Outlook: Today’s is jobless claims (expected up to 259,000 from 256,000 a week earlier) ahead of the big kahuna tomorrow, nonfarm payrolls. The markets are suspiciously quiet and in a narrow range, with a lull like this usually preceding some fancy volatility and sometimes a breakout. Risk sentiment is not exactly on a knife edge, but it’s not taking a clear direction either. If we take the S&P as a bellwether, risk appetite is on an upswing and we see that in the CAD/AUD/NZD, too. This is not a commodity play but rather a growth play, with the AUD notably reflecting growth in Asia generally and China in particular, despite scare stories about China stumbling. If it’s buying iron (but not coal), it’s hardly on its sickbed. In the US, the risk of recession seems to have retreated now that the ISM services PMI unexpectedly rose to 56.7 in July from 55.3 in June and beating market forecasts of 53.5. Trading Economics notes output and new orders rose while employment fell only a little and price pressures eased (72.3 vs 80.1). Not so much fin--inventories fell at a faster pace (45 vs 47.5). "Availability issues with overland trucking, a restricted labor pool, various material shortages and inflation continue to be impediments for the services sector”, Anthony Nieves, Chair of the Institute for Supply Management said.” This nugget of information perfectly reflects the cloud of ambiguity surrounding risk sentiment. “Good but can get worse” or “Not bad yet.” This is reflected in the comments from above about the S&P: According to Bloomberg, “The recent brisk rebound in equity markets won’t last as macroeconomic data continue to deteriorate and earnings forecasts are being slashed, strategists at Goldman Sachs Group Inc. and Sanford C. Bernstein warn. ‘Without clear signs of a positive shift in macro momentum, temporary re-risking could actually increase risks of another leg lower in the market rather than signal the end of the bear market.’” So we are looking for “macro momentum” and not likely to get it from payrolls. While the pace of the next equity index move is developing in its chemicals, we have the bond market to watch. Recently we saw the 10-year yield move up about 25 points and hang on to it. Meanwhile, the Bund slid back under 1% and is staying there. We are seeing an emerging divergence in economies and in yields that has to come home to roost at some point. We are inclined to think the US can hold out longer on the economy than the gloomsters think, so that Europe’s innate deeper weakness should drag the euro down–but not until the Fed dove camp gives up. This gets twisty because when the US economy looks okay and the stock market is fat, dumb and happy, risk gets a lower score and the dollar is shunned. It’s not a little weird that bad economic data would make the dollar looks more like a safe haven and thus to be accumulated. This is how European economic data can be disregarded in favor of all US, all the time. We used to call this the “Teflon euro” but it’s really the “sticky dollar,” with bad news clinging to the US and getting overrated. Bottom line, we think the nascent yield and dollar rallyette are fading. It’s not time to take any sizeable positions. This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes. To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!

The British pound is in positive territory today and briefly climbed above the 1.22 line. In the European session, GBP/USD is trading at 1.2185, up 0.18% on the day. Will BoE tighten by 50bp? The Bank of England meets on Thursday, and a 50bp hike looks likely, especially after hints from Governor Bailey to that effect. In today’s business climate of high inflation and central banks aggressively raising rates, such increases are no longer viewed as ‘massive’ or ‘supersize’. Still, it should be remembered that the BoE has not raised rates by 50bp since 1995, so such a move would be significant, even if it has been priced in by the markets. This would bring the Bank Rate to 1.75%, still well below the rate levels at the Federal Reserve and many other major central banks. In June, the MPC voted 6-3 to raise rates by 25bp, suggesting that Thursday’s decision will not be unanimous either. If the majority wins six or more votes, it would send out a strong message that the BoE is prepared to continue hiking and another 50bp move would be a strong possibility in September, which would be bullish for the pound. A close 5-4 vote might result in less hawkish wording in its comments and would signal that we may be getting close to the end of the rate-tightening cycle and the pound could weaken. The BoE is under heavy pressure to alleviate the cost-of-living crisis in the UK, with inflation rising to 9.4% in June, up from 9.1% in May. Inflation expectations are also accelerating, which will make it difficult for the BoE to curb inflation. The danger with a faster pace of tightening is that it could result in the UK economy, which is already showing signs of slowing, tipping into recession. Central banks have circled inflation as public enemy number one, even if the price is a recession. Investors, however, are jittery about the “R” word, and any indications that the UK is in a recession would likely sour sentiment towards the British pound. GBP/USD technical GBP/USD faces resistance at 1.2295, followed by a monthly resistance line at 1.2362.  There is support at 1.2128 and 1.2061.

Outlook: Why did the dollar do an about-face? The comments from the Fed presidents did the trick–not the Pelosi trip, not Jolts–but even the strongest words from mere regional presidents do not usually generate this much power. As triggers go, these are not terribly impressive. We surmise that the market really was overold and wanted to square up a bit. The move was substantial, though, and that gives us our usual trend-follower’s headache–short-lived correction or return to primary trend? We get it right about half the time. We have push-me/pull-you risk factors today. The Pelosi trip has some still unknown after-effects making some folks nervous. Both Pelosi and Pres Biden have said the US will stand up for Taiwan, despite no defense treaty (or even diplomatic relations), and while we’d like to know why this statement and this trip at this time, we see no reason to think they are bluffing. Bloomberg opines that it’s Pelosi who gets the credit/blame. “Yields fell on the pivot narrative, but the move was amplified by concerns about Pelosi's trip to Taiwan. After her plane landed safely on the island, yields rose by over 20 basis points in a matter of hours, one of the most aggressive bond selloffs seen in five years.” This is self-serving interpretation, not straight news. Attributing cause and effect is tricky. We can repeat that saber-rattling, even with China, hardly ever moves FX. It takes real bullets to do that. On the other side is the idea Opec will increase output. The FT writes “Saudi Arabia is moving towards a push for a small increase in oil production when the Opec+ group meets later on Wednesday, as it looks to bolster an improvement in relations with western powers in recent weeks. “Four people briefed on the kingdom’s thinking said a small production increase was becoming the most likely outcome in the wake of Crown Prince Mohammed bin Salman’s welcome in France last week and following US president Joe Biden’s trip to Jeddah in July.” Risk appetite should be returning. We even have revisions to final PMI’s in Europe showing conditions less bad than in the flash. Whether this pushes back against the dollar’s gain and makes it a one-day wonder remains to be seen. Some analysts are making a big deal out of the bar pattern, known as an outside day (higher high and lower low than the day before) and also as a key reversal. Considering that the usual timeframe for trading FX is not the daily basis (but rather 60-240 minutes), we have our doubts about whether the classic bars and candlesticks retain their traditional meaning. In any case, if you want the real scoop on patterns, there is only one source–The Pattern Site. Author Bulkowski, who wrote the definitive books, gives you incidence and outcomes in mind-numbing detail. The data is all for equities, but never mind–human behavior is the same or at least similar no matter the asset class. And since everyone sees the key reversal, we should talk about it. Do not consult YouTube or other sources. That’s because they all consider the key reversal to be a one-day phenomenon and it’s not–it takes two. The close in an upside key reversal has to hold the high for a second day to deliver the bullish promise. The same thing holds for the bearish version, which is what we have in the euro. Now consider scale. On 8/1, the euro high was 1.0275. Yesterday, the high was only 19 points higher (1.0294), which in an average true range of about 150 points is a mere 13%. We want to see a higher high so that the end result, a vastly lower low, appears vastly lower. Then there’s that second day criterion. For the reversal to be “key,” is has to last more than one day. This seems too obvious for words. Also pretty obvious has to be confirmation by another independent indicator. It can be one of the channels/bands or something like relative strength/momentum. You can get a band/channel breakout in a day but that’s too quick for most indicators and certainly our best one in FX, the MACD. Finally, confirmation can come from another security but can also be a trap. We have a clear, big reversal in some other places, notably the dollar/yen. But again, one day does not a reversal make. Finally, context matters. See the 240-minute euro chart. We are still within a range and that range is still is within the 23-50% retracement zone. Key reversal is not proven. We sometimes choose to pretend to buy into the consensus view for a quick gain but other times we stick to our knitting. As noted above, we are right only half the time. This time we expect divergence in the dollar...

ISM will release the July Services PMI report on Wednesday, August 3. Markets have been scaling down hawkish Fed bets since the last FOMC meeting. Inflation component of the PMI survey could impact the dollar's valuation.  The dollar has been having a difficult time finding demand amid disappointing macroeconomic data releases and the Fed’s decision to abandon rate guidance. The US Bureau of Economic Analysis’ initial estimate showed that the US economy contracted at an annualized rate of 0.9% in the second quarter and the probability of a 75 basis points (bps) Fed rate hike in September dropped below 20%. On Monday, the Institute for Supply Management (ISM) reported that the business activity in the manufacturing sector continued to expand at a moderate pace with the headline Manufacturing PMI coming in at 52.8. The Prices Paid component of the survey, however, declined to 60 from 78.5 in June, revealing a remarkable easing in price pressures. Consequently, the US Dollar Index (DXY), which tracks the greenback’s performance against a basket of six major currencies, fell to its lowest level in a month near 105.00.  DXY daily chart Dollar bears look for signs of softening inflation On Wednesday, the ISM will release its Services Report on Business. The headline PMI is forecast to edge lower to 53.5 in July from 55.3 in June while the Prices Paid component is expected to rise to 81.6 from 80.1. Market participants are likely to react to inflation developments rather than the overall state of the service sector unless the headline PMI diverges from the market consensus in a significant way. A Services PMI reading below 50 should escalate inflation fears and cause markets to continue to scale down hawkish bets. On the other hand, an unexpected jump could open the door for a USD rebound but such a reaction should remain short-lived. In case the report unveils a noticeable decline in the Prices Paid component, the dollar could continue to weaken against its peers. According to the CME Group’s FedWatch Tool, markets are pricing in an 81.5% chance of a 50 bps rate hike in September, suggesting that there is more room on the downside for DXY if the data is seen as a factor that would allow the Fed to remain cautious with regards to future rate increases. On the contrary, investors could refrain from betting on further dollar weakness if the Prices Paid component remains elevated above 80.  ISM Services PMI, Prices Paid Index Markets should pay close attention to the Employment component as well. Ahead of Friday’s jobs report, a print below 50 would point to a contraction in the service sector employment and put additional weight on the USD’s shoulders. To summarize, the only dollar-positive scenario would be with the ISM’s publication revealing that inflation continued to run hot in the service sector in July. 

EUR/USD retreated sharply from a multi-week high set on Tuesday amid resurgent USD demand. The risk-off impulse, US-China tensions, hawkish remarks by Fed officials boosted the greenback. The downfall, however, stalls near mid-1.0100s, warranting caution for aggressive bearish traders. The EUR/USD pair witnessed a dramatic turnaround and retreated around 130 pips from the vicinity of the 1.0300 mark, or a four-week high touched on Tuesday. The US dollar made a solid comeback from its lowest level since July 5 and turned out to be a key factor that exerted heavy downward pressure on the major. Against the backdrop of growing recession fears, mounting diplomatic tensions over US House Speaker Nancy Pelosi's Taiwan visit tempered investors' appetite for perceived riskier assets. This was evident from a generally weaker tone around the equity markets, which drove some haven flows towards the greenback. The intraday USD buying picked up pace after several Fed officials hinted that more interest rate hikes are coming in the near term. In fact, San Francisco Fed President Mary Daly noted that work on inflation is nowhere near almost done and that policymakers are still resolute and completely united on achieving price stability. Separately, Chicago Fed President Charles Evans said that he hopes the US central bank can raise rates by 50 bps in September and continue with 25 bps hikes until the start of the second quarter in 2023. Later, Loretta Mester, president of the Cleveland Fed, said that several more months of evidence that inflation has peaked will be needed before the central bank ends its rate hike cycle. Adding to this, St. Louis Fed President James Bullard said that the US central bank is committed to the inflation target and that a soft landing is feasible if the regime shift is executed well. The hawkish remarks assisted the US Treasury bond yields to reverse an intraday fall to the lowest level since April and provided an additional lift to the buck. That said, a modest recovery in the global risk sentiment prompted some USD selling during the Asian session on Wednesday and helped limit any further losses for the EUR/USD pair. Spot prices have now climbed back to the 1.0200 neighbourhood as market participants now look forward to the release of the final Eurozone Services PMIs for some impetus. Later during the early North American session, traders will take cues from the US ISM Services PMI. This, along with the US bond yields and the broader risk sentiment, might influence the greenback and allow traders to grab short-term opportunities. Technical Outlook From a technical perspective, the EUR/USD pair, so far, has struggled to find acceptance above the 38.2% Fibonacci retracement level of the 1.0787-0.9952 downfall. The overnight sharp pullback further warrants some caution for bullish traders. The overnight retracement slide, however, stalled near the 23.6% Fibo. level. The mentioned support, around the 1.0150 area, should now act as a pivotal point for intraday traders. Some follow-through selling would expose the 1.0100 round-figure mark, below which spot prices could slide back towards the parity mark. The downward trajectory could further get extended towards challenging the YTD low, around the 0.9950 region touched on July 14. On the flip side, the 1.0225-1.0230 area now seems to act as an immediate strong resistance ahead of the 1.0270-1.0280 supply zone. The latter coincides with the 38.2% Fibo. level and is closely followed by the 1.0300 round-figure mark. Bulls are likely to wait for a sustained move beyond the said handle before positioning for an extension of the recent recovery from a nearly two-decade low. The EUR/USD pair could then surpass an intermediate resistance near the 1.0365-1.0370 region, or the 50% Fibo. level, and aim to reclaim the 1.0400 mark, which coincides with the 50-day SMA.

Markets Less dovish comments from Fed officials overnight snapped yields higher, with the US 10yrs rallying back to 2.75%. At the same time, more sabre rattling from China sapped some confidence from equity markets with a sea of red this morning across major global indices. As we wrote on yesterday's Asia close note, prepare for The Fed speaker pivot push-back offensive to begin. With so few people believing in the 3.25% terminal rate, who buys this duration rally? Meanwhile, the China tail risk re-emerges, Ferrari's order book confirms the burgeoning income disparities, Uber re-ignites reopening, and BP can prepare for a populist backlash after a massive beat and dividend raise. US equities whipsawed between gains and losses before ultimately finishing lower on Tuesday, as geopolitical tensions remained at the forefront. Headlines surrounding US House Speaker Nancy Pelosi's arrival in Taiwan were greeted by China announcing missile tests, keeping investors on edge, despite Pelosi maintaining that her arrival did not alter longstanding US policy in the region. China's military drill is about 12 nautical miles from Taipei and 9 nautical miles from Keelung, which is very dangerous for military escalation between China and Taiwan as UN law defines territorial sea as within 12 nautical miles.  US Treasury 10yr yields soared 20bp on the day, with yields rising across the curve after a hawkish chorus of FED speak reminded investors that the Fed's work is "nowhere near almost done."Although the global benchmark S&P 500 was trying to hold on to the 4100 level, the combination of Pelosi-induced Taiwain jitters and the Federal Reserve officials ultimately reaffirming their commitment to bring inflation under control proved to be the indexes undoing. Rates had been suspiciously priced for a soft landing taking equities to a similar place. And while it sounds all too far-fetched, some stock market enthusiasts are still likely living in ISM manufacturing goldilocks Nirvana with activity down but not collapsing while deflationary pressures are building, ignoring the upcoming July FOMC reality check. Watch out for ISM Services, Eurozone PPI and retail sales and US Factory orders tonight   Oil Oil prices rose after swaying to and fro in a choppy session as traders hedged against the possibility of more crude coming to market after the OPEC+ production meeting.  Brent is still trading below $100 this morning as both event and headline risk continues to keep energy traders quick on the uptake. At the same time, the hawkish push-back from Fed members strengthening the US dollar provides yet another hurdle for oil bulls to clear. Aside from a possible event risk from a shift in OPEC+ production policy when the group meets later, oil traders remain laser-focused on global macro data, particularly concerning the two largest oil-consuming economies in the world, the USA and China.