed. We expect a rise in the headline index and a further decline in the core rate. This might spark some USD swings when the data are published but FX majors will probably end today’s session not far from current levels, given the ECB decision tomorrow. For there to be a more directional reaction, both headline and core inflation would have to surprise to the upside or the downside. Since a steady FOMC meeting outcome on 20 September is highly likely at this point, we expect the market reaction to be asymmetric and think that softer-than-expected data (even in the headline component) are unlikely to dent the current USD strength too much. On the other hand, an unexpected and sharp acceleration in the core index is probably needed to force investors to return to pricing in a higher chance of another rate hike in the US next week, which would drive the dollar index (DXY) back towards the recent peak of 105.15. In our view, EUR-USD is set to remain close to 1.0750, after press report suggesting that the ECB expects inflation to remain above 3% next year. Recent lows of around 1.0690 and 1.0770-1.08 are thus the key levels to monitor. Meanwhile, bad economic data in the UK early this morning will likely keep GBP-USD below 1.25. The return of USDJPY to 147 makes it clear that the debate on policy normalization in Japan is not enough to convince investors to ride a yen recovery, while USD-CNY and USD-CNH are likely to remain below 7.30 amid higher funding costs in the offshore market. Early tomorrow morning the decline that we expect in both headline and core inflation data in Sweden is unlikely to prevent another 25bp rate hike by the Riksbank next week. Still, the data will probably weigh somewhat on the SEK at the start of the European session. The PLN looks set to continue to suffer from the NBP’s bold rate cut last week. The HUF will likely trade close to 385 against the EUR after Hungarian Economic Development Minister Nagy hinted at stagnant growth for Hungary this year, while the NBH confirmed that the base rate (now 13%) will replace the 1D depo rate (now 14%) from 1 October. Lastly, the RUB steadying around 95 against the USD further suggests a steady outcome to the CBR meeting on Friday.

UK contracts faster than expected One-off factors largely behind the decline, BoE still expected to hike Major support being tested in cable The UK economy contracted faster than expected in July which is weighing on the pound this morning. GDP fell 0.5%, much faster than the 0.2% contraction that was expected, but as has been the case throughout this year, one-off factors played a big role. Strikes and the weather were largely blamed for the steep decline although some are clearly worried that overall momentum in the economy remains weak. I’m not sure the data will really sway the Bank of England at all next week. Not against the backdrop of such strong wage growth, as was reported yesterday. Markets are now pricing in a rate hike at around 75% which seems overly cautious to me but then, perhaps Bailey’s words last week are continuing to ring in the ears of traders. The Governor and his colleagues indicated the discussion will be more balanced than people seem to think which suggested a hold is very much on the table this month. That seems a little far-fetched at this stage and I think the words are probably intended for a little further down the line in November but then it wouldn’t be the first time the BoE has surprised us. That said, it also wouldn’t be the first time they’ve hinted at something and not followed through.   A pivotal level for cable? Cable has continued to drift lower after today’s GDP figures but there appears to be a little less vigor in the decline which may raise a few questions.     Is the decline of the last couple of months running on fumes? If so, are we going to see a correction or has this been a correction in the broader uptrend? The answer to the second question is that we’ll only know in time, should we see a big move higher from here. On the first question, there are signs that the sell-off is losing momentum. The drop today doesn’t appear to have been backed by moves lower on either the stochastic or the MACD. That in itself doesn’t mean the pair is about to reverse higher. But that it occurs around the 200/233-day simple moving average band and the 50/61.8 Fibonacci retracement zone – March lows to July highs – may suggest it could be early signs of struggles which could continue if tested again. A rotation off here would be interesting as it could signal that the sell-off since July has just been a bullish retracement. In that case, the 55/89-day SMA band above could be very interesting. A move below the 200/233-day SMA band and Fib levels could be a very bearish development, on the other hand, especially if back by momentum. And interesting one to watch over the coming days and weeks.  

China: Some spots of improvement in activity While the overall economic background remains a very challenged one, there were some more positive signs in the latest data deluge, though all things related to the property market continue to struggle.   No signs of panic from the PBoC The day of China's data deluge started quietly enough. The PBoC left the one-year medium-term lending facility (1Y MLF) unchanged. Given the problems they have been having propping up the CNY in recent weeks, and the fact that the day before, they had already reduced the reserve requirement, any cut to the MLF today would have seemed excessive and would have put the CNY under undue weakening pressure. That did not happen.  Shortly after that, new home price data were released. These fell again from the previous month and at a slightly faster pace. As we noted in the summary - amongst some brighter data on activity, anything real-estate related remains troubled.    Activity data either better, or better-than-expected When the bulk of data was released 30 minutes later, it was immediately apparent that this was on balance a more positive set of data than we have seen recently. Growth rates across a broad range of activity indices were slightly higher, and where they weren't, they tended to beat expectations. So for the most part, the data was either better, or better-then expected.    Summary of August's activity data   Retail sales actually rose Breaking the data down by component, the standout result was the 4.6%YoY rise in retail sales. This was up from only 2.5% in July, though the year-on-year, year-to-date (ytd) growth still slowed slightly. With the historical comparisons so messed up by lockdowns and re-openings, we prefer to look at our own seasonally adjusted real retail sales series. And this shows that sales actually picked up in real terms in August from July, and are now close to their long-run trend. That's both good and bad. Good as retail sales seems to have turned the corner. Bad, because this probably means growth will be more pedestrian from now on.   Real seasonally adjusted retail sales ING Calculations   Production also improved While it is also subject to the same caveats about year-on-year comparisons, the industrial production growth figures also edged slightly higher. We also got a slight decline in the surveyed jobless rate to 5.2%. This is not a terribly helpful or informative set of data, but the direction of travel is at least encouraging. As mentioned, anything real-estate related remained problematic. Property investment decreased at an 8.8%YoY pace, worse than the 8.5% decline in July, but not as bad as the market was expecting. And perhaps given the relationship between infrastructure spending and the property sector, it was not too surprising to see infrastructure spending growth slow slightly to 3.2% from 3.4%, though it is at least still growing.    CNY took advantage of the data After having been under weakening pressure for several weeks, the CNY rallied into this data, helped by another low PBoC reference rate which fixed at 7.1786, lower than the 7.1874 the previous day. Remarkably, our end-of-month, end-of-quarter forecast for CNY is no longer looking too bad at 7.25 with the CNY currently trading at 7.2597. Whether this will hold until the end of the month is another matter.      PBoC supporting the CNY

US dollar weakness emerges on as inflation expectations fall to lowest levels in over two year; November Fed rate hike odds remain a coin flip Oil rallies for a third straight week on tightness concerns US oil rig count rises by 2 to 515 The one-way move with oil prices has finally started to provide some underlying support for the Canadian dollar.  The Canadian currency however is starting to show some signs of exhaustion as short-term risks to the outlook grow.  The short-term crude demand outlook might be poised to take a big hit but it won’t matter as the global market supply deficit will keep oil above the $90 level throughout the rest of the year.  Unless sentiment deteriorates significantly for the Canadian economy, loonie strength could persist. USD/CAD should have decent support from the 200-day SMA which resides at the 1.3465 level. Canadian Economic Data/News: Canadian house prices declined again as the impact from the BOC’s tightening cycle continues to weigh on the housing market.  Existing Canadian home sales dropped 4.% in August from July, much worse than the expected 0.2% dip.  Housing shortages however kept home prices supported, rising 0.4% to C$757,600. The Canadian economy will likely see greater efforts by the PM Trudeau to address affordability concerns.  On Thursday, the PM unveiled plans to cut federal sales tax on construction of new apartment buildings.  Canada’s economy is softening, but optimism still remains weakness will happen in an orderly fashion.       Oil After a third week of gains, crude prices are not seeing the typical profit-taking as the short-term crude demand outlook gets a boost from improving US and Chinese economic data.  Oil is surging but so far it really has been passed on to the consumer as gas prices are still below $3.90 a gallon. $100 oil is not that far away, but that might not be a one-way trade as short-term risks to the outlook could shift consumer views and attitudes. The oil market is going to stay tight a while longer, but we might need to see a fresh catalyst to send oil to triple digits.    

Why the Bank of England might not raise rates on Thursday We're expecting one final rate hike from the Bank of England this week with wage growth and inflation both proving stubborn. But recent comments show the Bank is laying the ground for a pause, and we aren’t ruling that out on Thursday.   Investors have pared back BoE hike expectations Investor expectations for the Bank of England have come a long way since the start of July. Back then markets were pricing four more rate hikes, in addition to the one in August. Now it’s less than two, and investors are toying with the idea of a pause from the Bank of England on Thursday. Investors are pricing a 20% chance of a ‘no change’ decision, and that follows a series of comments from BoE officials that appear to be laying the ground for a pause. The Bank has made it abundantly clear that it thinks keeping rates elevated for a long period of time is now more important than how high they peak. Back in August, the BoE included a new line in its policy statement, saying that rates needed to stay “sufficiently high for sufficiently long”. The Bank is now also formally describing policy as "restrictive". That may be a statement of the obvious with rates above 5%, but it’s nevertheless significant that policymakers are now making a point of saying this.  To hammer home the message, Chief Economist Huw Pill said recently that he'd prefer a 'Table Mountain' profile for rates over a 'Matterhorn', or in other words a steadier path with a long period of no change, over a sharper pace of rate hikes and a swifter descent from the peak.   Markets have lowered expectations for peak Bank Rate   Could we get a pause on Thursday? This is a simple reflection of the UK mortgage market, where roughly 85% of lending is fixed, albeit for a relatively short amount of time. The average rate being paid on outstanding mortgages has risen from 2% to 3% so far, and we expect that to rise above 4% next year even if the BoE doesn’t hike rates any further. That's why the Bank is making it its mission to convince investors that rates need to stay high for a long time, and any further rate hikes should be seen as a tool to meeting this end. It does feel like the Bank is actively trying to set the stage for a pause. Could that happen this week? We wouldn’t totally rule it out. Policymakers will have had a keen eye on the Federal Reserve, which has succeeded in pushing back rate cut expectations with the so-called “skip strategy”. By drawing out its tightening cycle by pausing at every other meeting, the Fed has managed to keep the conversation about how many hikes we have left, rather than how long it will take before we get rate cuts. A similar strategy, whereby the BoE pauses in September but hints strongly that it could hike again in November, could be tempting for policymakers this week.     Our base case is one more rate hike None of that is our base case though, and we’re expecting one final hike on Thursday. The reality is that both wage growth and services inflation, the two key metrics upon which the BoE is basing policy, are higher than forecast back in August. We also still have one round of CPI data due the day before the meeting, and we expect services inflation to nudge slightly higher again.  Still, look closely enough and there are signs that wage growth may be starting to ease. The jobs market is clearly cooling now too, while a range of surveys suggest that fewer firms are raising prices, not least because lower energy prices are taking pressure off service sector costs. We expect this to show more readily in the services CPI numbers over the next few months. That means the Bank can probably afford to end its tightening cycle this week. Assuming though that the fall in services inflation and wage growth is pretty gradual, we think a rate cut is unlikely until at least the second quarter of next year.   Services inflation should start to come down later this year   Expect a faster pace of quantitative tightening (QT) The other decision the Bank will be making this week is on quantitative tightening as it decides whether to ramp up the pace over the next 12 months. The stock of gilts due to mature over the next year is roughly £10bn higher than over the last. The Bank has also completed its unwind of corporate bonds over the past year, and the implication is that it might boost gilt sales over the next 12 months to compensate. We therefore think the Bank will plan to reduce its gilt holdings by roughly £100bn over the next 12 months, up from £80bn over the last.   GBP: Biggest FX reaction comes on a pause On a trade-weighted basis, sterling has had a good year. It is still up over 5% year-to-date, although is now around 2% off the highs seen in July. Driving a large portion of that trend has been expected Bank of England rate policy. Most notably the recent repricing in the BoE terminal rate towards the 5.60% area from a peak near 6.50% has explained a large part of sterling's softness over the last couple of months. As policy tightening cycles in the G10 (ex-Japan) policy space reach their conclusions, one could argue that 8-10bp adjustments in money market curves will contribute only noise not trend to FX markets. And certainly, an as-expected 25bp BoE rate hike Thursday amid some hawkish rhetoric looks unlikely to be a game-changer for sterling.  That said, a surprise pause would have a big impact on sterling. And while the BoE may try to market a pause like a Fed 'skip', the market would doubt that the BoE would be in a position to raise rates later in the year. The FX options market prices a 95bp GBP/USD range for the 24-hour event risk covering the Fed and BoE meetings this week. A BoE pause could well push cable below the May lows just above 1.2300.  Perhaps surprising to some has been sterling underperforming the euro too - despite very poor eurozone confidence figures and the European Central Bank pointing to the end of the tightening cycle. Again this looks largely down to the greater downside for expected UK interest rates - a factor which should weigh on sterling into 2024. Our year-end 2023 EUR/GBP forecast remains 0.8800.    

New Zealand Services PMI declines US manufacturing data climbs, consumer sentiment falls The New Zealand dollar has started the week in positive territory. NZD/USD is trading at 0.5918 in the North American session, up 0.34%. New Zealand’s Services PMI declines New Zealand’s Services PMI eased to 47.1 in August, down from 47.8 in July. The reading marked a third straight decline in activity and was the lowest level since January 2022. This comes on the heels of Friday’s Manufacturing PMI, which fell to 46.1 in August, down from 46.6 a month earlier. This was the sixth consecutive month of contraction (the 50.0 line separates contraction from expansion). The Reserve Bank of New Zealand has been forecasting a recession and the weak PMIs support this view. New Zealand’s economy has cooled down due to the central bank’s steep tightening and global demand has weakened, most notably with China experiencing a slowdown and deflation. The RBNZ paused at the August meeting and interest rates may have peaked. If economic data remains weak, I would expect the RBNZ to prolong the pause at next month’s meeting. The US ended last week with mixed releases. The Empire State Manufacturing Index surprised and jumped to 1.9 in September, up from -19 in August and above the market consensus of -10. The UoM consumer sentiment index slowed to 67.7 in September, down from 69.5 in August and shy of the market consensus of 69.1 points. Inflation Expectations fell to 3.1% in August, down from 3.5% in July and the lowest level since March 2021. This is another sign that inflation is weakening and supports a pause at the Federal Reserve meeting on Wednesday. The markets have priced in a pause at 99%, according to the CME FedWatch tool, up from 92% one week ago.   NZD/USD Technical NZD/USD is testing resistance at 0.5908. The next resistance line is 0.5936 There is support at 0.5871 and 0.5843  

Weak UK PMIs bolster chances of November BoE pause The latest UK purchasing managers indices undoubtedly vindicate the Bank of England’s decision to keep rates on hold this month. We think the Bank’s tightening cycle is over.   We’ve had the latest purchasing managers indices for the UK and it’s another dismal outcome. The services PMI now stands at 47.2, down from 49.5 and that’s lower than had been expected by economists. There’s little doubt from the accompanying S&P Global press release that the economy is weakening, and the comments on the jobs market stand out in particular. The survey indicates that employment is now falling at the fastest rate since October 2009, when you exclude the volatility during lockdowns. And prices charged by firms are increasing less rapidly too. All of this supports the wider body of evidence from the data that the jobs market is weakening and that domestically-generated inflation is likely to slow over coming months. Admittedly, the Bank of England has been more reluctant to base policy on surveys while actual inflation and wage data have (at least until recently) been coming in consistently hot. But with lower gas prices taking pressure off the service sector to lift prices aggressively, in an environment where demand appears to be cooling, inflation in the service sector should continue to fall over coming months. Services CPI – currently 6.8% - should end the year below 6%. We therefore think the Bank will remain on hold in November and that August’s rate hike marked the top in this tightening cycle. Remember that we only have one inflation and wage data release before November’s meeting. So if the Bank felt it had enough evidence to pause yesterday, then barring any big surprises in those data releases, it’s unlikely that much will have changed by the next meeting. Remember, too, that one official who voted for a rate hike this week – Jon Cunliffe – now leaves the committee and there’s no guarantee his successor – Sarah Breeden – will vote the same way. That suggests the decision in November could be a little less contested than it was this month. Bigger picture, the Bank is also acutely aware that the impact of past hikes is still feeding through, and it’s made it abundantly clear that the length of time rates stay high is now more important than how high they peak in the short-run. That said, we expect the first rate cuts by the middle of next year.

Lower open expected for European markets By Michael Hewson (Chief Market Analyst at CMC Markets UK)     Last week the FTSE100 pushed up to its best level since late May before finishing the week slightly lower. Unlike its peers in the US and in Europe the FTSE100 is on course to finish the month higher, while the Nasdaq 100, S&P500 and DAX all look set to close out the month lower.     US markets have looked particularly vulnerable after last week's hawkish Fed meeting saw the US central bank revised up its Fed Funds target rate for 2024 to 5.1% from 4.6%, as a more resilient US economy reinforced the higher for longer mantra, which in turn served to push US 2-year yields to their highest levels since 2006 and 10-year yields to their highest levels since 2007.       The Fed also kept the prospect of another rate hike in November very much on the table with Governor Michelle Bowman and Susan Collins of the Boston Fed reinforcing that messaging over the weekend.     German and French yields have also pushed higher in the last 2 weeks in the wake of the ECB's surprise decision to hike rates by 25bps despite increasing evidence that the economy in Europe is struggling significantly. Unsurprisingly this decision weighed on markets in Europe which slid back sharply last week.    We also saw the S&P500 close at its lowest level since 9th June at the end of last week, as well as closing below its 100-day SMA for the first time since March. The Nasdaq 100 also finished the week below its 100-day SMA for the first time since 19th January in a sign that the upward momentum that has been the hallmark of the US markets' resilience may be starting to break down.     The outperformance of the FTSE100, which has struggled to push higher this year, can partly be explained by the fact that the Bank of England is probably done when it comes to raising rates, after last week's finely balanced decision to call a pause to the current rate hiking cycle. This realisation that additional rate hikes could do more harm than good in the face of a squeezed consumer has seen UK gilt yields plunge in the last 2-weeks with the UK 2-year yield slipping to its lowest since mid-June and offering some welcome relief to mortgage holders and the banks and real estate sector in the process.   This weakness in yields has unsurprisingly hurt the pound which looks set to be the worst performing G8 currency this month and on course for its biggest monthly decline since August last year.     The extent of this weakness particularly against the euro seems a little overdone given the weakness in the European economy could force the ECB into a rate cut sooner than perhaps it would like given the dire performance being seen in some of the recent PMI numbers.     The problem facing all the central banks is the rise in the oil price which if it continues unchecked could choke off any semblance of a rebound in economic activity. With Brent crude prices at 10-month highs and core inflation still uncomfortably high the price for keeping a lid on inflation could well see current interest rate levels remain higher for a lot longer. This is especially true in the UK, where while we may have averted the worst of what markets were pricing for UK rates, when the terminal rate was being priced at 6%, we could find that it could be a very long time before rates come down even a little.     Nonetheless stock markets do appear to be pricing in the very real prospect of a prolonged period of low growth, and high inflation, or stagflation and even possibly recession. Recent economic data is already flashing warning signs to this effect with this morning's German IFO data for September set to reinforce this with further weakness towards last years low point of 85.2 expected in the business climate number. Current assessment is set to also weaken further towards August 2020 levels of economic activity. This week's inflation data is expected to underpin the challenges facing central banks with the latest numbers from Australia, as well as core PCE \Deflator from the US as well as the latest flash CPI numbers for September from France, Germany, Spain as well as the wider EU flash number which is due on Friday, and which could show the ECB erred a couple of weeks ago when it tightened the rate hike screw further.     European markets look set to open lower this morning after the weak finish seen on Friday in the US.      EUR/USD – currently finding some support at the 1.0615 area, with a break below 1.0600 retargeting a return to the March lows at 1.0515. We did see a rebound to the 1.0740 area last week but we need to see a move back above 1.0780 to stabilise and minimise the risk of further losses to the lows this year at 1.0480.   GBP/USD – has slipped below the May lows at 1.2295 and could well sink further towards the 1.2190 area on the way to a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.       EUR/GBP – currently retesting the 200-day SMA at 0.8720, with a break above this key resistance arguing for a move back to the 0.8800 area. Support at the 0.8670 area.   USD/JPY – continues to squeeze higher towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.   FTSE100 is expected to open 21 points lower at 7,662   DAX is expected to open 30 points lower at 15,527   CAC40 is expected to open 22 points lower at 7,162 Email

05:40BST Tuesday 26th September 2023 Asia weakness set to see lower European open By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a poor start to the week yesterday as concerns around sticky inflation, and low growth (stagflation), or recession served to push yields higher, pushing the DAX to its lowest levels since late March, pushing both it and the CAC 40 below the important technical level of the 200-day SMA. Recent economic data is already flashing warning signs over possible stagnation, especially in Europe while US data is proving to be more resilient.   Worries over the property sector in China didn't help sentiment yesterday after it emerged Chinese property group Evergrande said it was struggling to organise a process to restructure its debt, prompting weakness in basic resources. The increase in yields manifested itself in German and French 10-year yields, both of which rose to their highest levels in 12 years, with the DAX feeling the pressure along with the CAC 40, while the FTSE100 slipped to a one week low.   US markets initially opened lower in the face of a similar rise in yields with the S&P500 opening at a 3-month low, as US 10-year yields continued to push to fresh 16-year highs above 4.5%. These initial losses didn't last as US stocks closed higher for the first time in 5 days. The US dollar also made new highs for the year, rising to its best level since 30th November last year as traders bet that the Federal Reserve will keep rates higher for much longer than its counterparts due to the greater resilience of the US economy. The focus this week is on the latest inflation figures from Australia, as well as the core PCE Deflator from the US, as well as the latest flash CPI numbers for September from France, Germany, Spain as well as the wider EU flash number which is due on Friday. This could show the ECB erred a couple of weeks ago when it tightened the rate hike screw further to a record high.   On the data front today the focus will be on US consumer confidence for September, after the sharp fall from July's 117.00 to August's 106.10. Expectations are for a more modest slowdown to 105.50 on the back of the continued rise in gasoline prices which has taken place since the June lows. The late rebound in US markets doesn't look set to translate into today's European open with Asia markets also sliding back on the same combination of stagflation concerns and reports that Chinese property company Evergrande missed a debt payment.   Another warning from ratings agency Moody's about the impact of another government shutdown on the US economy, and its credit rating, didn't help the overall mood, while Minneapolis Fed President Neel Kashkari said he expects another Fed rate rise before the end of the year helping to further boost the US dollar as well as yields.     EUR/USD – slid below the 1.0600 level yesterday potentially opening the prospect of further losses towards the March lows at 1.0515. Currently have resistance at 1.0740, which we need to get above to stabilise and minimise the risk of further weakness.      GBP/USD – slipped to the 1.2190 area, and has since rebounded, however the bias remains for a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.       EUR/GBP – currently have resistance at the 200-day SMA at 0.8720, which is capping the upside. A break here targets the 0.8800 area, however while below the bias remains for a pullback. If we slip below the 0.8660 area, we could see a move back to the 0.8620 area.     USD/JPY – has continued to climb higher towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.     FTSE100 is expected to open at 7,624     DAX is expected to open at 15,405     CAC40 is expected to open at 7,124  

As mentioned in previous updates, the reason why gold in our opinion has been holding up well despite the mentioned headwinds, is likely to be a market in search for a hedge against the current negative market sentiment and most importantly, the FOMC failing to deliver a soft, as opposed to a hard landing. A hard landing or stagflation may occur if the Fed keeps the Fed funds rate too high for too long or in the unlikely event the economy becomes too hot to handle. Other drivers can be rising energy prices keeping inflation elevated while hurting economic activity or a financial of geopolitical crisis erupts. Demand for gold as a hedge against a soft-landing failure is unlikely to go away as the outlook for the US economic outlook in the months ahead looks increasingly challenged. With that in mind, we maintain a patiently bullish view on gold while wondering whether the yellow metal in the short-term will continue to be able to withstand additional yield and dollar strength. The timing for a fresh push to the upside will remain very US economic data dependent as we wait for the FOMC to turn its focus from rate hikes to cuts, and during this time, as seen during the past quarter, we are likely to see continued choppy trade action. Spot gold, in a downward trending channel since May, is currently stuck in a $1900 to $1950 range with additional dollars and yield strength raising the risk of a short-term break below which may see $1885 being challenged. A close back above the 200-day moving average, last at $1927, is likely to coincide with a break of the mention downtrend, opening for a fresh attempt to challenge resistance in the $1950 area.  

The AUD/USD pair is stuck in the 0.6380-0.6450 range. In general, the current fundamental background allows bulls to expect new price gains, if not for one "but" – the greenback. The US dollar's position is quite strong, and this serves as an obstacle to the development of an upward movement. However, AUD/USD bears are also unable to take advantage of the greenback's strength: as soon as the pair declines into the 63-figure area, sellers take profits, thus impeding the bearish momentum.   In other words, the pair is in a deadlock situation. To develop an upward movement, buyers need to overcome the level of 0.6450 (the Tenkan-sen line on the daily chart), and in order to restore the downtrend, sellers need to push through the support level of 0.6370 (the lower Bollinger Bands line on the same timeframe). Both are challenging tasks, given the current fundamental picture. Traders need a strong informational impetus that will push the pair out of the range – either to the south or to the north. The Federal Reserve's hawkish stance is on the greenback's side. The results of the latest Fed meeting supported the US currency. The central bank updated its dot plot, indicating that it intends to raise interest rates once again by the end of this year, either at the November or December meeting.   Fed Chair Jerome Powell confirmed these intentions, citing the high level of inflation. However, Powell tied future central bank decisions to the dynamics of key inflation indicators. This is why the core Personal Consumption Expenditures Price Index, which will be published on Friday (September 29), may trigger strong volatility among dollar pairs. According to preliminary forecasts, this crucial inflation indicator is expected to decrease to 3.9% YoY, which is the lowest value since September 2021. In such a case, the dollar bulls may come under pressure because the likelihood of a rate hike in November will significantly decrease (at the moment, this probability is around 30%, according to the CME FedWatch Tool). Conversely, if the index starts to gain momentum and goes against forecasts, hawkish expectations regarding the Fed's future course of actions will increase. Take note that inflation could provide support to the aussie. In this case, we're talking about the Australian Consumer Price Index.   The inflation data for August will be published on Wednesday. The market forecast was for a 5.2% increase in the reported period. If the release comes in at least at the forecasted level (not to mention the "green zone"), the Australian dollar could receive significant support. The key point here is that the CPI has been consistently declining for the past three months, reaching 4.9% in July. If the CPI grows, it will be a "warning sign" for the Reserve Bank of Australia.   It's important to recall the main points from the recently published minutes of the RBA's September meeting. The text mentioned that the Board considered two scenarios: 1) a 25-basis-point rate hike; 2) keeping the rate unchanged. In the end, the majority of the RBA officials agreed with the arguments in favor of maintaining the status quo. However, simultaneously, the central bank emphasized that "some further tightening may be required" in the future if inflation proves to be "more persistent than expected." Clearly, the August CPI will be viewed by the market in terms of a potential RBA reaction. If the gauge exceeds expectations, buyers of AUD/USD will have an informational catalyst for an upward movement.     Do recall that the recent Australian labor data was also in favor of the aussie. Unemployment in August remained at the July level (i.e., at 3.7%), despite forecasts of an increase to 3.9%. The employment figure also grew significantly, reflecting an increase of almost 65,000, while the forecast was for an increase of only 26,000. The labor force participation rate increased to 67.0%, which is the highest result in the history of these observations. In addition, Australia's GDP data, which was published in early September, also supported the aussie, although the report was somewhat contradictory.   The country's GDP increased by 2.1% year-on-year in the second quarter. On one hand, this figure shows a downtrend (the result for the first quarter was 2.4%, and for the fourth quarter of 2022, it was 2.6%). On the other hand, experts had forecasted a weaker result for the second quarter, around 1.8% year-on-year. Therefore, the Australian dollar may emerge in the near future.   If Australia's inflation report comes out in the "green zone" (or at least in line with forecasts), and the report on the core PCE index comes out in the "red zone" (or at least in line with forecasts), buyers of AUD/USD may not only test the resistance level at 0.6450 (the Tenkan-sen line on the daily chart) but also approach the next price barrier at 0.6500 (the upper line of the Bollinger Bands indicator on the same timeframe). So, all eyes are on inflation!  

As mentioned in previous updates, the reason why gold in our opinion has been holding up well despite the mentioned headwinds, is likely to be a market in search for a hedge against the current negative market sentiment and most importantly, the FOMC failing to deliver a soft, as opposed to a hard landing. A hard landing or stagflation may occur if the Fed keeps the Fed funds rate too high for too long or in the unlikely event the economy becomes too hot to handle. Other drivers can be rising energy prices keeping inflation elevated while hurting economic activity or a financial of geopolitical crisis erupts. Demand for gold as a hedge against a soft-landing failure is unlikely to go away as the outlook for the US economic outlook in the months ahead looks increasingly challenged. With that in mind, we maintain a patiently bullish view on gold while wondering whether the yellow metal in the short-term will continue to be able to withstand additional yield and dollar strength. The timing for a fresh push to the upside will remain very US economic data dependent as we wait for the FOMC to turn its focus from rate hikes to cuts, and during this time, as seen during the past quarter, we are likely to see continued choppy trade action. Spot gold, in a downward trending channel since May, is currently stuck in a $1900 to $1950 range with additional dollars and yield strength raising the risk of a short-term break below which may see $1885 being challenged. A close back above the 200-day moving average, last at $1927, is likely to coincide with a break of the mention downtrend, opening for a fresh attempt to challenge resistance in the $1950 area.  

How elections and the RBNZ disinflation gamble can steer the Kiwi dollar The Reserve Bank of New Zealand is widely expected to keep rates on hold this week while awaiting new data and given the pre-election environment. The RBNZ’s assumptions on disinflation are quite optimistic, and there are risks of a November hike. Polls suggest a National-led coalition may win: NZD might benefit from a promised change in the RBNZ remit.   Growth and housing outlook not as bad as expected This week’s RBNZ announcement is widely expected to see another hold by New Zealand policymakers. A key reason is that the Bank still hasn’t seen the third-quarter inflation and jobs data, which will be released on the 16th and 31st of October, respectively. The New Zealand data calendar hasn’t, however, been totally quiet since the August RBNZ meeting. Growth figures were quite surprising: showing activity rebounded 0.9% quarter-on-quarter in the second quarter, more than doubling consensus expectations, and significantly above the 0.5% projected by the RBNZ. Also, a revision of first quarter figures indicated the country had not actually been in a recession into March.   Growth should cool again in the second half of the year, but the RBNZ’s projections of two negative QoQ GDP readings in the third and fourth quarters by the RBNZ may be overly pessimistic. The Treasury, which has generally been quite more upbeat than the RBNZ, currently forecasts no more negative quarterly GDP reads.   The house price correction, which has been a major cause for concern and might have argued for less restrictive monetary policy, has eased, largely in line with the revised RBNZ August projections. Latest monthly figures showed the house price index having declined by only 0.2% MoM, and 8.7% year-on-year, reinforcing the view that the worst of the housing correction is past us.   Housing correction has cooled off in New Zealand

Analysis of transactions and tips for trading EUR/USD Further decline became limited because the test of 1.0503 coincided with the sharp drop of the MACD line from zero. No economic data for the eurozone will affect market volatility ahead of important labor market reports, except for the data on industrial orders in Germany, trade balance in Italy, and retail trade volume in France. However, they will unlikely have much impact on the market.   For long positions: Buy when euro hits 1.0552 (green line on the chart) and take profit at the price of 1.0595. Growth will occur amid weak US labor market data. Note that when buying, the MACD line should be above zero or rising from it. Euro can also be bought after two consecutive price tests of 1.0524, but the MACD line should be in the oversold area as only by that will the market reverse to 1.0552 and 1.0595. For short positions: Sell when euro reaches 1.0524 (red line on the chart) and take profit at the price of 1.0475. Pressure may return, but they will not occur in the morning. Note that when selling, the MACD line should be below zero or dropping down from it. Euro can also be sold after two consecutive price tests of 1.0552, but the MACD line should be in the overbought area as only by that will the market reverse to 1.0524 and 1.0475.     Thin green line - entry price at which you can buy EUR/USD Thick green line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further growth above this level is unlikely. Thin red line - entry price at which you can sell EUR/USD Thick red line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further decline below this level is unlikely. MACD line- it is important to be guided by overbought and oversold areas when entering the market  

Polish manufacturing bottoming out and producer prices starting to stabilise Industrial production fell 3.1% YoY in September, but there are early positive signs as seasonally adjusted data points to a turnaround. Producer prices (PPI) also started stabilising, but deflation in YoY terms is there to stay for some time   Industrial production fell by 3.1% YoY in September (ING: -3.8%; consensus: -3.0%) with a further deepening of the decline in manufacturing (-3.7% YoY vs. -2.0% in August), though it is worth remembering that September this year had one working day less than in September 2022, what deducted ca 3pp from production in YoY terms. There are, however, some encouraging signs as seasonally adjusted data points to a 0.9%MoM increase in output. It was the second consecutive month of rising activity growth in seasonally adjusted terms.   Industrial ouput bottoming out Industrial production, 2015=100, SA Large annual declines in production were recorded in export-oriented industries: metals (-15.7% YoY), electrical equipment (-15.0% YoY), and electronic and optical products (-10.4% YoY). At the same time, increases were recorded in areas related to investment and energy. Production in the “repair and installation of machinery and equipment” increased by 7.3% YoY. Growth was also observed in the “electricity, gas, steam and air conditioning supply” (+3.7% YoY). This suggests that we should see continued expansion of investment and further deepening of the decline in exports in the composition of 3Q23 GDP.     Economy reached a bottom and should slowly recover Although the headline production indicator on an annual base still looks dismal, the seasonally adjusted data suggests that industry has most likely found the bottom and has started to rebound. Business surveys suggest that the decline in orders is slowing down, which should support a gradual stabilisation and then a bounce back in activity in the coming months.   Producer prices stabilise but the recent decline is yet to pass to consumer prices Producer prices (PPI) fell by 2.8% YoY in September (ING: -3.4%; consensus: -2.7%), following a 2.9% YoY decline in August (data revised). On an annual basis, we still have deflation, but the price level is beginning to stabilise. The MoM decline in prices over the past two months has stalled. Despite strong reductions in wholesale fuel prices, the magnitude of the price decline in the 'coke and refined petroleum products production' category turned out shallower than expected   PPI deflation continues, but price level ceased to decline PPI inflation, %YoY  

The European Central Bank kept all three key interest rates unchanged. The market's reaction was altogether surprising, strange, expected, and logical. The euro initially rose by 25 pips but then it also lost the same amount in three hours. So the market's response to this significant event can be characterized by a 25-pip move. However, while the event itself was important, its results were not. As mentioned, the rates remained the same, and ECB President Christine Lagarde was quite neutral during the press conference. Here's what she talked about.   First, Lagarde said that she believed the current rates are at levels that will make a substantial contribution to returning inflation to the Bank's 2% target. Rates will need to be kept at their current levels for a sufficiently long duration, but eventually, the ECB will achieve its goal. Decisions on rates will be made based on incoming economic and financial data, and the dynamics of underlying inflation. The APP and PEPP programs (monetary stimulus programs) continue to reduce the ECB's balance sheet at a moderate pace, following the general plan. Lagarde also said that rate decisions will be made from meeting to meeting. This suggests that Lagarde keeps the door open for further rate hikes but the chances of seeing new tightening in the near future are extremely slim. I believe that the results of the meeting turned out to be neutral. I previously mentioned that there were no other options besides keeping rates at their current levels. However, I allowed for the possibility that Lagarde might hint at future rate hikes "if necessary" or, conversely, announce when policy easing would begin. Neither of these scenarios was mentioned. Based on this, I conclude that the market's 25-pip reaction was quite in line with the meeting's outcomes. However, the trading instrument could and should have shown much greater movement, given that two important reports were published in the United States, which turned out to be significantly stronger than market expectations. However, it seems that even these reports were ignored. Thus, the market's reaction to the ECB meeting was logical but if we look at the bigger picture, it actually wasn't. We expected the lack of market activity with such results, but it was quite strange to see such an outcome in conjunction with the GDP and durable goods orders reports in the United States. Based on the analysis, I conclude that a bearish wave pattern is still being formed. The pair has reached the targets around the 1.0463 level, and the fact that the pair has yet to break through this level indicates that the market is ready to build a corrective wave. A successful attempt to break through the 1.0637 level, which corresponds to the 100.0% Fibonacci level, would indicate the market's readiness to complete the formation of Wave 2 or Wave b. That's why I recommended selling. But we have to be cautious, as Wave 2 or Wave b may take on a more complex form.  

EU GDP expected to stall in Q3 , BOJ tweaks YCC  By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets managed to get off to a positive start to the week yesterday, helped in no small part by the limited and incremental nature of the Israeli incursions into Gaza which appears to be helping assuage concerns that the escalations might prompt another front opening on Israel's northern border with Lebanon and Hezbollah. US markets also got off to a strong start with the Dow posting its biggest one-day gain since July, while the Nasdaq 100 and S&P500 both rose by more than 1%, while oil prices closed at their lowest level in over 2 weeks. While yesterday's rebound was welcome it isn't likely to change the fact that US stocks look set to close their 3rd successive monthly decline.     Yesterday the Japanese yen pushed higher on a report from Nikkei that the Bank of Japan was set to move the bands when it comes to its yield curve control policy. This morning we found out how true that story was when the Bank of Japan, while keeping rates unchanged, did just that, pushing the upper boundary to 1% which was less hawkish than markets had been expecting, given they had already been targeting that level when it came to their bond buying operations.     In moving the band, they have merely removed the discrepancy between the YCC rate and their bond buying levels, disappointing the markets who had been expecting something a little more radical, like pushing the band beyond 1%. In not being more hawkish the Japanese yen tumbled and slid back through the 150.00 level. At the same time, the BoJ raised their inflation forecasts for 2023 to 2.8, and for 2024 to 2.8%.   Despite yesterday's strong US session markets here in Europe look set to open slightly lower as we head into the final trading day of October and look ahead to tomorrow's Federal Reserve rate meeting as well as a tsunami of US economic data this week, we'll also be getting an insight into how the economy in Europe has fared over the last 3 months.     Yesterday we found out that theGerman economy contracted by -0.1% in Q3, while also slipping into disinflation in October, raising the question as to how far behind the rest of Europe might be in that regard.     The French economy is expected to have slowed from 0.5% in Q2 to 0.1% in Q3, with a similar slowdown expected to be seen in the Italian economy, which is also expected to have slowed to 0.1%.   On the wider EU measure the economy is expected to have slowed to 0% in Q3 from 0.1%, meaning that over the last 4 quarters we've seen little to no growth at all. Inflation is also expected to have slowed sharply with French CPI for October expected to have slowed to 4.5% from 5.7% on an annualised basis. EU flash CPI is expected to have similarly slowed from 4.3% to 3.1%, with core prices forecast to remain a little stickier at 4.2%, down from 4.5%.     Given the weakness seen in these figures there is rising concern that the ECB may have erred when it raised rates by another 25bps in September. They certainly ought to offer some pause for thought to the German hawks on the governing council who probably still feel that more needs to be done, when it comes to further rate hikes. In the US we have the latest Chicago PMI as well as October consumer confidence, neither of which are expected to show much in the way of resilience. Consumer confidence is expected to slow to 100.5 from 103, while Chicago PMI is forecast to edge higher to 45, from 44.1.               EUR/USD – continues to rally off the 1.0520 lows of last week, with the next support at the recent lows at 1.0450. Resistance at the 1.0700 area and 50-day SMA.    GBP/USD – continues to rally off the lows of last week at the 1.2070 area last week. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300.   EUR/GBP – retested the 0.8740 area yesterday, before slipping back. We need to see a break above 0.8750 to target the 0.8800 area. A move below 0.8680 and the 200-day SMA targets the 0.8620 area.   USD/JPY – retreated from the 150.78 area at the end of last week, slipping back to the 148.75 area and the lows from 2-weeks ago. Below 148.70 targets the 147.30 area. Still on course for a potential move towards 152.20, while above the 148.75 area.   FTSE100 is expected to open 10 points lower at 7,317   DAX is expected to open 20 points lower at 14,696   CAC40 is expected to open 5 points lower at 6,820  

Yen falls after BoJ decision, US bond investors hopeful on Treasury's plan to spend 'less'  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Bank of Japan (BoJ) kept interest rates unchanged, redefined the 1% limit on the 10-year JGBP yield as a loose 'upper bound' and scrapped its promise to keep that level intact. Alas, the move was less aggressive than expected by the market and sent the yen tumbling. Japanese policymakers' insistence that they won't hesitate to take additional easing measures 'if needed' also spoiled sentiment. The USDJPY trades just above the 150 mark this morning after the BoJ decision, although the spike in the 10-year JGB yield to almost 1% should've pulled the pair lower – especially after the news that the US Treasury will be borrowing less money in the last three months of this year.  The US Treasury will borrow less; the Fed is expected to announce no change. Yet...  The US Treasury Department said yesterday that they are planning to borrow around $776 billion in the final quarter of the year. That's still a historically high borrowing, but it has the merit to be below the expectation of around $800bn and it's well below the $1 trillion that they borrowed in the July-to-September period, and which wreaked havoc in the US bond market, sending – especially the long-end of the US yield curve rallying.  Today, the Federal Reserve (Fed) starts its two-day policy meeting. Yes, the FOMC announcement on interest rates is often a big event for investors, but this time around, it won't be the only shining star of the week. First, because we know that there won't be any rate hikes this week. The probability of no change is priced as being almost 100% sure. The Fed members will still be raising their eyebrows given the strength of the recent economic data, the uptick in inflation and global uncertainty. But they won't necessarily be raising the rates. Therefore, what they will say they will do will matter more for the market pricing than what they will do. And the rate expectations will be played for the December and January meetings – which both hint at no rate hike either, by the way. That could change, but for now, no more rate hike is what investors are betting on.   So, in the absence of a surprise rate decision, or a surprise forward guidance about a rate decision, what will really, really matter this week for the US sovereign space and the faith of the US yields, is the US debt situation, and the Treasury Department's quarterly announcement on details regarding the size and the maturity of the bonds that they will issue to borrow that extra $776 bn this quarter.  The composition of the US Treasury's bond issuances will be crucial. Shifting toward shorter maturity debt could relieve the pressure on the US long-term papers but the problem with the short-term bills is that the US Treasury already sold plenty of them - they came close to their self-imposed limit of 20% last quarter- and that's why they decided to sell more longer maturity bonds since September. The latter shift towards longer-term maturity debt explained why the long-term yields took a lift since September. Therefore, it's not a given that the Treasury's issuance calendar will fully calm down the bond investors' nerves on Wednesday. 

US Federal Reserve keeps its options open with another hawkish hold The Fed funds rate target range was held at 5.25-5.5% by a unanimous vote, with a hawkish tone retained to ensure financial conditions remain tight and aid in the battle to constrain inflation. Higher household and corporate borrowing costs are starting to bite though and we don’t expect any further hikes this cycle.   Rates held with a hawkish bias retained No surprises from the Federal Reserve today with the Fed funds target range held at 5.25-5.50% for the second consecutive meeting – the longest period of no change since before the tightening cycle started in early 2022. The accompanying statement acknowledges the “strong” economic activity – a slight upgrade on the “solid” description in September while there was explicit mention of “tighter financial and credit conditions”, which will weigh on the economy. Nonetheless, in the press conference Chair Powell recognises that the economy is starting to see the effects of tighter monetary policy, but that the committee still has a bias towards more hikes rather than seeing the prospect of cuts on the horizon. This is understandable since the Fed does not want to give the market the excuse to significantly backtrack on the recent repricing of “higher for longer” policy interest rates. While there does appear to be a slight softening in the degree of hawkishness the Federal Open Market Committee (FOMC) is expressing, they are careful not to provide a signal that policy has peaked, which could tempt traders to drive market rates lower in anticipation that the next move would be rate cuts. Such action could potentially reignite inflation pressures, but we doubt it.   Peak rates with cuts on the horizon for 2024 The surprise surge in longer-dated Treasury yields and the tightening of financial conditions it’s prompted will inevitably create more headwinds for activity in an environment where mortgage and car loan rates are already above 8% and credit card interest rates are at all-time highs. With Treasury yields staying at elevated levels, the need for further policy rate hikes is dramatically reduced and we do not expect any further Fed rate hikes. Consumer spending remains the most important growth engine in the economy, and with real household disposable income flat-lining, savings being exhausted and consumer credit being repaid – and this is before the recent tightening of lending and financial conditions is fully felt – means we see the primary risk being recession. If right, this will depress inflation pressures even more rapidly than the Fed is anticipating, giving it the scope to cut policy rates in the first half of next year.   Bond yields falling into the Fed meeting more to do with less (relative) supply pressure on the long end The bond market went into the FOMC meeting in a decent mood. The refunding announcement was deemed tolerable, partly as the headline requirement of US$112bn was US$2bn lower than the market had expected. Note, however, that 10yr issuance increases by US$5bn (to US$40bn) and 30yr issuance increases by US$4bn (to US$24bn), while 3yr issuance increases by just US$2bn (to US$48bn). As a stand-alone that is negative for the long end. But it’s the new December projections that has the market excited, as both 10yr and 30yr issuance is projected to fall by US$3bn (to US$37bn and US$21bn, respectively). In contrast, 2yr, 3yr and 5yr issuance volumes are to increase by US$8bn. So the issuance pressure morphs more towards shorter maturities and away from longer maturities as we head through the fourth quarter. Yields are down. The 10yr now at just under 4.8%. It has not materially broken any trends though. The big bond market story from the FOMC outcome is an underlying continuation theme. Higher real rates have been a feature since the last FOMC meeting, and the one before. And the Fed knows that this has a clear tightening effect. It’s a rise in market rates that cannot be easily diversified away by liability managers that need to re-finance in the coming few quarters. The Fed knows that both floating rate debt and all types of re-financings will amplify pain as we progress forward. Given that, it can let the debt markets do the last of the pain infliction for them. The rise in real yields has helped to push the curve steeper, and the 5/10yr has now joined the 10/30yr with a positive upward sloping curve. Only the 2/5yr spread remains inverted. This overall look does suggest the bond market is positioning for a turn in market rates ahead. The big move will come when the 2yr starts to anticipate cuts. We are not there quite yet; hence the 2/5yr inversion hold-out. That all being said, there is enough from the Fed today for the market to use the opportunity to test lower in yields. We still think we need to see the payrolls report first. If that is close to consensus then there is likely not enough to make the break materially lower. It is true that Powell has pointed to higher long rates as a pressure point. But does not have to mean that upward pressure on long rates suddenly goes away. There is still a path back up to 5% if the market decides not to use the double positive today of lower long-end supply (in relative terms) and a Fed that is pointing at long yields as something to get concerned by. We still feel that pressure for higher real rates remains a feature, despite the easing off on longer tenor issuance pressure. We need to see the economy really lurch lower, in particular on the labour market, before the bond bulls take over. The Fed is not quite pointing towards this just yet either.   FX: Too little to reverse the dollar momentum Markets perceived today’s Fed announcement and press conference as moderately dovish, and the drop in Treasury yields would – in theory – point to a softer dollar. The 2-year EUR-USD swap rate differential is around 8bp tighter than pre-meeting, but remains considerably wide at -128bp. As shown in the chart below, such a differential is consistent with EUR/USD trading around 1.05-1.06 and, despite the acknowledgement that financial conditions have tightened, there weren’t enough dovish elements to trigger a material dollar correction.   EUR/USD and 2Y swap rate gap     Looking ahead, we remain of the view that the dollar’s direction will be set by US data as the Fed’s reiteration of its higher for longer approach and threat of another hike still keep the big bulk of the bullish dollar narrative alive. Barring a negative turn in US activity data, our 1.06 EUR/USD year-end target remains appropriate. There are probably more downside risks in the month of November, although in December the dollar has negative seasonality.

Bank of England set to hold but we could see another split vote  By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a solid start to the month, helped by weaker economic data, and a slide in yields which raised the prospect that central banks could well be done when it comes to further rate hikes.   Nonetheless after such a poor performance during October there is a sense that what we saw yesterday was nothing more than a relief rally, although it's no less welcome for that.   As expected, the Federal Reserve kept rates unchanged for the second meeting in a row. At the ensuing press conference Fed chairman Jay Powell went on to state that no decisions had been made on whether more rate hikes were coming. He went on to say that while financial conditions had tightened, policymakers weren't confident that policy is sufficiently restrictive, although they had come a long way.     While on the face of it, Powell was trying to come across as hawkish, markets weren't buying it especially since yesterday's economic data showed that the US economy appeared to be slowing. As with anything it's a balancing act for Powell as well as the rest of the FOMC, and with this meeting out of the way the way is now clear for the rest of the committee to show their hands given the sharp fall in bond yields yesterday which indicated that markets feel the Fed is done.   US markets finished the session higher, while the slide in yields which we saw prior to the European close continued in the wake of the Powell press conference and looks set to see European markets carry on that momentum this morning with a higher open.   Today it's the turn of the Bank of England to come to its own decision on whether to raise rates and while we can expect to see a similar decision to hold rates as the Fed yesterday, the nuances of any decision are likely to be starkly different, although we can be fairly confident that the UK central bank is down when it comes to further rate hikes. Having hiked 14 times in a row it seems certain that the bar to further hikes is high, and as such we've seen a switch in narrative that articulates a policy of higher for longer.     There is certainly concern among some of the more hawkish members of the MPC that higher rates are needed, and we can expect the likes of Catherine Mann to push this line. She is likely to be in a minority in the short term if inflation continues to look sticky, however if as expected inflation slows further when the October numbers are released later this month, the prospect of further rate hikes is likely to diminish further.   We need to remember that the energy price cap comes down again in October, and on that comparative alone there should be a sharp drop from where we were a year ago. Sticky wage growth is likely to be a concern for the central bank, however even here there is a sense that this has seen a peak, remaining at 7.8% for the last 3-months, even as headline inflation continues to slow, while next week's Q3 GDP numbers are likely to reinforce concerns about a weaker UK economy.   There ought to be enough evidence today for a majority decision to hold rates, with perhaps one or two of the 4 hawks who voted for a hike in September deciding to uphold the status quo, while downgrading their GDP forecasts.     The most likely to switch to a hold would probably be external members Megan Greene and possibly Jonathan Haskel, although it has been suggested that the lone dove on the MPC, Swati Dhingra could lean towards a rate cut, which really would put the fox in the hen house as far as the pound is concerned. Given how sticky inflation currently is that would be a huge mistake and in all honesty I'm not sure it's necessary when it comes to looking at UK gilt yields which have already fallen quite sharply from their summer peaks. On the economic data front we'll also get to see further evidence that the ECB has overplayed its hand on the rate hike front when we get the latest manufacturing PMI numbers from Spain, Italy, France and Germany, all of which are expected to remain firmly in contraction territory.     Spain is expected to slow to 47, from 47.7, Italy to 46.3, from 46.8, France to slow to 42.6 from 44.2, while Germany is expected to edge higher to 40.7 from 39.6.               EUR/USD – slipped back to the 1.0520 area and last week's lows before rebounding again. We seem to be range bound between the 1.0700 area and the 50-day SMA. Below 1.0520 targets the 1.0450 level   GBP/USD – still trading below trend line resistance from the July peaks which is capping the upside, now at 1.2200. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300.   EUR/GBP – continues to slip towards trend line support from the August lows which is now at 0.8650. A move below 0.8680 targets the 0.8620 area.   USD/JPY – failed just shy of the highs last year at 151.95, sliding back from that key resistance. Still have strong support all the way back at 148.75, with a break above 152.20 targeting a move to 155.00.   FTSE100 is expected to open 33 points higher at 7,375   DAX is expected to open 87 points higher at 15,010   CAC40 is expected to open 40 points higher at 6,972  

CZK: CNB to start its cutting cycle We expect the Czech National Bank (CNB) to start the cutting cycle today with its first 25bp move. This seems fully in line with market pricing and economist consensus. However, surveys suggest it is a close call. And of course, upward pressure on commodity prices and tensions in the Middle East may be reasons to wait a little longer for the CNB. But we believe the new forecast plus weak economic data this week will be sufficient reasons to cut rates today. In addition to the decision itself, we will also see new numbers that should be revised towards a worse economic outlook, lower inflation, a weaker CZK and a faster pace of rate cuts. However, for the markets, today's cut has become a done deal and the collapse in PRIBOR in recent weeks indicates that more than 25bp is priced in for today's meeting. At the same time, the entire curve has shifted lower, making essentially the entire cutting cycle already priced in 1y horizon. We see a significant deterioration in the risk/reward of being received in rates at current levels versus a scenario of no rate cut today. In the FX market, we see the situation getting a lot easier. In the event of a rate cut being delivered, we expect EUR/CZK higher in the 24.80-25.00 range supported by a new CNB forecast indicating levels above 25.00 and still room to price in further rate cuts in the longer term, which would lead to a deterioration in the interest rate differential. Otherwise, we think the potential for CZK appreciation is limited and EUR/CZK may touch 24.50 only temporarily.

Bank of England keeps policy steady but pushes back against rate cut expectations The Bank of England may have kept rates on hold, but we're seeing the first signs of pushback against financial markets which are starting to price in rate cuts for 2024. We think investors are right to be thinking that way and we expect the first cut over summer next year.   The Bank of England has kept rates on hold for a second consecutive meeting and, barring some major unpleasant surprises in the data between now and Christmas, it’s fair to say the tightening cycle is over. On the face of it, this latest decision looks neither surprising nor controversial. Six members voted to keep rates on hold and three for a hike, in line with what more or less everyone had expected. With the exception of Sarah Breeden, where this was her first meeting, the remaining members voted exactly as they did in September – a recognition that we’ve had very little data since then, and what we have had hasn’t moved the needle for policy. But beneath the surface, we detect hints that the Bank is uncomfortable with markets beginning to price rate cuts for next year. Ahead of the meeting, investors were pricing at least two 25 basis point cuts by the end of 2024. BoE Governor Andrew Bailey is quoted as saying it’s “too early” to be talking about cuts, while the statement says rates need to be restrictive for “an extended period of time”. That's a slight hardening in the language compared to what we'd seen in August and September. And while the Bank’s models forecast inflation a touch below target in two years' time – which is considered to be the time horizon over which monetary policy is more effective – they show headline CPI at 2.2% once an “upside skew” is applied. That’s policymakers trying to tell us that, at the margin, the amount of tightening and subsequent easing may be insufficient to get inflation back to target. That said, the committee is visibly putting less weight on its forecasts than it once might have done given ongoing uncertainty and poor model performance.   The Bank's models point to inflation at or just below target in two years' time   As has been clear since the start of the summer, this is a central bank whose overriding goal now is to convince investors that it won’t need to cut rates for a significant period of time. However, we believe markets are right to be thinking about rate cuts from next summer. As the BoE itself acknowledges, much of the impact of past tightening is still to hit the economy. We estimate the average rate on mortgage lending, which so far has gone from 2% to 3.1%, will go to 3.8% by the end of 2024 as more homeowners refinance. It will be higher still if the Bank ultimately doesn’t cut rates next year. We also forecast core inflation to be below 3% by next August – and assuming the jobs market continues to gradually weaken, we think the Bank will be in a position to take its foot off the brake. We’re forecasting a gradual easing cycle that takes Bank Rate back to just above 3% by the middle of 2025 from the current 5.25% level.

Czech National Bank review: Staying on the safe side The CNB decided to wait for the start of the cutting cycle due to concerns about the anchoring of inflation expectations, high core inflation in its forecast and possible spillover into wage negotiations. The December meeting is live, but we slightly prefer the first quarter of next year. Economic data will be key in coming months.   Rates remain unchanged for a little longer The CNB Board decided today to leave rates unchanged despite expectations of a first rate cut. Five board members voted for unchanged rates at 7.00% and two voted for a 25bp rate cut. During the press conference, Governor Michl justified today's decision on the continued risk of unanchored inflation expectations, which may be threatened by the rise in October inflation due to the comparative base from last year. This could seep into wage negotiations and threaten the January revaluation, according to the CNB. At the same time, the board still doesn't like to see core inflation near 3% next year. So overall, it wants to wait for more numbers from the economy and evaluate at the December meeting, which the governor said could be another decision on whether to leave rates unchanged or start a cutting cycle   New forecast shows weaker economy and more rate cuts The new forecast brought most of the changes in line with our expectations. The CNB revised the outlook for GDP down significantly and the recovery was postponed until next year. Headline inflation was revised down slightly for this year but raised a bit for next year. The outlook for core inflation will be released later, but the governor has repeatedly mentioned that the outlook still assumes around 3% on average next year. The EUR/CZK path has been moved up, but slightly less than we had expected. 3M PRIBOR has been revised up by a spot level from the August forecast, implying now the start of rate cuts in the fourth quarter of this year and a larger size of cuts next year. For all of next year the profile is 30-65bp lower in the rate path, indicating more than 100bp in cuts in the first and second quarter next year.   New CNB forecasts   First cut depends on data but a delay until next year is likely Today's CNB meeting did not reveal much about what conditions the board wants to see for the start of the cutting cycle and given the governor's emphasis on higher inflation in the next three prints, we slightly prefer February to December. The new inflation forecast indicates 8.3% for October and levels around 7% in November and December. The last two months seem too low to us, but given the announced energy price cuts, this is not out of the question. So this is likely to be a key indicator looking ahead as to whether or not it will give enough confidence to the board that inflation is under control. Another key question is whether the CNB will move up the date of its February meeting so that it has January inflation in hand for decision-making.   What to expect in FX and rates markets EUR/CZK jumped after the CNB decision into the 24.400-500 band we mentioned earlier for the unchanged rate scenario after the decision. For now, the interest rate differential does not seem to have changed much after today's meeting, which should not bring further CZK appreciation. On the other hand, the new CNB forecast showed EUR/CZK lower than we expected and the board seems more hawkish. Therefore, we could see EUR/CZK around these levels for the next few days if rates repricing remains roughly at today's levels. However, we expect pressure on a weaker CZK to return soon as weaker economic data will again increase market bets on a CNB rate cut, which should lead EUR/CZK to the 24.700-24.800 range later. In the rates space, despite the high volatility, the market did not change much at the end of the day. The very short end of the curve (FRAs) obviously repriced the undelivered rate cut, however the IRS curve over the 3Y horizon ended lower, resulting in a significant flattening of the curve. The market is currently pricing in more than a 150bp in cuts in a six-month horizon, which in the end is not so much given the possible acceleration of the cutting pace after the January inflation release. Even though the CNB didn't deliver today's rate cut, we think the central bank is more likely to catch up with the rate cuts next year rather than the entire trajectory shifting. Therefore, we see room for the curve to go down, especially in the belly and long end.

CZK: CNB postpones start of the cutting cycle The Czech National Bank (CNB) decided yesterday to leave interest rates unchanged. At the same time, it presented a new forecast showing a weaker economy, lower inflation, a weaker koruna and also faster rate cuts next year. With the market expecting a rate cut, the central bank's decision led to an upward repricing of the short end of the curve, however the belly and end of the curve ended lower at the end of the day. The CZK is getting mixed signals, while the 2y interest rate differential ended only slightly higher in favour of the CZK at the end of the day. We are likely to see further pressures for CZK appreciation in the 24.400-24.500 EUR/CZK range today but we expect the pressure for a weaker CZK to return soon with more incoming data confirming a weak economy and triggering new bets on CNB rate cuts.

CEE: Weak data confirming weak economy The calendar today offers data on industrial production in Hungary and retail sales in the Czech Republic for September. In both cases, we expect confirmation of the weak performance of the economy. In Hungary, we will hear from the Minister of Economic Development. However this time it will probably not be market-oriented. Also, the two-day meeting of the National Bank of Poland (NBP) officially starts today but we won't see the outcome until tomorrow. On the FX side, EUR/CZK is back up after the surprise stable Czech National Bank (CNB) rates last week which supported the CZK. As we mentioned in our CNB review earlier, we expect weaker economic data and new bets on a rate cut in December to lead EUR/CZK higher again in our view. Yesterday's industrial production results were the first opportunities and more data to come this week including today's retail sales. At the same time, the interest rate differential hasn't changed much since the CNB meeting and therefore we don't see a justification for lower EUR/CZK levels at the moment. With that said, we see EUR/CZK above 24.50 for the days ahead.

China’s trade surplus shrinks in October A continuation of weak exports could weigh on the contribution of trade to GDP growth in the fourth quarter, though there could be a more positive story emerging about domestic demand buried in the import data. At this stage, it is too difficult to draw firm conclusions and more data is needed.   Trade figures raise more questions than they answer China's October trade surplus shrank to CNY405.47bn from CNY558.74bn in September. The cause was a combination of weaker exports (-3.1% year-on-year in Chinese yuan terms, down from -6.2% in September) and stronger imports (+6.4%, swinging up from -0.8% in September).  Ordinarily, the weaker export figure would not bode too well for the contribution to GDP from net exports, and it certainly indicates that overseas demand for China's exports remains weak.  Conversely, the import figure suggests that domestic demand may not be as weak as indicated by, for example, the recent run of PMI numbers. Though this raises the question, which data do you put more weight on?    China commodity imports (YoY YTD %)   Data distortions make interpretation difficult It is tempting to try to dissect these trade figures to try to figure out what is actually going on. But even using year-on-year cumulative figures runs the risk of distortions caused by lockdowns at the end of last year in China, and our best advice at this stage is to reserve judgment on what is happening and wait to see what next month's data bring before conjuring up some fanciful explanation for what happened this month. Even looking at the figures in terms of volume levels runs risks as these numbers are also highly seasonal.  For those who are prepared to stomach these problems, the chart below of imports of crude materials suggests that in fact, this month, nothing particularly exciting took place.   In year-on-year year-to-date terms, the chart shows that imports of iron and copper ores and concentrates, together with crude oil and natural gas are all growing, though not trending particularly strongly.  Earlier inventory building for crude may account for some of the current strength in oil, and the same is also probably true for natural gas as we head into the colder winter months.   Imports of copper and iron ore and concentrates have held fairly steady in these terms at about 8.5% YoY YTD in recent months, which is probably a bit more than the state of manufacturing or construction would indicate, so there may be a more positive story brewing here. However, we think it is too soon to draw any firm conclusions in the face of such conflicting numbers, and this month's figures aren't really out of the ordinary compared to recent months either.  Not shown here are imports of refined petroleum, which are running at a 95% rate of growth, though mainly due to increases in export quotas for similar products, and coal imports are also running strongly, though the rate of increase looks to be slowing.    No change to our GDP forecasts for now Until we get a better idea of what is happening here, we are not going to be revising our GDP figures for the year, which we recently revised higher to 5.4% for full year 2023. Whether there are the beginnings of a trade-off building between a weaker external environment and a firming domestic economy is an appealing hypothesis, but one that does not have enough support for now to run as a central forecast. Further data is needed.

Asia Morning Bites Rising US Treasury yields should weigh on Asian FX today. Also, the RBA has released its latest monetary statement and India will report industrial production later.   Global macro and markets: Global markets:  A disappointing auction for 30Y Treasuries yesterday fed through to higher yields across the curve.  The yield on the 30Y bond rose 15bp to 4.765%, and that lifted yields on the 10Y (+14.9bp to 4.624%) and also the 2Y (+8.8bp to 5.02%). Despite nosing below 4.5% the other day, it looks for now as if yields are happier this side of that line, though will get tested again next week as US inflation numbers look set to drop sharply. Our US economist, James Knightley, thinks that US inflation could drop to around the target range by 2Q24.  Jerome Powell took a tough line in his remarks early this morning at the IMF conference, saying that the Fed wouldn’t hesitate to hike if needed and that the inflation fight had a long way to go. These comments may also have helped to lift yields. Powell’s tone makes sense. There is no point in corralling the market into expecting cuts until shortly before they look necessary. However, there will come a point where the rhetoric and the macro diverge to such an extent that either markets call the Fed’s bluff, and start to price in cuts, or the Fed has to do an abrupt turn and throw in the towel. For now, though, further tough talk is likely. Whether this transforms into tough action will depend on the run of the macro data. Higher yields gave the USD another lift, and EURUSD dropped back to 1.0665. The AUD, which has been trading heavily since the RBA hike, dropped to 0.6360.  Cable is down to 1.2216 and the JPY has risen up to 151.35. Asian FX was slightly softer yesterday against the USD, and will likely soften further today in line with the overnight G-10 FX moves. USDCNY is back to 7.2846 and pushing back in the direction of 7.30. US stocks don’t like these higher yields, and the S&P 500 dropped 0.81% yesterday. The NASDAQ was down 0.94%. Chinese stocks were mixed to flattish, with the CSI 300 up just 0.05% and the Hang Seng down 0.33%. G-7 macro:  There was nothing too exciting on the macro calendar yesterday. Even the weekly US jobless claims were close to expectations, with a slight overshoot for the continued claims numbers. There is no US data to speak of today, and UK production and trade figures dominate the G-7 calendar. These won’t have any broader bearing on markets outside the UK. Australia:  The RBA has released its November statement on monetary policy. We did not think that the statement released with the earlier rate hike decision was particularly dovish, though the market certainly seemed to think so. We don't think this longer more detailed statement is particularly dovish either, but the link is included above, so have a read and make up your own mind. Once again, the market seems to have decided that whatever the content of the statement, lower yields are the way to go. We think that a bit of reflection may see that view reverse in time. That said, we do think rates have probably peaked. But there are risks to this view. The first is that inflation may well increase again when October data is released. Secondly, the monthly run rate (MoM% increase in the price level) has been 0.6% for the last two months, and that is way too high to be consistent with the RBA's inflation target. So that needs to drop, or there is still a chance, in our opinion, that rates have to rise again next year.   India:  September production data will be released later this evening, and the consensus forecast is for a drop from the 10.3% YoY rate of growth recorded in August, to just 7.0% in September. This would be consistent with a decline in the level of production, as implied by the sub-50 PMI index in September. We wouldn’t be surprised if the production growth figure came in a fair bit higher than that, as we aren’t convinced that, despite the PMI numbers, we will see an actual contraction in activity in September. What to look out for: India industrial production and Fed speakers India industrial production (10 November) US University of Michigan sentiment (10 November) Fed Bostic and Logan speak (10 November)

All eyes on US inflation and the government's funding deadline  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   What everyone – most investors, every household and every politician want to see and to sense right now is the end of the global monetary policy tightening cycle, and the beginning of the end starts mostly with the Federal Reserve (Fed).   Until the beginning of this month, we have seen a pricing that reflected the market's belief that the Fed is going to keep the rates high for long because the world is now braced for an extended period of high inflation. And the rapid rise in the US long term yields because of this very belief that the Fed will keep rates high for long helped the Fed keep its rates steady, at least at the latest meetings. The US 10-year yields spiked above the 5% mark in the second half of October, stagnated close to this peak for a week.   Then, a sufficiently soft set of jobs data from the US at the start of the month, combined with a record but lower-than-expected Treasury borrowing plans slowed down the sharp selloff in US Treasuries and reversed market sentiment. Investors, since the beginning of this month, began flocking back into the US long-term papers. The US 10-year yield tipped a toe below the 4.50% level, this time. We are talking about a plunge of more than 50bp for the 10-year paper in about two weeks.   And finally, last week, two bad 10- and 30-year bond auctions in the US, and Fed Chair Powell's warning that the Fed could opt for more rate hikes if needed, brought bond investors back to earth. And the 10-year yield rebounded from a dip. This is where we are right now – a period of heavy treasury selloff, followed by significant inflows, and uncertainty.   The uncertainty regarding when the Fed will be done hiking the rates is killing everyone, but even the Fed itself doesn't know when tightening will/should end. It will depend on crucial economic data, like inflation, jobs, and growth figures. The US jobs data is giving signs that the US labour market has started loosening. The US growth numbers are off the chart, but spending isn't necessarily sitting on solid ground, as the US credit card loans go from peak to peak and the credit card delinquencies have taken a lift. The delinquency rate is above the pre-pandemic levels, and just around the post-GFC levels – this means that the Americans spend on debt that they can't pay back anymore. And the US government debt is – as you know - growing exponentially, and Americans pay significantly higher interest on their debt because the rates went from near zero to above 5% in less than two years.  But uncertainty regarding the US debt does not mean that the US Treasuries will fall off grace, because there is nothing comparable to the US Treasuries that could replace US treasuries in a portfolio for low-risk allocations.   Volatility in this space is however unavoidable. This week, we will plunge back into the US political saga, as the government short-term funding deadline is due 17th of November and not much progress has been made to seal a fresh deal. And remember this, the last time the US politicians agreed on a short-term relief package, Joe Biden was forced to leave the funding for Ukraine outside of it. Since then, a new war in Gaza popped up, and the US is now expected to bring financial contribution there, as well.   We could see the US long-term yields recover from the past weeks' decline. Depending on the new funding resolution – or the lack thereof – we could see the US 10-year yield return above 4.80%.   Happily, slower inflows into US treasuries will be a relief for the Fed, which needs the yields to remain high enough to restrict the financial conditions without the need for more action. But the US political shenanigans are only one part of the equation. The other part is...economic data.   The all-important inflation data due Tuesday is going to impact the inflow/outflow dynamics in US Treasuries before the worries grow into the Friday funding deadline. A sufficiently soft inflation read should keep bond traders in appetite for further purchases and mask a part of the political worries, while disappointment could keep buyers on the sidelines and amplify a potential political-led selloff. The good news is that the US headline inflation is expected to have eased to 3.3% in October, from 3.7% printed a month earlier. Core inflation is seen steady around the 4.1% level. The bad news is, the expectation is soft and could be hard to beat.   The US dollar sees resistance at around the 50-DMA, the US stocks continue to cheer the latest pullback in the US yields. The S&P500 closed last week with a beautiful rally, that led the index to above its 100-DMA for the weekly close. The big tech remains the driver of the S&P500 gains as Microsoft hit a fresh high on Friday and Nvidia remained bid a few points below its ATH on news that Chinese AI startup bought enough Nvidia chips before the US exports curbs kicked in. This week, US big retailers will announce their Q3 results and will give a hint on the US consumer trends, health and expectations. Earnings could be mixed but the overall outlook will likely be morose.   

Back to US: retail sales, Big Retail earnings & US political jitters   Yesterday's rush to open fresh long US Treasury positions was likely intensified by a hurry to cover short positions. We shall see a correction in the US yields, as the Fed members still maintain their position for 'higher for longer' interest rates. But the market position is clear. The pricing now suggests a 50bp cut from the Fed by July next year; the sweet and sour cocktail of softening jobs market and easing inflation suggests that the Fed's next move will probably be a rate cut, rather than a rate hike.   So yes, ladies and gentlemen, the way is being paved for a potential Santa rally this year. But the Fed will continue to calm down the game, and any strength in the US economic data should reinforce the 'high for long' rhetoric and tame appetite.  Investors will watch the US retail sales data today. A strong figure could pour cold water on heated Fed cut bets. A soft figure, on the other hand, could bring in more buyers to US bond markets.   On the individual front, Home Depot shares rallied more than 5% yesterday. Earnings and revenue narrowed and the company released a cautious year-end guidance, but the results were better than expected. Target is due to report today, and Walmart on Thursday.  To add another layer of complexity – on top of the economic data and corporate earnings – the US political scene will impact bond pricing in the next few days. The US politicians try to avoid a government shutdown by Friday. The latest news suggests that the odds of shutdown diminished yesterday as House Speaker Mike Johnson gained more Democratic support for his interim funding plan. The interim plan however excludes aid for Ukraine, aid for Israel and could lead to a two-step shutdown at the start of next year. And it does not include the steep spending cuts that the hardcore Republicans are looking for. In summary, the political mess continues.   In the best-case scenario, the US politicians will agree on another short-term relief package and avoid a government shutdown, push away the threat of another rating cut – from Moody's this time. The latter would maintain appetite in US bonds and support a further rally in the US stocks. In the worst-case scenario, the US government will stop its operations by the end of this week and the political chaos will lead to a bounce in US yields and stall the equity rally.   

Back to US: retail sales, Big Retail earnings & US political jitters   Yesterday's rush to open fresh long US Treasury positions was likely intensified by a hurry to cover short positions. We shall see a correction in the US yields, as the Fed members still maintain their position for 'higher for longer' interest rates. But the market position is clear. The pricing now suggests a 50bp cut from the Fed by July next year; the sweet and sour cocktail of softening jobs market and easing inflation suggests that the Fed's next move will probably be a rate cut, rather than a rate hike.   So yes, ladies and gentlemen, the way is being paved for a potential Santa rally this year. But the Fed will continue to calm down the game, and any strength in the US economic data should reinforce the 'high for long' rhetoric and tame appetite.  Investors will watch the US retail sales data today. A strong figure could pour cold water on heated Fed cut bets. A soft figure, on the other hand, could bring in more buyers to US bond markets.   On the individual front, Home Depot shares rallied more than 5% yesterday. Earnings and revenue narrowed and the company released a cautious year-end guidance, but the results were better than expected. Target is due to report today, and Walmart on Thursday.  To add another layer of complexity – on top of the economic data and corporate earnings – the US political scene will impact bond pricing in the next few days. The US politicians try to avoid a government shutdown by Friday. The latest news suggests that the odds of shutdown diminished yesterday as House Speaker Mike Johnson gained more Democratic support for his interim funding plan. The interim plan however excludes aid for Ukraine, aid for Israel and could lead to a two-step shutdown at the start of next year. And it does not include the steep spending cuts that the hardcore Republicans are looking for. In summary, the political mess continues.   In the best-case scenario, the US politicians will agree on another short-term relief package and avoid a government shutdown, push away the threat of another rating cut – from Moody's this time. The latter would maintain appetite in US bonds and support a further rally in the US stocks. In the worst-case scenario, the US government will stop its operations by the end of this week and the political chaos will lead to a bounce in US yields and stall the equity rally.   

FX Daily: Dollar bears may have jumped the gun The dollar plummeted yesterday after a softer-than-expected US CPI reading. But we still think a turn in activity data - more than the disinflation story - is needed to take the dollar sustainably lower, and the move appears overdone also from a short-term valuation perspective. US retail sales will tell us whether the dollar can start to recover today. USD: Dollar slump looks overdone We had pointed to the risk of a USD correction yesterday given the chances of a soft CPI reading, and the tendency of the dollar to underperform after key US data releases/events. The move was, however, quite extreme. If position-squaring did play a role in exacerbating the size of the dollar correction, the depth of the drop in Treasury yields means the FX shifts have taken their cues from a substantial repricing of monetary policy expectations. The Fed funds futures curve erased any residual bet of monetary tightening after the lower-than-expected October inflation report, and now prices in the start of the easing cycle in June and 50bp of cuts by July. We have no reason to argue against this pricing from a macro perspective: our US economist discusses here how disinflation has much further to go, and we currently forecast 150bp of Fed cuts in 2024, still more dovish than the 97bp priced in by the market. However, we’d be wary of jumping too aggressively on a dollar bear trend now. First of all, markets have moved a lot after a softer inflation reading, even though the narrative of disinflation being well underway is something that would hardly surprise the Fed. The month-on-month core print, by the way, came in at 0.227%, not too far from a rounded consensus 0.3%. Resilient growth is what's been keeping the dollar stronger, and while we expect the US to head into recession in 2024, there is no hard evidence just yet. In other words, strong US activity figures remain a very clear possibility in the near term and could trigger an inversion in the US bear run. Secondly, rates have moved significantly, but not enough to justify the huge dollar drop. According to our short-term fair value model, the dollar has moved into undervaluation (after the US CPI release) against all G10 currencies except for the Japanese yen, Canadian dollar and Norwegian krone. This is quite remarkable given the dollar had been generally overvalued in the short term for many months. Today, October retail sales will be watched closely after coming in very strong in September. Consensus is for a 0.3% MoM decline in the headline figure but a 0.2% increase in the index excluding auto and gas. The dollar should be very sensitive to the release. A soft reading may fuel speculation that softer growth is coming through and could add to disinflation to trigger more Fed dovish bets. However, US activity data has had a tendency to surprise on the upside, if anything, and it may be too early to see a slew of soft readings. Our view is that this USD bear run is overdone, and we expect another, or a few more rounds of dollar resilience into the New Year before a clear-cut dollar decline can emerge. PPI data will also be watched for confirmation that the disinflation process effectively accelerated in October. On the geopolitical side, keep an eye on headlines from the Biden-Xi Jinping meeting at the APEC summit.

GBP: Softer services inflation rules out BoE December surprise The chances of a Bank of England surprise hike in December were already very low, but this morning’s UK inflation figures for October are further helping a dovish case. Headline inflation dropped from 6.7% to 4.6%, and core from 6.1% to 5.7%: a slightly faster deceleration than consensus in both rates. We know the BoE primarily looks at services inflation, which noticeably undershot the Bank’s forecast (6.9%) by coming in at 6.6%. There are no other CPI releases before the next meeting, so along with the markets sticking to their view for a pause, there may be mounting speculation the BoE might soften its stance towards future policy direction. As we write this report this morning, markets are close to pricing in a first rate cut in the UK in June (23bp). We keep pointing to the fact that pricing in the Sonia curve appears a bit too conservative compared to that of the US and the eurozone in pricing monetary easing and that raises the risk of GBP underperformance as the UK economic outlook deteriorates. The combination of a tentative improvement in eurozone data and soft inflation figures in the UK should help build a floor around 0.8700 in EUR/GBP.

Having seen the cap come down in April, headline inflation slowed to 8.7% from 10.1% in March, and knowing that further reductions were coming in June and October it wasn't unrealistic to assume similar sharp slowdowns in these months as well, which is precisely what has happened with October CPI slowing to 4.6% and core CPI slowing to 5.7%.   Of course, we've heard a lot today from the UK Treasury, as well as the government that they have succeeded in their goal to get CPI below 5% by the end of the year, which is hilarious given that what we've seen today has happened despite them, and not because of them. Let's not forget this is the government which raised tax rates and made people worse off.   The reality is this was a goal that was always easier to achieve than not, given what we have been seeing in headline PPI numbers these past few months, and the fact we knew the energy price cap was keeping inflation higher than it should have been.   The actual reality is were it not for the design of the energy price cap, headline inflation would have fallen much quicker than it has, merely confirming the idea that there is no political intervention that can't make a big problem even worse, and which in turn helped to create the very stickiness we are seeing in wages growth which is making services inflation stickier than it might have been.   This has meant that UK services inflation has taken longer to come down than it should have, although we have seen a modest slowdown to 6.6% from 6.9% in September. The effect of the energy price cap is evident in where we've seen the biggest slowdown in October inflation, with household and services inflation declining -1.9% month on month, compared to an 8.7% increase in October 2022. Gas costs fell 31% in the year to October 2023, while electricity costs fell 15.6%, which is the lowest annual rate since January 1989.   That said gas and electricity prices are still well above the levels they were 2 years ago, with gas prices still higher by 60%, but nonetheless what the last 24 hours have told us is that its increasingly likely that central banks are done when it comes to further rate hikes, and that pricing is now shifting to who is likely to cut rates first.   On that count the jury remains out, however given the recent gains in the US dollar over the last few months, the repricing of rate risks suggests that the US dollar might still have the biggest downside risk even if the Fed is the last to start cutting.   On that score it looks to be between the ECB and the Bank of England when it comes to which will cut rates first with markets pricing 78bps from the Bank of England by June next year. At this point this seems a little excessive in the same way markets were pricing a 6.25% base rate back in June.   That said the thinking has shifted, and rather than higher for longer further weakness in the economic data will only reinforce the idea that rates have peaked and that cuts are coming, with the debate now on extent and timing. This is no better reflected than in the UK 2-year gilt yield which is now 100bps below its June peaks having fallen as low as 4.54% earlier today.    On the score of who is likely to be first out of the traps in rate cuts it's more than likely to be the ECB, perhaps as soon as the end of Q1 next year, with the Bank of England soon after, which will be good news for households, as well as governments when it comes to debt costs.   Despite today's undershoot on UK inflation the pound has managed to hold onto most of its gains against the US dollar of the last 24 hours having hit 2-month highs earlier today, above 1.2500 and closing above its 200-day SMA for the first time since 13th September yesterday.   The euro has also rallied strongly, similarly closing above its 200-day SMA, in a move that could signal further gains, while equity markets also rallied strongly. The strongest moves came in the Nasdaq 100 and S&P500 which posted their biggest one-day gains since April, with the Nasdaq 100 coming to within touching distance of its July peaks at 15,900. We need to see a concerted push through here to signal a return to the 2021 peaks.   The S&P500 similarly broke out of its downtrend from its July peaks, retesting its September peaks, with a break of 4,520 potentially opening the prospect of a return to those July highs at 4,590.   While US markets have rallied strongly, the reaction in Europe has been much more tepid which suggests an element of caution when it comes to valuations for European stocks. The DAX has managed to recover above its 200-day SMA and above its October highs, while the FTSE100 reaction has been slightly more measured compared to the FTSE250 which has seen strong gains this past two days, pushing up to 2-month highs in early trade today.    In summary today's inflation numbers are good news for consumers across the board, especially given that headline CPI has fallen below the base rate for the first time since 2016, however the Bank of England will still be concerned about services inflation, as well as wage inflation, which is still above 7%.   While markets are cheering the end of inflation it is clear that central bankers will be reluctant to do so less it return in 2024.

Pipeline pressures support the US soft landing view After yesterday’s big reaction to the benign CPI data, which saw risk assets rally hard and the dollar come off as interest rate expectations fell sharply, it is the turn of retail sales and producer price inflation today. It once again feeds the soft landing narrative with subdued price pressures and resilience in activity. Last month, US retail sales surprised to the upside, rising 0.7% month-on-month despite credit card transaction numbers looking weak and we get a repeat of that for today’s October report. Headline retail sales fell 0.1% MoM, but this was better than the 0.3% drop expected, while September’s 0.7% initial print has been revised up to 0.9% MoM growth. The details show motor vehicle sales fell 1%, which tallies with the drop in unit sales reported by manufacturers while furniture sales dropped 2% MoM – the fourth consecutive monthly decline, which is consistent with the collapse in housing transactions on the basis that when you move home buyers tend to also buy a few new items. Gasoline station sales fell only 0.3% MoM despite the price of gasoline plunging while department stores and miscellaneous stores had a tough month with sales down more than 1% MoM. On the positive side it was a good month for health & personal care (+1.1%) while groceries and electronic both rose 0.6% MoM. Clothing was flat on the month and non-store (internet) rose 0.2%. Therefore the control group, which better matches the trends of broader consumer spending via removing volatile items such as autos, gasoline, building materials and eating out, came in at +0.2% MoM as expected. This indicates decent resilience and supports our view that fourth quarter GDP growth may not be as weak as the consensus is currently predicting – consensus is currently predicting 0.7% annualised 4Q GDP growth while we are forecasting 1.5% GDP growth.   WoW change in credit card spending   There will no doubt be some scepticism of the resilience in retail sales given the credit card spending numbers have been so soft over the past couple of months – are we all really returning to cash? But this is the life of an economist at the moment – data inconsistencies everywhere.   PPI shows weak pipeline price pressures Meanwhile, pipeline inflation pressures as measured by PPI are very soft with headline producer prices falling 0.5% MoM versus +0.1% consensus while core (ex food & energy) was flat on the month (0.3% consensus). This means that the annual rate of producer price inflation has slowed to 1.3% year-on-year from 2.2% while core is at 2.4% versus 2.7% previously. With wage growth looking more subdued amidst rising productivity growth, it reinforces our view that we will start consistently getting 2% CPI YoY prints at some point in the second quarter of  2024, giving the Federal Reserve the ability to respond to any eventual economic weakness with interest rates cuts.   Import prices, PPI and CPI (YoY%)

Happily digesting By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Yesterday was about digesting Tuesday's softer-than-expected US CPI data, feeling relieved that the US Senate passed a stopgap spending bill to avert a government shutdown and welcoming a softer-than-expected producer price inflation, and a softer-than-expected decline in US retail sales – which came to support the idea that, yes, the US economy is probably slowing but it is slowing slowly, while inflation is easing at a satisfactory pace.   The sweet mix of the recent economic data backs the idea that the Federal Reserve (Fed) could achieve what they call a 'soft landing' following an aggressive monetary policy tightening – and more importantly stop hiking the interest rates.   At this point, investors are 100% sure that the Fed won't hike rates in December. They are 100% sure that the Fed won't hike rates in January. There is more than a quarter of a chance for a rate cut to be announced by March. And the pricing suggests that there is a higher chance for a rate cut in the Fed's May meeting, than not.   Conclusion: investors threw the Fed's 'higher for longer' mantra out of the window this week.   BUT this is certainly as good as it gets in terms of Fed optimism. If the markets go faster than the music, the Fed must calm down the game by a tough talk, and if needed, by more action. The Fed's Mary Daly expressed her concerns about the Fed's credibility if it declared victory over inflation prematurely. And credibility is the most important tool that a central bank has. When the credibility is broken, there is nothing to break.    

EUR: No news is good news Perhaps helping the euro this week has been the lack of key eurozone data. Over the last couple of months, eurozone data releases have pulled the rug from under any emerging EUR/USD rally and have emphasised the pessimism in this trading bloc. Looking at the calendar, we cannot see any important releases until the November PMIs next Thursday. This suggests EUR/USD could hang onto this week's gains for a few more days.  We could see a 1.0800-1.0900 range develop over the next few days and certainly, a move back under the 1.0765 area would undo all of this week's positive developments. In terms of the bigger picture, we doubt EUR/USD will lead next year's dollar bear trend. And we favour benchmark cross rates, such as EUR/AUD to come lower. Before that, however, we currently forecast EUR/USD staying quite steady - not far from current levels - into year-end.

Industrial output in the eurozone fell more than expected, as total production dropped 1.1% on month in September, while forecasts were for output to be down 0.8% on month. However, this report did not lead to any noticeable movements in the foreign exchange market. Investors were clearly waiting for US data, the forecasts for which also carried a negative tone, as they intended to extend the dollar selloff. However, the annual trend in retail sales slowed from 4.1% y/y in September to 2.5% y/y in October, whereas a slowdown from 3.8% to 2.1% was expected. So not only were the actual reports better, but the previous results were also revised for the better. Afterwards, a full-fledged rebound started, and the dollar was able to improve its position. The only thing we can highlight for today is the initial jobless claims in the United States. The total number is expected to increase by 8,000. The changes are extremely insignificant and are unlikely to have a serious impact on the current situation. Considering that the rebound is not yet complete, we expect the dollar to gradually rise further.   The EUR/USD pair has entered a retracement phase due to the high overbought levels. The level of 1.0900 acts as resistance, and we observed a decline in the volume of long positions near this area. On the four-hour chart, the RSI downwardly crossed the 70 line. This technical signal indicates that the euro's overbought conditions have started to ease, given that a retracement phase is being formed. On the same time frame, the Alligator's MAs are headed upwards. The signal corresponds to the upward cycle, ignoring the ongoing retracement. Outlook The ongoing retracement persists, which is why traders are considering a scenario with the pair moving towards the level of 1.0800. The succeeding movement will depend on the price's behavior near this level—whether sellers can keep the quotes below it or if the level will act as support. The complex indicator analysis points to the retracement phase in the short-term and intraday periods.  

As the new year approaches, the UK remains exposed to elevated recession risks, despite a slight uptick in business growth this month, according to recent economic data.  The latest survey of purchasing managers at UK firms reveals a marginal return to growth in November, ending three months of contraction as the Flash UK PMI composite output index, tracking overall economic activity, rose to 50.1 from October's 48.7, the first time in four months it exceeded the 50-point mark indicating stagnation. While the services industry experienced growth and manufacturing contracted at a slower rate, concerns linger as reduced discretionary consumer spending and cost-of-living pressures impact sales and as total new work has decreased for the fifth consecutive month while businesses raised prices in November, passing on wage inflation and higher fuel costs. Despite a pause in interest rate hikes and a slowdown in inflation measures, the survey suggests the UK GDP may remain broadly flat in the final quarter of 2023, prompting concerns for the Bank of England about persistent domestic inflation pressures.  The situation for the bank of England remains precarious and it appears that the recent tax measures announced by the chancellor will do little to help the average consumer that might find themselves struggling with higher bills as the new year approaches. The risk of recession remains high and unless we see a significant rebound in economic activity with a strengthening consumer the possibility for further weakness for the UK economy will continue to increase leaving the central bank with even fewer choices.  

Disinflation is on this year's Thanksgiving menu The US dollar index rebounded yesterday, and the rebound was on the back of some data points that cooled down the Fed doves' enthusiasm. First, the short-term inflation expectations advanced to a seven-month high in November, with Americans expecting a 4.5% jump in prices over the next year. Then, the University of Michigan's sentiment index improved more than expected, and the weekly jobless claims fell the most since June – all negative for the Federal Reserve (Fed) doves.   Adobe Analytics said that Thanksgiving shopping will be up by 5.4% this year, and no it is not because of inflated prices. On the contrary, according to Adobe e-commerce prices fell for the 14th straight month, by 6% from last October to this October and if we factor in the online deflation, the Thanksgiving spending growth would be an eye-popping 12%. But it's always the same old story. Americans spend, but they spend their savings, and worse, they spend on debt. In this context, the use of buy now spend later options has jumped by 14.5% since last year – and it will certainly hit back, one day. For now, the US 2-year yield remains real steady around the 4.90% level, the US 10-year is headed back to fresh lows since this fall, after a short attempt for a rebound yesterday and the dollar index is back to testing the 200-DMA to the downside.  Happily, for the American people, the Fed doves and all of us, disinflation is on the menu of this Thanksgiving. Turkey prices cost around 5.6% less than last year, stuffing mix costs nearly 3% less, pie crusts are nearly 5% cheaper and cranberry prices are down by more than 18%. It is said that an average 10 people Thanksgiving feast would cost less than $62 - that's less than $6.2 per person, down from around 4.5% compared to last year.   Last word  Thanksgiving is one of the calmest trading days of the year. Expect thin trading volumes and higher volatility.  

CEE: Turkey hiking rates again Today's calendar in the region is basically empty. Elsewhere today, we have a central bank meeting in Turkey. We expect another rate hike of 250bp to 37.5%, which is broadly in line with expectations, but surveys show a wider range of rate hikes. The latest inflation release in October showed the underlying trend starting to improve not only for the core rate but also the headline. Accordingly, we expect the bank to consider a slower hike. However, risks are on the upside given strong tightening moves since August. In FX, yesterday brought an unexpected turn in Czech rates. The market was heavily paid across the curve, more so than elsewhere in the CEE region. The rates move thus shot the interest rate differential up for once, erasing the potential for the CZK weakness we mentioned earlier. EUR/CZK responded by moving lower and back to 24.450. For now, this seems to match the rate move exactly. However, it is hard to say where rates will head today. Yesterday's statement from the Czech National Bank, released after the rate move, suggests that the discussion about waiting for January inflation continues. On the other hand, weak economic data and a stronger koruna are reasons for lower rates and bets on an earlier rate cut. Despite the timing of the first rate cut, we think the short end of the curve should be lower, leading the CZK to weaker levels. Thus, we remain negative on the currency.

No surprise in November The National Bank of Hungary (NBH) reduced its base rate by 75bp to 11.50% at its November rate setting meeting. At the same time, the entire interest rate corridor was lowered by 75bp, maintaining the symmetry of the +/- 100bp range. Although this was again a unanimous decision, the menu seen in October was also present at this rate-setting meeting. That is, the Monetary Council decided between a 50, 75 or 100bp cut. The statement and press conference made it clear what the reasoning was for sticking with the proverbial golden mean.   The pros and cons canceled each other out A hawkish shift compared to the October meeting was dropped due to favourable incoming macroeconomic data. Hungarian inflation returned to single-digit territory, with the underlying monthly repricing pattern showing similarities to 2019-2020 (pre-shock pattern). The improvement in the external balance continued on the back of rising export capacity, supported by shrinking domestic demand, which reduced import needs and the energy balance also improved. Last but not least, together with the ongoing disinflation, the Hungarian economy exited the recession and the incoming high-frequency data suggest that the year-on-year print could return to positive territory from the fourth quarter of 2023. However, all these positive changes have been accompanied by significant external risks. Geopolitical tensions and sanctions are still with us, and we can't rule out another shock to energy and commodity markets as a result. The armed conflicts in Ukraine and Gaza keep the economic landscape highly unpredictable. On the macroeconomic side, there are ongoing labour market tensions and recessionary fears in the international environment. Against this background, the Monetary Council decided to maintain its cautious approach and closed the door on the dovish 100bp easing option.   Steady as she goes Even before today's official and explicit forward guidance, we expected the National Bank of Hungary to stick to the recent step size as the baseline pace of further rate cuts. During the background discussion, Deputy Governor Virág made it clear that – based on the latest information – the policy rate could fall below 11% by the end of the year and reach single digits in February 2024. We wouldn't go so far as to say that this is a pre-commitment, but it's certainly the closest thing to it. Such a rate path would imply a continuation of 75bp rate cuts up to (and including) the February rate-setting meeting. In general, the statement and the press conference did not bring any changes either in the tone of monetary policy or in the main functions that influence monetary policy decisions. As a result, today's rate-setting meeting can be described as a well-managed non-event.   Our market views After the NBH meeting, everything seems to be in line with market expectations and rates have not moved much. This is good news for the HUF, which has re-established a relationship with rates over the last three days and has weakened to 380 EUR/HUF before the meeting. Still, the recent rally in rates points to weaker HUF levels, but this will probably not be the case for now. A stable NBH and higher EUR/USD could offset this, plus we could see some progress in negotiations with the EU in the near term. Overall, today's meeting thus seems to be positive for HUF, which will halt the weakening from recent days. In the short term we probably need to see some catalysts for new gains, e.g. the EU story, but overall we remain positive on the HUF. If everything goes in a positive direction, then we believe EUR/HUF will move into the 370-375 range before the year ends. On the other hand, the current weakness probably hasn't changed the market's long positioning much and we should still keep that in mind if bad news comes. Rates have rallied a lot in recent weeks and have closed the biggest gaps between market pricing and our forecast. But something is still missing to perfection and we still see the whole curve lower but rather flatter later. At the short end of the curve, we think the market needs to accommodate the set pace of 75bp rate cuts as the central bank confirmed today, while the long end remains significantly elevated also because of high core rates. Thus, as we mentioned earlier, the long end in our view has more potential to rally further and the curve has steepened too early and too quickly, closing the gap with the region.

Next week in the US, we will be closely following the ISM manufacturing index and the Fed's favoured measure of inflation. All eyes will be on CPI releases in the eurozone, where we expect continued improvement and the core rate falling to 4%. Elsewhere, we expect to see positive third-quarter GDP releases in Hungary and Poland.   US: Closely following the ISM manufacturing index for any signs of a rebound Markets have firmly bought into the view that the Federal Reserve won’t hike interest rates any further and that 2024 will see a series of interest rate cuts from the second quarter onwards. Around 90bp of cuts are currently priced, whereas we're forecasting 150bp for next year on the basis that consumer weakness is likely to be a key theme given subdued real household disposable income growth, fewer savings resources, and less borrowing as interest rates continue rising. This should allow inflation to slow more quickly, giving the Federal Reserve greater scope to loosen monetary policy. Next week’s data flow includes the Fed’s favoured measure of inflation, which we expect to show a 0.2% month-on-month rate of price increases. This is broadly in line with what the central bank wants to see and, if repeated over time, would bring the annual rate of inflation as measured by the core personal consumer expenditure deflator back to 2%. We also get more housing numbers, which should signal healthy new home sales, but this is due to the lack of availability of existing homes for sale. Prices should continue rising in this environment, but with home builder sentiment having plunged in recent months, cracks are starting to form as the legacy of high borrowing costs bites more and more harshly. We will also be closely following the ISM manufacturing index for any signs of a rebound after having been in contraction territory for the past 12 months. Eurozone: Core inflation to continue improving to 4% Next week, we'll see new inflation numbers for the eurozone. Inflation dropped more than expected in September and October, and the question now is whether the low inflation trend will continue. We expect some continued improvement, with core inflation falling to 4% and headline inflation dropping to 2.7%. Still, there are signs of continued inflation pressures that shouldn’t be ignored after a few encouraging data releases. The November PMI showed that businesses still see increased input costs, resulting in more survey respondents indicating that selling price inflation ticked up. Thursday will tell us whether inflation has continued its rapid normalisation. Poland: We forecast a further decline in core inflation Flash CPI (Nov): 6.7% YoY Our forecasts suggest that in November, CPI inflation inched up to 6.7% year-on-year from 6.6% YoY in October, marking the first increase since it peaked in February. We expect a further decline in core inflation, but it will be accompanied by less favourable developments in energy prices as gasoline prices bounced back after two months of declines. GDP (3Q23): 0.4% YoY We expect the flash estimate of 0.4% YoY to be confirmed by the final data. We will also learn the composition of third-quarter GDP. According to our forecasts, household consumption declined slightly (-0.2% YoY), while fixed investments continued expanding at a solid rate (7.5% YoY). At the same time, we project a smaller drag from a change in inventories and a lower contribution of net exports than observed in recent months. Monthly data suggests that economic recovery continued at the beginning of the fourth quarter as annual change in industrial output and retail sales turned positive in October. Hungary: Novembers manufacturing PMI expected to remain in positive territory The Statistical Office will release the details behind Hungary's strong GDP growth in the third quarter next week. We see positive contributions from industry, construction and agriculture. On the expenditure side, we think net exports were the main driver of the improvement, along with some early positive signs on consumption. November's manufacturing PMI could remain in positive territory, with export capacity still in good shape, reinforcing our view that year-on-year GDP growth could also return to positive territory in the fourth quarter. Key events in developed markets next week Key events in EMEA next week    

CEE: Quiet first half of the week The first half of the week basically has nothing to offer in the region. We will see the first interesting data on Thursday. In Poland, November inflation will be published, where we expect a slight increase from 6.6% to 6.7% YoY, slightly above market expectations. Poland's second estimate of third-quarter GDP will also be released, which will offer a breakdown. We expect a confirmation at 0.4% YoY. On Friday, we will see the same GDP numbers in Hungary and the Czech Republic and also PMI in the region. The Czech Republic will also release budget numbers, and Moody's will publish a rating review of Poland. We don't expect any changes, but it will be interesting to see the assessment of the political and fiscal situation after the elections.  The zloty did not move much last week despite confirmation of an economic recovery. However, the short end of the rate curve is gradually moving up as we expected, which we think should push EUR/PLN down. Of course, the long positioning of the market is good to keep in mind here and will likely be an issue for faster PLN appreciation. These days, we see EUR/PLN below 4.360.  The koruna strengthened last week after a surprise paying flow and maybe some hints of hawkishness from the Czech National Bank (CNB). However, we believe that weak economic data and more mixed CNB views will bring back the rate-cutting discussion and that market rates will go down again. The first signal was already visible on Friday, and rates are thus pointing to a weaker koruna back above 24.450 EUR/CZK.  The forint rebounded last week after the National Bank of Hungary (NBH) meeting but still failed to hold new gains. We think EUR/HUF should go down from these levels, but we need to see new triggers. Last week, we saw positive headlines from the EU money story – and we may see more this week, which would certainly help. Rates also bounced up after the central bank meeting. Overall, we are positive on the HUF and expect levels below 380 EUR/HUF in the coming days. 

Australian dollar extends gains Australian retail sales expected to decelerate to 0.1% The Australian dollar has extended its gains at the start of the week. In the European session, AUD/USD is trading at 0.6603, up 0.28%. The Aussie has posted an impressive streak, rising 3.8% against the greenback since November 14th. Australia releases retail sales for October on Tuesday. The consensus estimate stands at a negligible 0.1%, compared to a strong 0.9% gain in September. The sharp gain, which indicated resilience in consumer spending, provided support for the RBA to raise rates at the November meeting. If retail sales misses the estimate, it could sour sentiment towards the Aussie and send the currency lower. RBA Governor Michele Bullock will speak at an event in Hong Kong on Tuesday and investors will be looking for hints about what the RBA is planning at its meeting on December 5th. RBA to undergo major overhaul Changes, big changes are coming to the Reserve Bank of Australia. The Australian government announced it would introduce legislation to overhaul the central bank. This follows an independent review which called for sweeping changes at the RBA. There has been much criticism of the RBA for its pledge not to raise rates before 2024, only to embark on a tightening campaign which has raised the cash rate to 4.35%. The new Governor, Michele Bullock, has said she is favour of the changes. Last week, Bullock said on Tuesday that inflation has peaked and that the upside risk to inflation was domestic and demand-driven. Bullock noted that inflation had dropped from 8.0% to 5.5% in less than a year, but it would take much longer for inflation to drop that amount again and fall to 3%. The RBA’s target range is 2%-3%. The RBA remains hawkish and raised rates earlier this month after holding rates for four straight times.  

German GDP shrinks in Q3 US to release manufacturing and services PMIs The euro is almost unchanged on Friday. In the European session, EUR/USD is trading at 1.0903, down 0.03%. German economy declines German GDP posted a minor drop in the third quarter, coming in at -0.1% q/q. This was down slightly from -0.1% in the second quarter and matched the market consensus. On an annualized basis, GDP declined by 0.4%, down from a revised o.1% gain in Q2 and missing the market consensus of -0.3%. The consumer spending component of GDP decelerated in the third quarter and was a key driver of the decline in GDP. German consumers remain in a sour mood and are being squeezed by rising interest rates and a high inflation rate of 3.8%. The German business sector is also pessimistic about economic conditions. The Ifo Business Climate index managed to climb to 87.3 in November, up from 86.9 in October but below the market consensus of 87.5. A reading below 100 indicates that a majority of the companies surveyed expect business conditions to deteriorate in the next six months. Earlier this week, German services and manufacturing PMIs pointed came in below 50, which points to contraction. The manufacturing sector is particularly weak and has been in decline since June 2022. It has been a relatively light week for US releases, with markets back in action after the Thanksgiving holiday. Later today, the US releases manufacturing and services PMIs, with little change expected. Still, the markets will be watching carefully, as the data will provide insights into the strength of the US economy. The consensus estimates for November are 49.8 for manufacturing (Oct: 50.0) and 50.4 for services (Oct. 49.8). If the readings diverge significantly from the estimates, we could see some strong movement from the US dollar before the weekend.   EUR/USD Technical There is resistance at 1.0943 and 1.0997 1.0831 and 1.0748 are providing support  

New Zealand retail sales flatline in Q3 US releases PMIs later today The New Zealand dollar has posted slight gains on Friday. In the European session, NZD/USD is trading at 0.6059, up 0.17%. The New Zealand dollar is headed to a second-straight winning week and has sparkled in November, with gains of 4% against the US dollar. New Zealand retail sales unchanged The New Zealand consumer hasn’t been in the mood to spend and the markets were braced for a decline in third-quarter retail sales. The news was better than expected, however, as retail sales were flat at 0.0% q/q, breaking a streak of three straight losing quarters. The improvement in retail sales points to resilience in the New Zealand economy. On an annual basis, retail sales came in at -3.4%, little changed from the second-quarter reading of -3.5%. The sharp decline is a result of the central bank’s aggressive tightening and an inflation rate of 5.6%, which is very high and well above the 1%-3% target band. The Reserve Bank of New Zealand meets on November 29th and is expected to leave the cash rate unchanged at 5.5%. The RBNZ has held rates three straight times and market speculation is rising that the RBNZ will pivot and trim rates in 2024. The RBNZ is unlikely to send any signals about cutting rates, however, especially with inflation well above the target. I expect the RBNZ to maintain its ‘higher for longer’ policy, which would mean further rate pauses well into 2024. This would provide RBNZ policy makers the flexibility to raise rates if inflation unexpectedly rises or to trim rates once inflation drops closer to 3%, which is the top of the target range, without risking a loss of credibility.   The US wraps up the week with the release of manufacturing and services PMIs, with little change expected. Still, the markets will be watching carefully, as the data will provide insights into the strength of the US economy. The consensus estimates for November stand at 49.8 for manufacturing (Oct: 50.0) and 50.4 for services (Oct. 49.8). If either of the PMIs miss expectations, that could translate into volatility from the US dollar in the North American session. . NZD/USD Technical NZD/USD continues to put pressure on resistance at 0.6076. The resistance line 0.6161 There is support at 0.5996 and 0.5885    

Mixed feelings By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve (Fed) President Jerome Powell pushed back against the rate cut bets at his speech given in Atlanta last Friday. He is of course playing the card of 'high for long' rates to tame inflation, yet he hinted that the Fed will probably not hike rates when it meets this month. He said that the US monetary policy is 'well into restrictive territory' and that the fell of effect of higher rates to combat inflation is working its way through economy. 'We are getting what we wanted to get,' said Powell. And indeed, inflation is cooling, people start to spend less, and the job market loosens. But in parallel, the financial conditions are loosening fast, as well. Hence the market optimism and stocks/bond gains become increasingly vulnerable to hawkish Fed comments, and/or strong economic data. The US jobs data will take the center stage this week. Investors expect further fall in US jobs openings, less than 200'000 job additions last month with slightly higher pay on month-on-month basis. The softer the data, the better the chances of keeping the Fed hawks away from the market.   Unsurprisingly, the part of Powell's speech where he pushed back against rate cut expectations went fully unheard by investors on Friday. On the contrary, the Fed rate cut expectations went through the roof when it became clear that the Fed will stay pat again this month. The US 2-year fell to nearly 4.50% on Friday, the 10-year yield tipped a toe below the 4.20% mark. The S&P500 flirted with the summer peak, flirted with the 4600 level and closed the week a touch below this level, while the rate sensitive Nasdaq closed a few points below the 16000 and iShares core US REIT ETF jumped nearly 2.70% last Friday.   The SPDR's energy ETF, on the other hand, barely closed above its 200-DMA, as last week's OPEC decision to cut the production supply by another 1mbpd and to extend the Saudi cuts into next year barely impressed oil bulls – even less so given the apparent frictions at the heart of the group regarding this supply cut strategy when prices keep falling. The decline in oil prices continues this Monday. The barrel of US crude remained aggressively sold near the 200-DMA last week, and we are about to step into the $70/73pb region which should give some support to the market. With the clear deterioration of the positive trend, and the lack of any apparent boost to the oil market following last week's OPEC meeting, there is a chance that we will see oil finish the year below the $70pb mark. An increasingly shaky OPEC unity, record US production, a slowing global economy, deteriorating global demand outlook and efforts to shift toward cleaner energy sources weigh heavier than the supply worries. As such, the $100pb level becomes an increasingly difficult target to reach. And even though the COP28 president Mr. Al Jaber said last weekend that there is 'no science' behind demands for phase-out of fossil fuels – yes 70'000 people flew to Dubai to hear that there is no evidence that fossil fuel is destroying climate – efforts to phase-out fossil fuel continues at full speed with solar panel installation surpassing the most optimistic estimates according to Climate Analytics.  In the FX, the US dollar's positive attempt above the 200-DMA was halted by Powell's speech on Friday – or more precisely by investors' careful extraction of all the dovish elements in that Powell speech. Both the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) will likely keep their rates unchanged this week, but the RBA will certainly sound hawkish faced with worries of 'home-grown' inflation. The AUDUSD stepped into the bullish consolidation zone following a 6+% jump since the October dip and could gather further strength this week. The EURUSD, on the other hand, remains under growing selling pressure despite FX traders' hesitancy regarding what to do with the US dollar. The pair sank to 1.0830 on Friday and is preparing to test the 200-DMA, which stands near 1.0820, to the downside. The easing Eurozone inflation, along with slowing European economies, boost the dovish ECB expectations. The final PMI data will confirm further contraction in the Eurozone last month, as the Eurozone GDP read will likely confirm a 0.1% contraction last quarter. Coming back to the EURUSD, the pair will likely see a solid support near 1.0800/1.0820, which includes the 200-DMA and the major 38.2% Fibonacci retracement on October – November rebound. And clearing this support should pave the way for an extended selloff toward 1.0730.    

GBP: ECB vs. BoE story dominates Dovish commentary from the ECB has now seen investors pricing ECB rate cuts several months ahead of the Bank of England (BoE) next year and expectations build of a deeper easing cycle in the Eurozone than in the UK. We disagree with that pricing and think the BoE will deliver more hikes than the ECB next year. This probably means that EUR/GBP does not need to spend too much time below 0.8600. Indeed, 0.8500 represents very strong support and we remain happy with our forecasts of EUR/GBP edging up to the 0.88/0.90 area into next year. The UK data calendar is very quiet this week, with just Friday's release on inflation expectations of note. The bigger driver of EUR/GBP this week will be any ECB pushback against dovish pricing of their 2024 policy cycle.

CEE: Rates should drive FX to further gains This week we start today in the Czech Republic, where wage numbers, key to the central bank, will be released. Markets expect real wages to fall 0.7% YoY in Q3, while the central bank expects 1.0% YoY. The National Bank of Poland (NBP) has a press conference scheduled today after the MPC published a statement on Friday on the incoming government's intention to suspend the governor. On Wednesday and Thursday, we will have some hard economic data across the region including industrial production or retail sales in the Czech Republic, Hungary and Romania. Also on Wednesday, we will see a decision from the NBP. We expect interest rates to be unchanged in line with market expectations. So the main event here will be the press conference on Thursday. On Friday, we will see inflation numbers in Hungary, where we expect another jump down from 9.9% to 7.9% YoY, slightly below market expectations. Also on Friday, S&P will publish a rating review of Hungary. The agency cut the rating down earlier this year, so we can't expect much new here. CEE FX remains volatile following the global story. However, if EUR/USD stabilises this week, rates should take over as the main driver again. Here, the picture for CEE remains positive. With core rates falling and lower beta of local rates in the region, interest rate differentials have improved in favour of CEE across the board. We expect more gains from PLN, which should be supported by the NBP's hawkish turn. EUR/PLN briefly touched lows of 4.320 on Friday, and we expect further testing of lower levels later. EUR/HUF, despite wild moves last week, should head lower after HUF rates stabilised. On the other hand, we expect EUR/CZK to move up towards 24.40 after the dovish data expected this week.

EUR: Not easy to pick a bottom Shorting the euro appears to be one of the most popular bets in FX at the moment. Comments by hawkish hardliners like Isabel Schnabel yesterday – who suggested that another hike is now off the table and essentially moved the discussion to rate cuts – have added further pressure on the euro. We continue to point to how the current downward correction in EUR/USD is not out of line with short-term rate differentials; when taking the two-year swap rate gap (-130bp) as a driver, a further leg lower to the 1.06 area would not be an aberration. That makes us reluctant to call for the bottom in EUR/USD just yet, and even more so in EUR-crosses, especially against the likes of AUD and NZD. A catalyst for an idiosyncratic euro rebound is not in sight, at least for today, when there are no scheduled European Central Bank speakers and the eurozone’s data calendar only includes the October retail sales – hardly ever a market mover in the region. The big slump (7.3% YoY) in Germany’s factory orders for October (data released this morning) is likely to keep the negative euro narrative alive at the start of the European session. EUR/USD is now trading very close to the 1.0770 100-day MA support, and a break lower can further fuel the bearish momentum. A test of 1.0700 before the weekend is entirely possible if the dollar remains bid.

CEE: NBP to confirm hawkish turn This morning, the monthly data set was released in the region. We had retail sales data in Romania and retail sales and industrial production in Hungary, all for October. Here we highlight the industrial sector, which fell by 2.8% YoY, below market expectations. Later this morning, we'll see retail sales in the Czech Republic, which should confirm a weak economy in the fourth quarter as well. Later today, we will see a decision from the National Bank of Poland (NBP). We expect rates to remain unchanged, as in November. So, the main event here will be the governor's press conference tomorrow. But today, we'll still see a statement that should confirm the central bank's hawkish turn last month. The Polish zloty is slowly but steadily moving towards stronger levels, and we think that the current market conditions justify the level of 4.320 EUR/PLN. However, PLN rates have followed the fall in core rates, which in our view gives more opportunity for rates to react to the hawkish tone of the central bank – and we should see some upward repricing over the next two days especially at the short end of the IRS curve. This should support PLN and we should see more gains and move towards 4.300 EUR/PLN by the end of the week.

Too dovish Falling energy prices help softening global inflation expectations and keep the central bank doves in charge of the market, along with sufficiently soft economic data that points at the end of the global monetary policy campaign. This week, the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) kept rates unchanged – although the RBA said that they could hike again if home-grown inflation doesn't slow. But overall, the Federal Reserve (Fed) is expected to cut as soon as in May next year, and the European Central Bank (ECB) is expected to announce six 25 basis point cuts next year. If that's the case, the ECB should start cutting before the Fed, sometime in Q1. It sounds overstretched to me.   Data released earlier this week showed that French industrial production fell unexpectedly for the 3rd straight month in October, Spanish output declined, and German factory orders fell 3.7% in October versus a 0.2% increase penciled in by analysts. The slowing European economies and falling inflation help building a case in favour of an ECB rate cut, but I don't see the ECB cutting rates anytime in the H1. Remember, economic slowdown is the natural response that the ECB was looking for to slow inflation. Now that it happens, the bank won't leave the battlefield before making sure that inflation shows no sign of life. But the EURUSD is understandable extending its losses within the bearish consolidation zone, as the German 10-year yield sinks below the 2.20% level. The EURUSD is now testing the 100-DMA to the downside. Trend and momentum indicators are comfortably bearish and the RSI hints that we are not yet dealing with oversold market conditions. Therefore, the selloff could deepen toward the 1.07/1.730 region.  The direction of the EURUSD is of course also dependent on what the USD leg of the pair will do. We see the dollar index recover this week despite the falling yields driven lower by a soft set of US jobs data released so far this week. The JOLTS data showed a significant fall in job openings in October, while yesterday's ADP print revealed around 100K new private job additions last month, much less than 130K penciled in by analysts. There is no apparent correlation between this data and Friday's official NFP read, but the fact that independent data point at further loosening in the US jobs market comforts the Fed doves in the idea that, yes, the US jobs market is finally giving in. On the yields front, the US 2-year yield remains steady near 4.60%/4.65% region, while the 10-year yield fell to 4.10% yesterday, from above 5% by end of October. This is a big, big decline, and it means that investors are now ramping up the US slowdown bets. That's also why we don't see the US stocks react to the further fall in yields. The S&P500 and Nasdaq both fell yesterday, while their European peers extended gains regardless of the overbought conditions. The Stoxx 600 closed yesterday's session above the 470 level. The softening ECB expectations are certainly the major driver of the European stocks toward the ytd highs; German stocks hit an ATH yesterday despite the undoubtedly morose economic outlook. Actual levels scream correction.      

Weak German industrial production marks end of another disappointing week Another disappointing macro week suggests that the German economy is on track for another quarter of contraction. After a drop in exports and a sharp fall in new orders, it is now the turn of industrial production to disappoint, signalling a very weak start to the fourth quarter. In October, industrial production fell by 0.4% month-on-month, from -1.3% in September, the fifth consecutive monthly drop. On the year, industrial production was down by 3.5%. Industrial production in energy-intensive sectors dropped by 1.4% MoM and is down by more than 7% on the year. Even worse, production in the construction sector decreased by more than 2% MoM. To make a disappointing report even worse, industrial production is some 7% below its pre-Covid level, almost four years since the start of the pandemic. Fiscal woes add to recession risks This week’s data confirms that it will not be easy for the German economy to gain fresh growth momentum. Even if the worst of the weakening in sentiment seems to be behind us, the hard economic reality does not look pretty. In fact, the economy seems to be on track for another quarter of contraction. And the list of dampening factors for the German economy is long; be it the still-unfolding impact of the European Central Bank's monetary policy tightening, the potential slowing of the US economy or new uncertainty regarding already-announced fiscal stimulus measures and potential new austerity measures. Only a turn in the inventory cycle could bring some relief in early 2024, although this turn has not happened yet. In the meantime, the fiscal woes continue. In yesterday’s regular weekly government meeting, the coalition could not agree on a budget for next year. Time is running out and the government needs to find a solution to what currently looks like a €17bn hole in the 2024 budget. The problem is clear, the solution isn’t. Either the government declares an emergency situation for the fifth year in a row to get a deviation from the constitutional debt brake or it will have to agree on expenditure cuts and/or tax increases. So far, the liberal FDP has opposed declaring another emergency for 2024, fearing further deterioration of support from its own party members as well as voters. For the Greens and the SPD, expenditure cuts for flagship projects like the green transition and social benefits also look like a no-go. It currently looks unclear as to how the coalition wants to square the circle. Deviating from the debt brake would be the least harmful for the economy. Austerity measures would clearly push the economy further into recession, leaving aside that it would lead to an unprecedented fiscal policy stance across the eurozone - austerity in a low-debt country and rather loose fiscal policies in high-debt countries. In any case, recent fiscal woes have clearly damaged the credibility and reliability of policy announcements and at least in the short term, will lead to more investment and consumption being held back. All in all, we expect the current state of stagnation and shallow recession to continue. In fact, the risk that 2024 will be another year of recession has clearly increased. It would be the first time since the early 2000s that Germany has gone through a two-year recession, even though it could prove to be a shallow one.

2024 set to be the year that the hike cycle is felt The ECB hike cycle seems over, but the shockwaves of tightening will still shape the eurozone economy in 2024. Traditional lags in transmission are now accompanied by longer ones in average interest burden increases, potentially extending the impact of tightening. For the ECB, the risk of being behind the curve for the second time in one cycle is growing. The end of the hike cycle is most likely here. The ECB has raised interest rates aggressively - from -0.5% to 4% in just over a year. With inflation coming down quickly and the economy stagnating, it is hard to see how the ECB could continue hiking rates, either this week or in the coming months. Instead, the focus is shifting towards possible first rate cuts. This makes it an excellent moment to focus on how fast monetary transmission is happening and what to expect from the impact of this in 2024.   The initial impact of tightening was significant In March, we concluded that the early signs of a rapid impact on transmission channels were significant. Since then the pace has moderated a bit, depending on the channel. As back in March, we follow the ECB’s own categories of transmission channel. At the end of 2023, broad money supply is still contracting quickly, currently at an annual pace only seen in 2009. Bank rates for loans for households and businesses are still rising rapidly and the euro has broadly appreciated against the currencies of major trade partners since late summer - it is now slightly above levels seen at the start of ECB’s rate hikes. Asset prices have also corrected, but with very different results across asset classes.   Flow chart of how monetary policy impacts the economy, according to the ECB Moving on from the channels to the real impact of monetary tightening so far, the impact on bank lending has slowed. Most importantly, the bank lending impact was strong at the start of the tightening cycle - lending growth to non-financial corporates has slowed from around 1% month-on-month in the summer of 2022 to 0% in November and has stabilized around 0% since. This also seems related to a working capital and inventories-related lending surge in summer, the need for which faded when supply chain problems eased. Lending to households slowed from 0.4% month-on-month in May 2022 to 0% in April 2023, since when it has also stabilized around 0%. Overall, the lending correction is not dramatic, but has a significant impact on future investment. Don’t forget that there is likely more to come - the ECB Bank Lending Survey suggests continued weakness in lending ahead. In short, the impact of monetary policy tightening on lending and consequently on the real economy is unfolding like every textbook model would suggest.   At face value, monetary transmission is working quickly   Not every aspect of tightening works quickly, quite some of the burden is still to come While at face value the transmission of monetary policy tightening is working as planned, looking slightly deeper reveals more complexity and more sluggishness. Coming from a long period of negative rates is having a big impact on how fast interest payments are rising. Looking at net interest payments from corporates, we see that these have increased disproportionally slowly so far (chart 4). The same holds for households, where the average mortgage rate paid by households in the eurozone has only increased by 0.8% while new mortgage loan rates are up by 2.7%. For governments, the same is true. Interest rate payments are increasing but remain at relatively low levels. Low locked in-rates have caused a relatively small increase in debt burdens so far.   Average interest payments have started to move up only slowly   This means three things: First of all, costs have not increased materially so far, which would be an additional tightening effect. Higher costs force cuts in spending or investment elsewhere, which results in weaker activity. While the relationship between interest rates for new loans and average debt burden was more synchronized in previous hike cycles, the initial effect on debt burdens has been relatively limited. Secondly, this means that the impact of the hike cycle is likely more spread out this time. Over the course of next year, loans will have to be refinanced at higher rates, which will continue to increase average debt burdens. So, while the initial impact of ECB tightening has already been forceful, it is reasonable to expect that the effect will not fade quickly in 2024 as more businesses, households and governments adjust to a new reality of higher rates. Lastly, since there is now such a discrepancy between the current interest rate and the average interest rate paid in the economy, the ECB could cut rates but average interest payments could still be increasing. So, if the ECB were to start the process of decreasing interest rates, part of the tightening effect would still be coming through the pipeline. This would dampen the effect on monetary easing.   Important moderating effects have kept the impact on GDP mild so far Much to the chagrin of the ECB, governments have continued to provide ample fiscal support to the economy. As chart 6 shows, the fiscal stance is falling moderately, but continues to be generally supportive of economic activity. It is not the first time that fiscal and monetary stances are at odds with each other - think back of the 2010s when fiscal austerity countered ECB efforts to bring inflation up to 2%. Now this is working the other way, as fiscal support boosts economic activity and therefore counters the ECB’s efforts to reduce underlying inflation.   As in the 2010s, monetary and fiscal policy are working in different directions   The labour market is also moderating the impact of tightening; at least for now. The weaker economic environment since late 2022 has not yet translated into a weaker labour market. While a relatively simple Okun’s Law would suggest that the labour market should be cooling slightly, it remains red hot. This supports economic activity and maintains wage pressures for the moment. Tightening efforts in the labour market remain relatively invisible for now. Finally, investment has continued to be supported by the supply-side problems from 2021 and 2022. While new orders have fallen, production has been kept up by the large amount of so far unfulfilled orders brought forward. The size of eurozone order books has fallen rapidly since late 2022, which has boosted activity and masked weakness in drying up orders when it comes to total economic activity. These factors have so far suppressed the impact of tightening on the economy, but we expect them to be less supportive of growth in 2024. While the fiscal stance is set to remain expansionary, with the exception of Germany, it will likely be less so in 2024 than in 2023. The labour market has recently shown more serious signs of weakening, which leads us to expect that unemployment will finally start to slowly increase over the course of next year. Backlogs of work have largely been depleted, meaning that the full effect of monetary tightening will likely be felt more strongly next year as mitigating factors fade.   Unemployment is lower than you would expect on the basis of current economic activity   The landing has been very soft so far, but gets bumpier in 2024 Inflation has come down very quickly over the course of 2023. Peaking at 10.6% YoY in October, it has fallen to 2.4% in November. This has been achieved with economic activity stagnating but not falling and the labour market continuing to go from strength to strength. The monetary stance has moved from an interest rate of -0.5% and QE to a 4% interest rate and QT. Can we really move from a broadly accommodative stance to a very restrictive stance and not notice any economic pain? That seems unlikely: much of the impact of the higher rate environment is likely to be felt next year because of the usual lag of monetary policy, because some effects of tighter policy are now more lagged than in previous cycles, and because mitigating factors are set to fade. Milton Friedman’s famous quote that monetary policy has ‘long and variable lags’ seems to be an understatement in the current complex monetary environment. That does mean that the restrictive impact of monetary policy on the economy is set to increase while inflation already looks to be solidly under control. The month-on-month core inflation rate in November was negative and the trend has been sharply down. Disinflation in 2023 was mainly the result of base effects due to ending supply shocks and not so much to monetary policy tightening. Disinflation in 2024, however, will be mainly the result of the further unfolding of monetary policy tightening. While there are clear uncertainties about the inflation outlook - including how wage growth will develop and whether new spikes in energy prices could emerge - there is a high risk that the ECB is getting behind the curve for the second time in one cycle. It was late in responding to inflation on the way up and could well be late in responding on the way down as well. Expectations of rate cuts have moved forward and have grown a lot recently. Given the wrong assessment of inflation dynamics on their way up and concerns about possibly more persistent inflationary drivers, we think the ECB will be very hesitant to simply reverse the rate hiking cycle. Instead, we expect the ECB to wait for additional wage growth data for the first quarter and then start cutting in June - but rather gradually, with three cuts of 25bp every quarter. That would still leave monetary policy restrictive and keep average interest rate payments going up as society adjusts to higher interest rates. It would also make new investments slightly more attractive again. The hike cycle may have so far seemed like an easy adjustment to swallow, but ironically the pain of tightening will likely be felt most when the ECB already starts to ease.

UK wage growth eases to 7.3%, lower than expected US inflation expected to fall to 3.0% The British pound is drifting on Tuesday. In the European session, GBP/USD is trading at 1.2551, down 0.04%. UK wage growth falls to 7.3% Tuesday’s UK employment report was notable for the decline in wage growth. Earnings excluding bonuses rose 7.3% in the three months to October, down from 7.8% in the three months to September. This was lower than the consensus estimate of 7.4%. Wage growth is an important driver of inflation and the decline is an encouraging sign for the Bank of England. Still, earnings are rising much faster than inflation, which suggests that the BoE won’t be cutting interest rates anytime soon. Inflation has fallen to 4.6%, but this is more than double the Bank’s target of 2%. The BoE will announce its latest rate decision on Thursday and is widely expected to hold the cash rate at 5.25%. Governor Bailey has warned that rates could remain in restrictive territory for an extended period, but the markets are marching to a dovish tune and have priced in three rate cuts in 2024. Bailey has come out against expectations about rate cuts and we could see the BoE push back against rate cut speculation at the Thursday meeting. US inflation expected to ease to 3.0% The US releases November CPI later today, with a consensus estimate of 3.0% y/y, compared to 3.2% in October. Monthly, CPI is expected to remain flat, unchanged from October. Core CPI, which has been running higher than the headline rate, is projected to remain unchanged at 4.0% y/y. Monthly, the core rate is expected to inch higher to 0.3%, up from 0.2% in October. The Fed is widely expected to hold rates at a range of 5%-5.25% at the Wednesday meeting, but the inflation release could be a key factor as to what the Fed does in the upcoming months. There is a major disconnect between the markets, which have priced in four rate cuts in 2024, and the Fed, which is insisting that the door remains open to further hikes. A strong inflation report could chill market expectations for rate hikes, while a soft inflation release will provide support for the market stance and could force the Fed to reconsider its hawkish position.. GBP/USD Technical There is resistance at 1.2592 and 1.2682 1.2484 and 1.2369 are the next support levels      

Australia releases consumer and business confidence on Tuesday The Australian dollar has posted slight losses in Monday trading. In the North American session, AUD/USD is trading at 0.6564, down 0.18%. The Aussie continues to show sharp swings and declined 1.50% last week. This snapped a three-week winning streak in which the Australian dollar surged 4.9% against its US counterpart. Australian dollar eyes consumer and business confidence Australia will release consumer and business confidence data on Tuesday. Consumer confidence fell sharply in November, as the Westpac Consumer Sentiment index declined 2.6% to 79.9, down from 82 in October. Consumers are deeply concerned about the rising cost of living and the possibility of further interest rate increases. The markets are expecting a rebound in December, with a forecast of 3.0%. The NAB Business Confidence index is expected to improve to -1 in November. The index came in at -2 in October, the first time it dropped into negative territory in four months. The zero level separates pessimism from optimism. Reserve Bank of Australia Governor Michele Bullock speaks at an event in Sydney on Tuesday and the markets will be looking for hints regarding future rate policy. The RBA held the cash rate at 4.35% at its meeting earlier this month and doesn’t meet again until February. This will give policy makers a chance to monitor the effect of elevated rates on the economy.   US nonfarm payrolls beats forecast Friday’s US nonfarm payrolls came in at 199 thousand in November, higher than the consensus estimate of 180,000 and the October gain of 150,000. Unemployment dropped from 3.9% to 3.7% and average hourly earnings rose to 0.4% m/m, up from 0.2% in October and above the market consensus of 0.3%. The strong data points to a resilient labour market despite signs that the economy is cooling down, and has reduced fears of recession. The markets are still expecting around four rate cuts in 2024, while the Fed is still talking about possible rate hikes. Tuesday’s inflation report will be closely watched by the markets, and if CPI is stronger than expected, the markets may have to tone down their expectations of a rate cut early in 2024.   AUD/USD Technical AUD/USD tested support at 0.6555 earlier. Below, there is support at 0.6523 0.6585 and 0.6613 are the next resistance lines  

Santa comes early as Fed pivots, Bank of England and ECB up next By Michael Hewson (Chief Market Analyst at CMC Markets UK)     It had been widely anticipated that Fed chairman Jay Powell's main challenge yesterday would be in trying to push back on the idea that the US central bank was ready to cut rates sharply over the next 12 months. With the sharp fall in yields since November there was an expectation that the loosening in financial conditions might put the central banks fight against inflation at risk.   It was therefore quite surprising that yesterday's statement and dot plots embraced that narrative, delivering an early Christmas present to the markets, returning the 2024 median for dot plots to 4.6%, back to where it had been in September, while forecasting core PCE to decline to 2.4%.     The US dollar sank, along with 2-year yields which fell 30bps to a 6-month low, gold surged back above $2,000 an ounce, and US markets pushed up to their highest levels this year, with the Dow posting a new record high, confounding market expectations of a hawkish pushback.      At the press conference Powell tried to give the impression that the Fed retained the option to hike rates again, however this message is rather undermined by the fact that the FOMC cut their dot forecasts as much as they did. The admission that the FOMC discussed rate cuts was also noteworthy.     If "higher for longer" wasn't dead before last night, it certainly is now, and certainly makes the job of both the Bank of England, as well as the ECB later today that much harder in maintaining a hawkish bias, with European markets set to open sharply higher, with new record highs expected for the DAX and CAC 40.       Having seen the Federal Reserve leave rates unchanged yesterday its now the turn of the Bank of England and ECB to follow suit, as well as try to navigate the messaging of when they expect to start cutting them. When the Bank of England took the decision to hold rates steady in September it was a close-run thing, but on the balance of risks it was also probably the right one given the challenges facing the economy as we head into year end.     These challenges have been thrown into sharper focus this week with wage growth slowing to 7.3%, and an economy that contracted by -0.3% in October. This week's data has prompted markets to price in the prospect that the BOE will prioritise the UK economy over its battle against inflation, with yields dropping sharply to their lowest levels since June.   The emphasis in recent meetings to what has become a "Table Mountain" approach to rate policy, and a higher for longer approach does present some problems in terms of messaging especially when growth is slowing sharply however when looking at high levels of services and wage inflation it's hard to see how the Bank of England can overlook that even against the currently challenging growth outlook.   Now that the energy price cap inflation is out of the headline numbers, CPI is now back at a more manageable level of 4.6%, well below last year's peak of 11.1%, although core prices are still at a lofty 5.7%. The Bank of England's biggest concern however is wage growth which is currently at 7.3%, while services inflation is at 6.6%, and appears to be behind some of the dissent on the MPC amongst those who still want higher rates, although this number has shifted to 3 external members of Catherine Mann, Megan Greene, and Jonathan Haskel.   It will be interesting to see if they drop their dissent given this week's economic data, and opt for the status quo today, with the markets also already pricing in some rate cuts for next year. These will still probably happen; however, they may not come as early as markets are currently pricing given current inflation levels. When they do happen, they are likely to come well after the ECB starts cutting given inflation here in the UK is still over 2% higher than it is in the EU on an annualised basis.   This is the challenge facing the ECB today given that they were the central bank which raised rates as recently as September, and a dovish pivot today would surely be an admission that the ECB erred 3-months ago.  When the ECB met in October President Christine Lagarde said that risks to growth were tilted to the downside, but also that inflation was still too high, although it isn't now given headline CPI for November is now at 2.4%.   At the time there was no commitment as to whether the ECB was done on the rate hike front, however that has now changed given recent comments from Germany's Schnabel and France's Villeroy. Recent economic data coming out of Europe since June has been dire and we now know that the ECB governing council has been surprised at how quickly inflation has slowed.   Putting to one side that it shouldn't be a surprise given the trend in PPI over the past 12 months a few other members of the Governing council, have also admitted that the next move in rates is likely to be lower in 2024.   That's not surprising given that in Q3 the French economy slipped into contraction, and with Germany not having seen much in the way of growth this year markets are now pricing in rate cuts for as soon as April 2024. It was also noteworthy that at the start of this month Villeroy said that rate hikes were over based on the current data, thus supporting the view that inflation was returning to target. That is already quite apparent with November CPI falling to 2.4%, having been at 5.3% only 3 months before.     No changes in policy are expected with the biggest challenge facing Christine Lagarde today being in convincing the market that rate cuts won't begin much before the summer of next year, given how bad the economy in Europe already is.      EUR/USD – yesterday's rebound pushed above the 200-day SMA this time opening the prospect of a move towards 1.0940. Support still above the 50-day SMA at 1.0720.   GBP/USD – held above the 200-day SMA at 1.2500 yesterday rallying strongly. A break below the 200-day SMA and 1.2460 signals a broader test of the 1.2350 area. Having broken resistan ce at the 1.2620 area could extend towards 1.2720.   EUR/GBP – breaking higher and heading towards the 100-day SMA at 0.8640. Support now at 0.8580.   USD/JPY – the US dollar slid sharply yesterday having run into resistance at 146.60, falling below 144.70, dropping below the 200-day SMA at 142.50, and could see a retest of the 140.00 area.     FTSE100 is expected to open 72 points higher at 7,620   DAX is expected to open 177 points higher at 16,943   CAC40 is expected to open 84 points higher at 7,615  

EUR: Still eyeing 1.10 The euro stands a chance to end the year above 1.10, which seemed quite unlikely only a few weeks ago when the dollar was restrengthening and ECB rate cut bets were rising rapidly. Despite the diverging narratives which emerged from the ECB and Fed meetings last week, probably favouring more attempts at the 1.1000 key resistance into Christmas, a break higher is far from guaranteed. Firstly, the euro still has to deal with the domestic factors that triggered its previous underperformance. Today, the IFO figures will be watched quite carefully, while the rest of the week sees the final release of CPI figures. We’ll also need to see whether post-meeting comments by ECB officials diverge in some way from last week’s pushback by President Lagarde.

UK Services PMI accelerates, Manufacturing PMI declines Bailey’s dampens rate cut expectations The British pound is steady on Friday, after posting gains of 1.1% a day earlier. In the European session, GBP/USD is trading at 1.2767, up 0.03%. UK PMIs a mix British PMIs were a mixed bag in December. The Manufacturing PMI eased to 46.4, down from 47.2 and shy of market expectations of 47.5. Manufacturers are pessimistic as the UK economy is struggling and demand for UK exports has weakened. The services sector is in better shape, as the PMI rose to 50.9, up from 53.7 in November, which marked the strongest level of growth since May. Services providers continued to show optimism about business conditions, despite the squeeze from the cost of living and elevated borrowing costs. Bailey pushback sends sterling soaring It’s been a dramatic week, with central bank rate decisions in the spotlight. On Wednesday, Fed Chair Powell shifted his hawkish stance and projected that the Fed would trim rates three times in 2024. This sent the US dollar lower against the majors. The Bank of England took the opposite approach on Thursday in its decision to hold rates at 5.25%. Governor Bailey stuck to his script of “higher for longer”. Bailey acknowledged that inflation was moving in the right direction but said in his rate statement that “there is still some way to go” and kept the door open to further rate hikes to bring inflation back down to 2%. Bailey was crystal clear in comments to reporters after the meeting, reiterating that “it’s really too early to start speculating about cutting interest rates”.   There was no mistaking Bailey’s hawkish message and the pound responded with massive gains. Still, Bailey’s view was far from being unanimous, as the MPC vote was 6-3, with three members in support of raising rates. The markets are marching to their own tune and expect a flurry of rate cuts in 2024, despite Bailey’s pushback. The markets trimmed rate-cut bets following the BoE decision but have still priced in around 100 basis points in easing in 2024. Clearly, there is a deep disconnect between the markets and Bailey & Co. with regard to rate policy.     GBP/USD Technical There is resistance at 1.2835 and 1.2906 1.2727 and 1.2653 are providing support    

EUR: ECB versus data Unlike officials at the Federal Reserve, European Central Bank members have managed to deliver a more coordinated pushback on rate cuts, both at last week’s policy meeting and in post-meeting communication. Governing Council member Peter Kazimir said the risks of premature cuts are bigger than those of keeping monetary tight for too long, and fellow hawk Pierre Wunsch highlighted how rate cuts cannot be discussed until wages move to a level that is compatible with the inflation target. Despite that, it still appears quite hard to dissuade the market from its conviction that rates will start to be cut in April. Data remains the missing link for a more material repricing in ECB rate expectations, and another miss by the Ifo yesterday in Germany suggests we are not at peak pessimism yet on the eurozone economic outlook. EUR/USD can trade above 1.10 during the holiday period as the dollar enters a seasonally soft period, but rate differentials are still too depressed to argue for a sustainable rally above 1.10 just yet.

China Caixin Manufacturing posts slight growth The Australian dollar is in positive territory on Tuesday. In the European session, AUD/USD is trading at 0.6826, up 0.22%. The week between Christmas and New Year’s was subdued in the currency markets. Still, the Australian dollar hit a six-month high on Christmas Day, rising to 0.6871. The Aussie ended the year on a roll, gaining 3.1% in December. China’s Caixin Manufacturing PMI ticked up to 50.8 in December, up from 50.7 in November and above the consensus of 50.4. This was the highest reading since August, but the reading points to stagnation in manufacturing. The reading was better than the official Manufacturing PMI release on Saturday of 49.0 which indicates contraction. The non-manufacturing PMI edged up to 50.4, compared to 50.2 in November. Activity in the non-manufacturing sector has been minimal over the past six months, as China remains mired in an economic slowdown as we move into 2024. Where is RBA headed? The Reserve Bank of Australia meets next on February 6 and it’s anyone’s guess what the central bank has in mind for 2024. The RBA has raised interest rates just once since June and held the cash rate at 4.35% at the December meeting. It’s likely that the RBA is done with raising rates, but the timing of a rate cut is unclear. Many economists are circling September for the first rate cut, while Bank of America is predicting a rate cut only in 2025. The markets are more optimistic and have priced in a rate cut in mid-2024. What all the views can agree on is that the inflation rate will play a critical role in determining the RBA’s rate path. Inflation has fallen to 4.9% but remains much higher than the RBA’s target band of 2-3%. Australia will release the December inflation report on January 10 and the release should be treated as a market-mover.   AUD/USD Technical AUD/USD is testing resistance at 0.6812. Next, there is resistance at 0.6845 0.6779 and 0.6746 are providing support  

FX Daily: A dollar rally to start the New Year The dollar jumped yesterday as investors started to return from the long Christmas break. Markets are unwinding some dovish bets, and questioning stretched equity valuations, ultimately favouring defensive bets in FX. The dollar also tends to seasonally outperform at the start of the year. Today, the focus moves back to data, as well as the FOMC minutes.   USD: Dollar seasonally strong in January and February Defensive bets dominated in global markets as investors returned from the long Christmas break. This was particularly evident in the FX market, as the dollar corrected sharply higher yesterday to the detriment of European currencies. The tendency of dollar selling and European FX buying that emerged in December was triggered by the dovish pivot at the December FOMC, but seasonal factors also played a role. The dollar tends to underperform at the end of the year, likely due to some tax-related flows from US corporations: DXY weakened in December in each of the past seven years. While the seasonality factor isn’t as strong, January tends to be a good month for the dollar, with DXY having risen on average 0.4% in the past 20 years. February has shown a stronger positive seasonality pattern, with DXY having appreciated in each of the past seven years. The dollar strength in the early part of the year is often associated with the December tax flows by US corporates being reverted, and while expectations of a firmer dollar at the start of the year (which we agree with) could have exacerbated yesterday’s USD buying, the key factor remains Federal Reserve dovish bets against the backdrop of stretched equity valuations after a strong year for US stocks, in particular in the tech sector. We have observed some tentative unwinding of dovish bets as trading resumed: interestingly, the Fed Funds futures curve no longer fully prices in a March cut (21bp at the moment). As trading volumes pick back up this week, US calendar events will also offer direction to investors. Today, the Fed releases the minutes of the December FOMC, which should shed some light on the reasoning behind the dovish revision of the Dot Plot. Given the strong dovish reception by the market after the December Fed announcement, there is a risk of the minutes preventing further dovish bets as some conditionality (in terms of economic data developments) for easing policy emerges in the minutes. Today also sees the release of JOLTS job openings for November and the December ISM manufacturing, and consensus is positioned for a good print in both releases. We are inclined to think that the dollar can hold on to most of yesterday’s gains in the next couple of days, as data may prove benign and investors favour defensive positions ahead of Friday’s US payrolls – which are expected to print a respectable 170k. DXY may hover around the 102 gauge into the payrolls. Beyond the very short term, we still expect a further dollar decline to materialise this year as the deterioration in the economic outlook forces large Fed cuts, but the pace of USD depreciation should be more moderate in 1H24 compared to November/December 2023.  

Next week features China's usual data deluge plus GDP, India's trade data and Australia's unemployment rate. Meanwhile, Japan reports CPI inflation and Bank Indonesia decides on policy China data deluge plus latest GDP report The monthly deluge is accompanied by GDP data for December and the fourth quarter of 2023 this month. We believe that the seasonally adjusted quarter-on-quarter growth rate was similar in the fourth quarter to the third last year, at about 1.3%. We think that this will result in a slight uptick in GDP growth to 5.2% year-on-year in the fourth quarter, and also 5.2% for the full-year figure – slightly in excess of the government’s 5.0% target. Box ticked. For the rest of the data, we expect no improvement in any of the real estate-related data, though it will be interesting to see whether any of the recent increases in lending volumes of the MLF have any impact at all on infrastructure spending. We may see some very small further improvements in manufacturing and industrial production growth. The key area to look out for remains the retail spending figures, which have been a pocket of relative resilience – although they have been punching a little bit above their longer-run trend growth in recent months and may not be able to sustain this for long. Unemployment figures from Australia While the market seems to have decided that the Reserve Bank of Australia (RBA) has finished hiking and were given an encouraging nod by the recent inflation data, the fact is that monthly inflation increases are not yet low enough for the central bank to hit its inflation target on a 12-month timeframe, and it will need to slow further. For that to look more probable, it would certainly help if indicators such as employment growth slowed. In November, employment surged, and most of the jobs that were created were full-time. Both the strength of the full-time numbers and the weakness of the part-time figures were at odds with their recent trends. We would not be surprised to see a reversal with about 30,000 part-time jobs, but a dip to only 10,000 full-time jobs for a full employment change of +40,000. Unemployment may push up by about 20,000, and though this will remain slower than trend labour force growth, we may see the unemployment rate push up to 4.0%. India's trade report Trade data for December is not likely to diverge substantially from the November figures, which delivered a trade deficit of USD 20.6bn. With the Reserve Bank of India de-facto pegging the INR, this is unlikely to have a material impact on markets. Japan inflation likely to moderate, core machinery orders to rise Japan's CPI inflation is expected to decelerate to 2.7% YoY in December from 2.9% YoY in November, with falling utility prices and other energy prices weighing on the overall number. Service sector prices, however, will likely rise on the back of high demand in travel related items such as accommodations and eating out. Meanwhile, core machinery orders should advance in November, supported by solid vehicle demand and recent recovery of semiconductor sector. Bank Indonesia to extend their pause Bank Indonesia (BI) is likely to extend its pause into 2024, with Governor Perry Warjiyo wary over a potential flare up in food inflation. Inflation has been relatively stable, but a looming El Nino episode and an expected acceleration in domestic activity ahead of the national elections in February could stoke price pressures in the near term. Concern over inflation should keep BI on hold, with the central bank also attempting to support the IDR, which is down 0.58% early in 2024. Singapore NODX to post modest rise again Singapore’s non-oil domestic exports (NODX) could post another modest expansion in December after recently snapping a string of negative growth for 13 months. A favorable base and a recent pickup in select electronics shipments likely supported NODX in December 2023. We can expect this trend to extend into early 2024. Key events in Asia next week

UK wages/UK CPI (Dec) – 16/01 and 17/01 Since March of last year headline CPI in the UK has more than halved, slowing from 10.1%, with November slowing more than expected to 3.9%, prompting speculation that the Bank of England might be closer to cutting rates in 2024 than had been originally priced. The decline in headline inflation is very much welcome, however most of it has been driven by the falls in petrol prices over the past few weeks. Inflation elsewhere in the UK economy is still much higher although even in these areas it has been slowing. Food price inflation for example is still much higher, slowing to 6.6% in December, while wage growth is still trending above 7% at 7.2%. Services inflation is also higher at 6.3% while core prices rose at 5.1% in the 3-months to November.   This week's wages and inflation numbers are likely to be key bellwethers for the timing of when the Bank of England might look at starting to reduce the base rate, however the key test for markets won't be on how whether we see a further slowdown in inflation at the end of last year, but how much of a rebound we see in the January numbers. Whatever markets might look to price as far as rate cuts are concerned the fact that wages are still trending above 7% is likely to stay the Bank of England's hand when it comes to looking at rate cuts. It's also important to remember that at the last rate meeting 3 members voted for a further 25bps rate hike. That means it will take more than a further slowdown in the headline rate for these 3 MPC members to reverse that call, let alone call for rate cuts. Expectations are for wages to slow to 6.7% and headline CPI to come in at 3.8%.  

Nearly all of the major ones ended the week within 0.5% of where they had started, an unusual level of quiescence. The hotter-than-expected consumer inflation report out of the US initially made some waves, and helped the dollar rally modestly. By the end of the week, markets were, however, back assigning an implied 80% chance of a March cut in Federal Reserve rates after a miss in Friday’s producer inflation report. Government bond yields were lower and risk assets rose upwards in response, while the dollar was essentially flat. This week is relatively quiet in terms of economic data or policy announcements, although there will be an unusual number of ECB and Federal Reserve speeches on tap. The November Eurozone industrial production data on Monday, and December UK inflation on Wednesday, provide the main economic references. Federal Reserve speeches will be particularly critical to see if the central bank continues to push back against market hopes for a March cut in rates and 165 basis points of cuts for the whole of 2024, which still strikes us as way too aggressive.  

The Australian dollar has struggled so far this year, as receding bets in favour of Fed rate cuts hammer risk assets, while economic data suggests that the Australian economy contracted at the end of 2023. Last week’s preliminary PMI data for December was a disappointment. The composite index edged upwards in the final month of the year, although fell short of expectations and continued to print well below the level of 50 for the third straight month (46.9). Quarterly GDP data won’t be released until early-March, although it would be reasonable to assume that a QoQ contraction in activity is a distinct possibility. Investor expectations regarding the state of the Australian economy will be key in determining the extent of any continued rebound in AUD in the coming weeks. This week will be a relatively busy one in that regard, with housing, retail sales and trade data to be released on Tuesday and Thursday. Arguably the most important data point will, however, be Wednesday’s monthly inflation print for November. Any downside surprise here could further weigh on AUD this week

EUR Economic data out of the Eurozone is not improving and continues to tell a tale of a stalling economy, albeit this has not yet translated into layoffs and employment continues to hold up well. Last week’s retail sales report was slightly stronger-than-expected, although we still saw a more than 1% annual contraction and a fourth quarterly downturn in activity in the past five monthsEUR Economic data out of the Eurozone is not improving and continues to tell a tale of a stalling economy, albeit this has not yet translated into layoffs and employment continues to hold up well. Last week’s retail sales report was slightly stronger-than-expected, although we still saw a more than 1% annual contraction and a fourth quarterly downturn in activity in the past five months.     The hawkishness on display at the European Central Bank's December meeting is being diluted slowly by dovish noises coming from various members of the Council. This week's industrial production data for November is expected to be dismal, and more clarity on the ECB's plans should come from a barrage of ECB officials' speeches, including president Lagarde on Wednesday. The bank’s latest meeting accounts should also shed some light on the December communications when released on Thursday.

A disappointing set of domestic economic data sent the yen lower against the dollar once again last week, with the Japanese currency opening trading this week around the 145 level. Expectations for the first Bank of Japan interest rate hike have continued to be pushed further into the future amid signs of an easing in wage pressure and a drop in inflation. Last week’s earnings data for November was a massive miss, with wages growing by only 0.2% year-on-year, the lowest rate since December 2021 and well below the +1.5% consensus. Bank of Japan officials have placed heavy emphasis on earnings data in recent communications. The upcoming annual ‘Shuntō’ salary negotiations, which conclude in March, will be key in determining the timing of the first hike. As things stand, a strong wage negotiation will likely be needed to convince investors that tightening will commence soon, with swaps now assigning only around a one-in-three chance of a first move in April. National inflation data will be the focus this week, with the December data due on Thursday.   CHF We recently said that it might be difficult for the franc to hold onto its gains and, indeed, the currency sold off last week and was among the worst performers among the G10 currencies. We continue to view the franc as expensive, and believe that more weakness could be in store in the coming quarters, particularly should the Swiss National Bank begin to shift its attention towards supporting the country’s growth outlook. We don’t view the recent uptick in inflation as something that could potentially prevent the SNB from delivering a dovish pivot, particularly as both measures of inflation remain firmly within target. The focus this week should be on external news, although Thursday's speech by SNB President Jordan in Davos will also be worth following.

The Canadian dollar has continued to edge lower against its US counterpart since the start of the year, with the USD/CAD pair beginning the week around the 1.34 level, which is around its highest level since the middle of December. We are entering into a highly important couple of weeks for the Canadian dollar. Tuesday’s inflation report will be a highly important one in guiding Bank of Canada interest rate expectations. Economists are pencilling in a monthly contraction in headline consumer prices (-0.3% consensus), which would be only the second negative print in the past year. Retail sales data on Friday should also give policymakers a decent barometer as to how well consumer spending held up towards the end of last year, as we head into the January BoC meeting next Wednesday. No change in rates is seen, although the tone of the bank’s communications will held investors gauge whether we can expect a first cut as early as April, which is currently more than fully priced in by swaps.

The EUR/SEK pair ended last week largely unchanged, although the krona did briefly slip to its lowest level on the euro since mid-December. Swedish activity data released last week was mixed. On the one hand, retail sales fell by 1.7% YoY in November, compared to a decline of 1% in the previous month, the nineteenth consecutive month of annual declines in retail trade. On the other hand, the more important GDP data unexpectedly rebounded in November (+0.2% vs. 0.6% consensus), easing fears that the ongoing recession could extend into Q4. The above data imply a significant divergence from the Riksbank's forecast, which warned of an economic decline of 0.4%. This will undoubtedly be a relief for the Riksbank and should make for an easier task in controlling inflation without damaging the economy. If the good data materialises into a more hawkish stance by the central bank, the krona could receive some support.

The Chinese yuan remained under pressure last week and ended it slightly lower against the broadly stronger US dollar. Data confirmed that China experienced the longest deflationary period since 2009, registering three months of declining consumer prices in a row. In December, the CPI index fell by 0.3%. The fact that this was a smaller decline than the month previous (-0.5%), and slightly more limited than expected (-0.4%), has not allayed concerns about domestic demand. Most other releases, including PPI inflation and financial data, also failed to provide optimism, although trade activity did, at least, pick up at the end of the year. Amid concerns about the economy's weak performance, the PBoC injected CNY 216 billion in fresh medium-term funds into the banking system today, but contrary to expectations it did not lower the 1-year MLF rate. Looking ahead, attention will be on the year-end data package to be released on Wednesday. GDP growth is particularly worth watching, as it could set the tone for sentiment toward China in 2024.  

As seasoned traders know, the thrill of market volatility comes with its challenges. Picture this: prices are in a frenzy, spreads are widening, and you're aiming to capitalize on the market commotion, eager to secure those precious pips. However, your excitement is met with a surprising hurdle—your broker hesitates to accept your order, presenting an additional confirmation window. What's happening here? Unraveling Requoting in CFD Let's embark on a journey to demystify requoting in CFD trading. In this episode, we continue to unravel the peculiar situations that traders inevitably encounter when dealing with leveraged contracts for difference. We've previously delved into the repercussions of widening spreads, the art of "stop-loss hunting," and the nuances of price slippages. As a quick recap from our last lesson, price slippage occurs when the final execution price deviates from the displayed market price upon placing a market order. It's a phenomenon that can work in your favor or against you, depending on the market conditions and the direction of your intended position.   EXPLORE MORE: Mastering CFD Contracts on Stock Indices: A Comprehensive Guide for Traders   What Exactly is Requoting? Requoting, in essence, is the rejection of an immediate order at the desired price, replacing it with an alternative execution proposal. In this episode, we explore the intricacies of requoting, shedding light on its connection with price slippages. We've discussed how price slippages can be both advantageous and disadvantageous, contingent upon market scenarios. Requoting, often perceived as an undesirable phenomenon, shares a similar narrative. It's essential to understand that, unlike price slippages, traders aren't obligated to accept the new execution terms proposed during a requote. This crucial distinction provides traders with the power to evaluate and decide whether the revised terms align with their trading strategy. What is Requoting in CFD? In certain scenarios, brokers may outright reject an immediate order, presenting an alternative execution price. This is what we call "requoting." Requoting is closely related to price slippage, occurring when the deviation between the price at which we place a market order and its final execution price exceeds an acceptable deviation parameter. It usually surfaces during market panics or euphoria, following the release of impactful economic data that the market has not anticipated, amidst overall liquidity decline, and an imbalance between supply and demand. Requotes often accompany expanding spreads and sudden price jumps, posing significant risks when opening instant or market orders. When Can Requoting Occur? Requotes are somewhat connected to price slippages, and they usually arise when the difference between the price at order placement and the final execution price is too substantial, surpassing an allowable deviation parameter. In such situations, platforms like MetaTrader may display a new order window, notifying traders of the revised execution price and offering the option to accept or reject it. Read more: Navigating the Bear Market. Understanding the Downtrend in Forex Trading What Triggers Requoting? Requoting is closely tied to price slippages and tends to manifest when the difference between the price at order placement and the final execution price exceeds an acceptable deviation parameter. This occurrence is particularly prevalent during market panics or euphoria, immediately following the release of significant economic data that catches the market off guard. Requoting tends to surface in times of overall liquidity decline and an imbalance between supply and demand. These situations often accompany expanding spreads, sudden price jumps, and scenarios where opening instant or market orders entail substantial risks. Does Your Broker Have the Right to Reject Your Order? It's pivotal for traders to grasp that brokers reserve the right to reject an order and propose new terms under specific conditions. For instance, XTB, a leading brokerage, outlines conditions for rejecting instant orders when the base instrument's price from the liquidity provider significantly deviates from the order price. This condition underscores the broker's commitment to maintaining fair and transparent trading practices. The Impact of Requoting on Your Trading Results Similar to price slippages, requoting can either work in your favor or act as a hindrance to your trading results. The general sentiment is that requoting is an undesirable aspect of trading. However, traders must recognize their agency in the process. When faced with a requote, traders have the autonomy to accept or reject the proposed execution terms. This decision-making power sets requoting apart from price slippages, where traders have no option to retract from the position once initiated. While requoting is often viewed negatively because the proposed broker price is typically less favorable, traders can leverage their judgment to mitigate potential downsides. In summary, requoting has the potential to impact trading outcomes, but only if traders willingly accept the proposed terms. Join us as we navigate through the nuances of requoting, exploring its intricacies and empowering traders to make informed decisions in the dynamic landscape of CFD trading.

Rates Spark: Near-term balance of risks still tilted towards higher rates Markets are geared for dovish outcomes this week, not just in rates where still notable probabilities are discounted for first cuts as early as March, but also across wider risk markets. This sets up markets for disppointments if they don't get exactly what they want. Data is a wild card, but the ECB will have this in mind if it is earnest about pushback.   Near-term balance of risks still tilted towards higher rates The thought of a soft landing actually materialising against all odds are supporting risk assets in all corners of the market. The S&P 500 closed at new record levels on Friday and also on Monday the equities rally pushed on through. In rates the pricing in of a soft landing has pushed down rates along the curve at the start of the week, supported by the idea that inflation is coming down as markets are eyeing this week’s PCE data. But markets are starting to fine-tune their expectations more in line with our thinking, even if we see more scope for correction in this direction: pricing for a March Fed cut is now down to 10bp, even though overall pricing for cuts this year has even deepened somewhat again to 134bp. Even though we also see inflation coming down steadily, we warrant caution about markets still getting ahead of themselves – especially in EUR rates. The European Central Bank will meet on Thursday and we expect a reiteration of their data-dependent path towards policy normalisation. Last week yields came down the day that Lagarde hinted at rate cuts in the summer. The best that markets can hope for is a reiteration of that comment, but given the guarded fashion of Lagarde’s statements we can see a scenario where she does not repeat this dovish message in the context of the policy meeting this week. We therefore see a chance that EUR 2Y rates will recalibrate higher again in response to the press conference when markets don’t get exactly what they are looking for. In the US there is also no guarantee that the nudge lower in rates we saw at the start of this week will extend. Markets have their eyes on a 2.0% core PCE inflation, in line with the Fed’s mandate that will be published on Thursday, which, if met, would keep the market pricing of a March rate cut as a realistic scenario. If, on the other hand, the actual number were to exceed 2.0%, even by a bit, we could imagine the market reacting more sensitively to such a disappointment. Similarly, we would expect an asymmetric reaction to the GDP growth figures, which our economist expects to come in firm on Thursday. On balance, if data come in as expected the further downside is moderate, but at least near term the potential could still be larger.   Tuesday's events and market views Japan will kick-off this week's central bank meetings but no change of the policy rate is expected. In terms of economic data releases Tuesday will be another light day. The EU Commission will publish the consumer confidence index and the ECB will release results of its bank lending survey. In the US we a few business indicators from regional Feds. It is the rest of the week will be of more interest, with eurozone PMIs on Wednesday, the ECB meeting and US GDP data on Thursday followed by the PCE on Friday. In primary markets Germany will sell 4Y and 30Y green bonds while the Netherlands taps a 15Y bond. The US Treasury sells new 2Y notes. In SSAs the EU has mandated syndicated taps of existing 7Y and 30Y bonds, which should also be Tuesday’s business.

Bank of Japan stays on hold, UK public finances in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw a cautious but broadly positive start to the week, despite weakness in basic resources which served to weigh on the FTSE100. US markets picked up where they left off on Friday with new record highs for the Dow, S&P500 and Nasdaq 100 although we did see a loss of momentum heading into the close, as US yields rebounded off their lows of the day.   The tentative nature of yesterday's gains appears to be being driven by a degree of caution ahead of some key risk events over the next couple of weeks, starting today with the latest Bank of Japan policy decision. This is set to be followed by the European Central Bank on Thursday, and then the Fed and Bank of England next week.   For most of this month central banks have been keen to reset the policy narrative when it comes to the timing of rate cuts which had markets pricing in the prospect of an early move. While US markets have managed to shrug off the prospect of a delay to possible rate cuts, markets in Europe have struggled with the concept probably due to the weakness of the underlying economy relative to how the US economy has been performing. There is a sense that the ECB is over prioritising the battle against inflation which is coming down rapidly and not seeing the damage that is being done to the wider economy by keeping rates higher than they need to be.   Today's Bank of Japan decision didn't offer up any surprises with the central bank keeping monetary policy unchanged against a backdrop that has seen market expectations of rate cuts from other central banks increase markedly since the last Fed meeting. This shift in expectations has helped to ease some of the pressure on the BoJ to look at tightening policy itself to slow the decline of its own currency. The bank also cut its inflation forecast for this year from 2.8% to 2.4%, while nudging its 2025 forecast slightly higher to 1.8%.   Asia markets have seen a more upbeat session on reports that Chinese authorities are looking at a package of stimulus measures to help stabilise the stock market, which could come as soon as next week. Despite this more positive tone European markets look set to open only modestly firmer, with the only economic data of note due today being the latest public finance data from the UK for December.  As far as UK government borrowing is concerned rising interest costs at the beginning of Q4 served to exert upward pressure on the headline numbers, pushing borrowing up to £16bn in October, the second highest October number since 1993. Since those October peaks, gilt yields have declined sharply, along with headline inflation, helping to ease borrowing costs in the mortgage market. This weakness has also come as a welcome relief to the Chancellor of the Exchequer, after UK 10-year yields fell to a low of 3.44%, down from a peak of 4.73% in October. These lower interest costs are likely to see December borrowing slow to £14.1bn, while January could see a surplus as end of year tax payments boost the numbers.     EUR/USD – currently has support at the 200-day SMA at 1.0840. A break below here and the 1.0800 level targets the 1.0720 area. Currently capped at the 50-day SMA with main resistance up at 1.1000.  GBP/USD – remains resilient with support just above the 50-day SMA and 1.2590 area. We need to get above 1.2800 to maintain upside momentum. Also have support at the 200-day SMA at 1.2550. EUR/GBP – continues to find support at the 0.8540/50 level which has held over the last 2-months. A fall through here could see further falls towards the 0.8520 area. We still have resistance at the 0.8620/25 area and the highs last week. USD/JPY – has retreated modestly from the 148.50 area but remains on course for the 150.00 level. Pullbacks likely to find support at the 146.25 level cloud support as well as the 50-day SMA. FTSE100 is expected to open 15 points higher at 7,502 DAX is expected to open unchanged at 16,683 CAC40 is expected to open 7 points higher at 7,420

Singapore's central bank likely to stand pat after inflation picks up Stubborn inflation points to the Monetary Authority of Singapore standing pat at its 29 January meeting.   December inflation picks up to 3.7% Singapore’s December inflation quickened to 3.7% year-on-year, faster than markets had forecasted (3.5% YoY) and up from the 3.6% YoY reported in the previous month. December saw food inflation moderate to 3.7% YoY (from 4% YoY) while clothing inflation fell 1% YoY.  Forcing headline inflation higher were faster prices increases for transport (3.9% vs 2.8% YoY) and recreation and culture (6.3% vs 5.6% YoY previously). Meanwhile, core inflation, which is the price measured more closely followed by the Monetary Authority of Singapore (MAS), rose to 3.3% YoY – much higher than expectations of a 3% YoY rise. December’s core inflation was faster than the 3.2% YoY gain recorded in November.   We expect inflation to remain elevated in the near term, with Singapore implementing the second round of increase for the goods and services tax (GST). On top of this, a potential increase in global shipping costs due to issues on security at important shipping lanes could mean that inflation remains sticky in 2024.       Inflation comes in higher than expected, pointing to MAS keeping setting untouched     Faster inflation points to MAS standing pat MAS recently switched to conducting four policy meetings per year, with the first policy meeting for 2024 set for 29 January. With inflation accelerating more than expected and price pressures remaining elevated due to the implementation of GST and potential spikes in global shipping costs, we expect the MAS to retain all policy settings at its upcoming meeting. Furthermore, we believe the MAS will likely want to retain their hawkish bias until they are convinced that core inflation will remain under control.  

CEE: Fair level reached before next move Yesterday's data published in Poland was fairly mixed, indicating cautious signs of recovery in industry and construction but weaker growth in retail sales. The general economy gained momentum in the fourth quarter of last year but the pace slowed after the third quarter. December is again hopeful that a recovery is coming. Today's calendar is essentially empty except for Hungarian wage data. It gets more interesting in the bond space. In Poland, the first auction will take place today after the recent sell-off and political tensions. At the same time we saw a hawkish turn from the National Bank of Poland. So today's auction will test where demand is after recent events. The FX market opened the week in CEE in line with our expectations yesterday. PLN managed to stabilise around 4.360 per euro and for now we don't see too much bias either way until we see more progress on the political side. EUR/CZK remains in the 24.700-800 range where it is likely to remain in the days ahead, unless the CNB steps in with bolder statements than we have seen so far. EUR/HUF has moved up into our 383-384 range and given the rate pricing we think this will be the level ahead of the National Bank of Hungary's meeting next week.

05:40GMT Thursday 25th January 2024 ECB and US Q4 GDP in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK) European markets saw a much more positive session yesterday, carrying over the momentum from a buoyant US market, but also getting a lift after China announced a 0.5% cut in the bank reserve requirement rate from 5th February. US markets finished the day mixed with the Dow finishing lower for the 2nd day in succession, while the S&P500 and Nasdaq 100 once again set new record highs, as well as record closes, although closing off the highs of the day as yields edged into positive territory. This divergence between the Dow and Russell 2000, both of which closed lower for the second day in succession, and the Nasdaq 100 and S&P500 might be a cause for concern, given how US market gains appear to be being driven by a small cohort of companies share prices. Today's focus for European markets which are set to open slightly lower, is on the ECB and the press conference soon after with Christine Lagarde, where apart from questions on timelines about possible rate policy, Lagarde could face some questions a little closer to home amidst dissatisfaction over her leadership style from ECB staffers. When looking at the economic performance of the euro area, we've seen little in the way of growth since Q3 of 2022, while inflation has also been slowing sharply. Yet for all this economic weakness, a fact which was borne out by yesterday's flash PMI numbers, especially in the services sector, the ECB has been insistent it is not close to considering a cut in rates, having hiked as recently as last September. Only as recently as last week we heard from a few governing council members of their concerns about cutting too early, yet when looking at the data, and the fact that the German economy is on its knees, the ECB almost comes across as masochistic in its desire to combat the risks of a return of inflation. In a way it's not hard to understand given that after November headline inflation slowed to 2.4%, it picked up again in December to 2.9%, while core prices slowed to 3.4%. This rebound in headline inflation while no doubt driven by base effects will be used as evidence from the hawks on the governing council that rates need to stay high, however there is already evidence that the consensus on rates is splintering, and while no more rate hikes are expected the economic data increasingly supports the idea of a cut sooner rather than later. Markets currently have the ECB cutting rates 4 times this year in increments of 25bps, starting in June, although given the data we could get one in April. This contrasts with the market pricing up to 6 rate cuts from the Federal Reserve despite the US economy being magnitudes stronger than in Europe. No changes are expected today with the main ECB refinancing rate currently at 4.5%, however Q4 GDP due next week, and January CPI due on 1st February calls for a March/April rate cut could start to get louder in the weeks ahead, especially since PPI has been in deflation for the last 6 months. US bond markets appear to be starting to have second thoughts about the prospect of 6 rate cuts from the Federal Reserve this year, although there is still some insistence that a March cut remains a realistic possibility. Today's US Q4 GDP numbers might bury the prospect of that idea once and for all if we get a reading anywhere close to 2%. This seems rather counterintuitive when you think about it, the idea that the Fed would cut before the ECB when Europe is probably in recession and the US economy is growing at a reasonable rate, albeit at a slower pace than in Q3. Expectations for Q4 are for the economy to have slowed to an annualised 1.9% to 2%, which would be either be the weakest quarter of 2023 or match it. Nonetheless the resilience of the US consumer has been at the forefront of the rebound in US growth seen over the past 12 months, with a strong end to the year for consumer spending. This rather jars against the idea that US GDP growth might get revised lower in the coming weeks as some have been insisting. If you look at the December control group retail sales numbers, they finished the year strongly and these numbers get included as a part of overall GDP. Weekly jobless claims are also at multi-month lows of 187k, and while we could see a rise to 200k even here there is no evidence that the US economy is slowing in such a manner to suggest anything other than a modest slowdown as opposed to a sudden stop or hard landing.  The core PCE Q/Q price index is expected to slow from the 3.3% seen in Q3 to around 2%, which may not be enough to prompt a softening in yields unless we drop below 2%. EUR/USD – pushed up to the 1.0930 area before retreating. While above the 200-day SMA at 1.0830, the bias remains for a move higher towards the main resistance up at 1.1000.  GBP/USD – pushed up towards 1.2775 yesterday with support at the 50-day SMA as well as the 1.2590 area needed to hold or risk a move lower towards the 200-day SMA at 1.2540. We need to get above 1.2800 to maintain upside momentum. EUR/GBP – fell to 0.8535 before rebounding modestly. Also have support at the 0.8520 area, with resistance at the 0.8620/25 area and the highs last week. USD/JPY – finding a few offers at the 148.80 area over the last 3days which could see a move back towards the 146.25 area. A fall through 146.00 could delay a move towards 150 and argue for a move towards 144.00. FTSE100 is expected to open 19 points lower at 7,508 DAX is expected to open 36 points lower at 16,854 CAC40 is expected to open 10 points lower at 7,445.  

The Commodities Feed: Gold trades softer on lower rate cut expectations Gold is softer this Thursday as stronger economic data and positive sentiment in the broader financial markets have eased Fed rate cut expectations for the March meeting. Meanwhile, a stronger EIA report pushed ICE Brent above US$80/bbl.   Metals – Gold trades softer Gold has been trading lower as the prospect of a rate cut in March eased amid positive economic data and overall sentiment in the broader financial markets. The US composite PMI advanced to 52.3 in January, the highest level since June 2023, as service sectors show a rebound. The eurozone composite PMI also increased from 47.6 to 47.9 in January, indicating early signs of bottoming out, although it still remains in the contraction zone. The positive economic data hints that the US Fed may opt to wait before cutting rates, which weighed on gold demand. Investment demand for gold remains soft, with total known ETF holdings of gold falling by around 1.3mOz in the month so far to a total of 84.3mOz as of 24 January, the lowest level in nearly four years.

Today's core PCE the next key signpost ahead of next weeks Fed meeting By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets managed to eke out a small gain yesterday after the ECB kept rates unchanged but left the door ajar to the prospect of a rate cut before the summer. ECB President Christine Lagarde did push back strongly on speculation that policymakers had discussed anything like that insisting that such talk was premature, echoing her comments made earlier this month. It was noteworthy however that the possibility of a cut before June wasn't ruled out completely, and it was that markets reacted to yesterday as yields declined sharply, which does keep the prospect of an earlier move on the table given how poor this week's economic data has been.   US markets also managed to finish the day higher with the S&P500 and Nasdaq 100 putting in new record closes, after US Q4 GDP came in well above expectations at 3.3%. The core PCE price index also remained steady at 2% for the second quarter in succession, and in line with the Federal Reserve's inflation target, thus keeping faint hopes of a US rate cut in March alive. It also places much greater importance on today's December core PCE deflator inflation numbers which aren't expected to vary much from what we saw in the November numbers. At the moment markets seem convinced that the Fed might spring a surprise in March and slip in an early rate cut if inflation shows further signs of slowing. That might make sense if the US economy was struggling but this week's economic numbers clearly suggest it isn't, and if anything is still growing at a decent clip. There is a danger that in cutting rates in March they drive market expectations of further cuts into overdrive, something they have been keen to push back on with recent commentary.   In any case with the Federal Reserve due to meet next week markets are continuing to try and finesses the timing of when the first rate cut is likely to occur, after Powell's surprisingly dovish shift when the central bank last met just before Christmas. That means today PCE numbers are likely to be a key waypoint for markets and the central bank, after the PCE core deflator slowed to 3.2% in November, slipping from 3.4% in October, and the lowest level since April 2021. A further slowdown to 3% or even lower, which appears to be the consensus could see markets continue to build on the prospect of a rate cut in March, which took hold back in December. The bigger concern for some Fed officials is that headline CPI appears to be ticking higher again, which may make the last yards to 2% much trickier. This will be the Fed's key concern over an early cut as it could reignite the inflationary pressures that have taken so long to get under control. This caution would suggest that March is too early for a US rate cut, and that the market is getting ahead of itself, with policymakers also likely to pay attention to consumer demand. This means personal spending is also likely to be a key indicator for the FOMC and here we are expecting to see a pickup to 0.5% from 0.2%. With the US consumer still looking resilient the Fed is likely to be extra cautious if inflation starts ticking higher again as it already has with headline CPI.   It was also interesting to note that while yields fell sharply yesterday, the US dollar didn't, it actually finished the day higher and well off the lows of the week.       EUR/USD – slipped back towards the 200-day SMA at 1.0820/30 yesterday, with a break below 1.0800 targeting a potential move towards 1.0720. Resistance at the highs this week at 1.0930 and behind that at 1.1000.  GBP/USD – while the pound has struggled to push higher this week, we've managed to consistently hold above the support at the 50-day SMA as well as the 1.2590 area. We need to get above 1.2800 to maintain upside momentum. EUR/GBP – finally slipped to support at the 0.8520 area, which needs to hold to prevent a move towards the August lows at 0.8490. Resistance at the 0.8620/25 area and the highs last week. USD/JPY – currently finding resistance at the 148.80 area which has held over the last week or so which could see a move back towards the 146.25 area. A fall through 146.00 could delay a move towards 150 and argue for a move towards 144.00. FTSE100 is expected to open 30 points higher at 7,559 DAX is expected to open 50 points lower at 16,857 CAC40 is expected to open 28 points higher at 7,492.

US GDP rises 3.3% (annualized) in Q4 A fairytale outcome for the US economy GBPUSD drifts lower US economic data continues to point to an economy that’s doing very well despite the various headwinds including very high interest rates. GDP data for the fourth quarter easily exceeded expectations, rising 3.3% on an annualized basis, adding to the increasing view that the US could be heading for a fairytale scenario, not just a soft landing. We’ve spoken a lot about resilence in the US economy over the last couple of years but that the economy can continue to show such strength and low unemployment with interest rates so high and inflation falling back toward target is unbelievable.   Cable edges lower after failing again at 1.28 The pound has repeatedly tested 1.28 against the dollar over the last couple of months and despite the occasional breach, it’s failed to significantly break higher.   GBPUSD Daily Source – OANDA It broke below a rising trendline last week, further signaling that the trend is weakening, amid divergence between price and the MACD. It’s now tested those highs again – and the trend line – and failed which could be another suggestion that the rally is running on fumes. A move below 1.26, the low of the last month, would further back this up and could trigger a sharper decline in the pair.

ECB leaves rates on hold Lagarde still eyeing summer rate cut EURUSD consolidating after correction The European Central Bank left interest rates on hold on Thursday and claimed inflation is progressing towards its target while giving no clear guidance on when interest rates will start falling. We came into the new year with markets pricing in a March rate cut and that is now looking increasingly difficult. Even with a late pivot – which was always likely the strategy of the central bank – policymakers would have to signal that a rate cut is a live possibility over the next six weeks in appearances made between meetings. That’s not impossible but it’s arguably not particularly transparent. The data is unlikely to surprise to that degree. President Christine Lagarde and some colleagues have previously indicated a rate cut in summer may be appropriate but investors are not convinced we’ll have to wait that long. Lagarde stuck with that today while suggesting demand was weaker, as is the economy, and inflation is falling. Perhaps this is her way of leaving the door slightly ajar for March or maybe the usual lack of clear guidance has left everyone desperately looking for something that isn’t there. I get the feeling Lagarde and her colleagues wanted to give absolutely nothing away today, instead opting for an array of vague, uninformative statements that buy them six more weeks before they may have to say or do something. A bullish correction or sideways continuation?   The euro has drifted lower after the announcement and press conference but it hasn’t broken out of the range it’s traded in over the last week or so. EURUSD Daily Source – OANDA The correction we’ve seen since the turn of the year appears to be running on fumes but there’s still a question of whether this is just that, and will turn higher and look to break the highs, or just a continuation of the longer term sideways trend. There are some important support levels between 1.07 and 1.0850 which could tell us which is the case.  

The Japanese yen has edged lower on Thursday. In the North American session, USD/JPY is trading at 147.62, up 0.08%. US GDP roars with 3.3% gain The US economy continues to surprise with stronger-than-expected data. On Wednesday, the services and manufacturing PMIs both accelerated and beat the estimates, followed by first-estimate GDP for the fourth quarter earlier today. The economy sparkled with an expansion of 3.3% q/q, blowing past the consensus estimate of 2.0%. This follows the blowout gain of 4.9% in the third quarter. Consumer spending remained strong at 2.8%, compared to 3.1% in the third quarter. The US economy expanded in 2023 at 2.5% y/y, up from 1.9% in 2022. The US dollar’s reaction to the positive GDP report has been muted. There were concerns earlier this year that the economy might tip into a recession, as the Fed continued to raise interest rates to beat down inflation. However, solid consumer spending and a resilient labour market have boosted economic growth and the Fed is well on its way to achieving the tricky task of a soft landing for the economy. On the inflation front, the core personal expenditure price index was unchanged at 2% in the fourth quarter, while the headline index rose 1.7%, down sharply from 2.6 in Q3. The week wraps up with the personal consumption expenditures (PCE) price index on Friday, considered the Fed’s preferred inflation gauge. The PCE price index and core PCE price index are expected to edge slightly lower in January, which would be an encouraging sign that the inflation is moving lower.   Japan releases Tokyo Core CPI, a key inflation indicator, on Friday. The consensus estimate for January stands at 1.9% y/y for January, after a 2.1% gain in December. If the estimate proves correct, it would mark the first time in almost two years that it has fallen below the BoJ’s target of 2%. . USD/JPY Technical USD/JPY is testing resistance at 147.54, followed by resistance at 148.44 There is support at 146.63 and 145.73  

US to release The Canadian dollar is showing limited movement on Thursday. In the European session, USD/CAD is trading at 1.3513, down 0.08%. Bank of Canada keeps rates on hold There were no surprises from the Bank of Canada, which maintained the benchmark rate at 5% on Wednesday. The rate has remained the same since July and it looks very likely that the central bank has wrapped up its rate-tightening cycle, barring a huge turnaround in inflation, which has been generally moving lower. Governor Macklem said in a follow-up press conference that inflation is still too high and that it was “premature” to be discussing lowering interest rates. Macklem said that he was concerned about “persistence in underlying inflation” and that more time was needed to let monetary policy do its work. Macklem’s pushback was fairly predictable, as he needed to convey a clear message that the battle against inflation is not yet over. The Canadian Imperial Bank of Commerce and the Bank of Montreal both stated after the BoC decision that they expect a rate cut in June. The markets are more bullish and have priced in a rate cut in April at 66%. If inflation moves closer to the 2% target, the odds of an April cut will likely rise. The US economy continues to churn out solid numbers and the January PMI reports were better than expected. The services PMI rose to 52.9, up from 51.4 in December and above the market consensus of 51.0. This marked a seven-month high. The manufacturing PMI clawed into expansion territory with a reading of 50.3, up from 47.9 in December which was also the consensus estimate. This was the highest level since October 2022. The US releases first-estimate GDP for the fourth quarter later today. The consensus estimate stands at 2.0%, which follows a sparkling 4.9% gain in the third quarter, which was the highest growth rate since Q4 2021. If the estimate is wide of the mark, we could see a strong reaction from the US dollar in the North American session. . USD/CAD Technical USD/CAD is putting pressure on support at 1.3494. Below, there is support at 1.3459 There is resistance at 1.3558 and 1.3593

Expect the Bank to drop its tightening bias Financial markets expect the Bank Rate to be one percentage point lower in two or three years' time than was the case in November. That will have important ramifications for the Bank’s two-year inflation forecast, which is seen as a barometer of whether markets have got it right on the level of rate cuts priced. Previously, the Bank’s model-based estimate put headline inflation at 1.9% in two years’ time, or 2.2%, once an ‘upside skew’ is applied. We wouldn’t be surprised if this ‘mean’ forecast (incorporating an upside skew) is still a little above 2% in the new set of forecasts. And if that’s the case, it can be read as the BoE subtly pushing back against the quantity of rate cuts markets are pricing in. If that happens, we suspect markets will largely shrug it off. The bigger question is whether the Bank makes any changes to its statement – and its forward guidance currently reads like this: Policy needs to stay “sufficiently restrictive for sufficiently long.” It’s likely to stay restrictive for “an extended period of time.” “Further tightening” is required if evidence of “more persistent inflationary pressures.” We think the baseline assumption going into this meeting is that the last of those sentences gets dropped and that the three hawks who'd been voting for a rate hike in December finally throw in the towel, given the recent run of inflation data. A hawkish surprise is, therefore, a statement that looks much the same as December’s, with at least one or two committee members voting for a further rate hike. A dovish surprise would see the Bank remove or water down the sentence on how long policy needs to stay restrictive. There’s also a tail-risk that Swati Dhingra, known to be the most dovish committee member, votes for a rate cut, though our base case is a unanimous decision to keep rates unchanged (6-3 previously).     Markets seem more sensitive to dovish nuances of late The market discount for BoE rate cuts has moderated. At the end of last year, a first cut by May was still fully discounted, and overall more than six cuts were fully priced in for 2024. This has come back towards slightly more than 50% implied probability of a May cut and four cuts overall being priced in. These are not unplausible scenarios but are obviously dependent on data and, for instance, the government's tax plans. But looking at markets more globally, they appear more sensitive to softer data and any dovish nuances provided in communications. As such, we do see a possibility for front-end rates to tick slightly lower if the MPC, for instance, removes its hike bias - in its commentary as well as the voting split. Further out the curve 10Y gilt yields have risen back towards 4% from around 3.5% at year-end. But yields appear capped at 4%, facing resistance to move higher. If we take a simple modelling approach, augmenting a short-term money-market-based estimate of the 10Y gilt with yields of its US and German bond peers, we conclude that gilts see slightly too high yields already. Keep in mind that the BoE meeting is flanked by the Fed meeting, jobs data in the US, and the CPI release in the eurozone, which should be crucial in driving wider sentiment. When it comes to FX markets, sterling has been the best-performing G10 currency against the dollar this year. Its implied yield of 5.2% means that it is the only G10 currency up against the dollar on a total return basis this year. As above and given that the market is minded to look for the more dovish interpretation of central bank communication in what should be a year of disinflation, the idea of the BoE playing dovish catch-up with the Fed and the ECB could be a mild sterling negative.  That probably means that EUR/GBP will struggle to maintain any break below strong support at 0.8500 in the near term, and the BoE event risk means EUR/GBP could start to trade back over 0.8600.  However, our end-quarter target of 0.8800 looks too aggressive now. Scope for tax cuts in early March, sticky services inflation and composite PMI readings comfortably above 50 in the UK could well mean that EUR/GBP traces out a 0.85-0.87 range through the first half of this year. For GBP/USD, the FX options market currently prices a very modest 42 USD pips of day event risk around the Wednesday FOMC/Thursday BoE meeting. Our baseline scenario assumes GBP/USD could trade back down to/under 1.2700 on Thursday, especially should the FOMC meeting have disappointed those looking for a March rate cut from the Fed.