US CPI (Jul) – 10/08 – with US CPI reaching another 40 year high of 9.1% in June, there was some concern that the Federal Reserve might have been tempted to go for a bigger than expected 100bps rate move in July. While the headline number grabbed all the attention it was notable that core prices fell back from 6% to 5.9%. Concerns about a 100bps rate move in July didn’t last very long as two of the most hawkish members of the FOMC pushed back against the idea, saying that they felt that 75bps was sufficient. Since those numbers were released, the debate has moved on a touch with concerns over a recession now outweighing concerns over aggressive central bank tightening. Bond market pricing since the June CPI numbers were released has seen prices rally strongly and yields fall back. Part of the reason for this change of tack has been the belief that while the Federal Reserve is likely to continue to talk tough on inflation in the short term, and continue to hike rates into year end, they will find it difficult to continue to do so into next year. We’ve already started to see weakness in broader commodity prices as well as in prices paid data in recent months, which suggests that headline inflation could well have peaked in the short term. Expectations are for a fall to 8.8%, with core prices expected to rise from 5.9% to 6.1%.      UK Q2 GDP – 12/08 – the UK economy managed to get off to a decent start to the year with 0.8% GDP growth in Q1. This is expected to slow sharply in Q2, especially given the sharp rise in the energy price cap in April, as well as the various tax rises which also came into effect at the same time. Having said that on the monthly numbers the picture looks slightly more positive. In April, not surprisingly the economy saw a -0.2% contraction in economic output, however in May this was more than reversed by a 0.5% expansion. On the various PMI indicators, despite rising costs economic activity has been positive, although retail spending has been a drag. Retail sales have also been a net negative thus far, however the Queen’s Platinum Jubilee celebrations could have acted as a positive catalyst in terms of tourism numbers. We saw in the latest GDP numbers from the likes of Spain and Italy how tourism can offer a positive catalyst and with a cheap pound the UK could see a similar uplift, which could see the UK avoid what is expected to be a negative print of -0.1%, even as Q3 offers an even more challenging environment.    US PPI (Jul) – 11/08 – having fallen back from its March peaks to 10.9% in May, US PPI unexpectedly jumped back to 11.3% in June, raising concerns that further inflationary pressure is building up in US supply chains. This was unexpected given that there had been little indication of such pressures in prices paid numbers for the same month. Furthermore, as far as core prices were concerned prices continued to fall away from their March peaks. Excluding food and energy, prices fell from 8.5% to 8.2%, with the hope that this wider trend can continue into July and Q3. There is some evidence that the June spike may have been a one-off given recent sharp falls in prices paid numbers. This could see prices slide back sharply from 11.3% to 10.3%, with core prices falling below 8%. The wider question for investors and markets in general is how much more can prices fall before finding a floor. This is the more important question when it comes to inflationary pressures. Where is the new neutral rate, given its highly unlikely to be at 2.5% which is where Fed chair Jay Powell seems to think it is.   China Trade (Jul) - 07/08 – China’s trade surplus hit a record in June, as the reopening of the economy after weeks of restrictions saw exports rise by 17.9%, and their strongest level this year. There is certainly an element of a pent-up rebound in these numbers and because of this the July numbers are likely to more subdued, with an expectation of a rise of 13.2%. Imports are likely to be a different story. These are expected to continue to look soft. We saw a 1% gain in June, as the stop start nature of China’s zero-covid policy is likely to weigh on internal demand. Retail sales have been weak for several months now and while demand has picked up in recent months as lockdown restrictions have been eased, the uncertain nature of China’s covid policy is likely to keep demand fairly weak. Forecasts are for a 4% rise which...

As written yesterday, GBP/USD highs were located at 1.2197, 1.2214 and 1.2233. GBP/USD traded perfectly to 1.2214. Lows at 1.2072 and 1.2063 traded exactly to 1.2064. Then longs dead stopped perfectly at reported range top at 1.2174. Vital to 1.2214 and 1.2063 are perfect levels. GBP/USD knew exactly where it would trade. If GBP/USD traded in between price at an interval then the message is GBP/USD contains a hesitant price and is not certain to direction. The larger range yesterday was 1.2174 to 1.2009. GBP/USD traded 40 pips above 1.2174. Next week's range: 1.2181 Vs 1.2020. GBP/JPY short strategy traded 200 pips lower. Longs next week must trade above 162.07. DXY traded 178 pips this week while USD/CAD traded 124 pips. USD/CAD's months long problem is short ranges to DXY. USD/CHF traded 181 pips Vs DXY 178. SPX traded 88 pips this week, 226 last week and 188 points 2 weeks ago. SPX trades consistent to DXY 200 ish pip ranges. A free trade to longs and shorts for free money occurs when SPX trades above or below DXY ranges. EUR/USD's overall range this week began at 1.0283 to 1.0136. Next week: 1.0290 Vs 1.0155. EUR/USD big break for higher 1.0425. What is EUR/USD doing. Exactly nothing. The numbers may change slightly but the location remains the same week to week. Plus, EUR/USD trades consistent to ranges. The number 00 to end an exchange rate trades but not very often. Today is unusual. GBP/USD top target today is 1.2200, AUD/USD 0.7000. USD/JPY 134.00. USD/CAD price path today: 1.2876, 1.2884,1.2892, 1.2900, 1.2916, 1.2924, 1.2933. GBP/JPY is an outlier currency pair and here's today's setup. 161.96, 162.06, 162.26, 162.36, 162.46, 162.56, 162.67. Bottom 161.45 achieves by 161.65 and 161.85. Upper target 162.67. Continuation Fail 162.26. Note ending numbers, 5, 6 and 7. GBP/JPY works on a 2 pip differential as a permanent fixture to its prices and won't ever change. USD/JPY traded 415 pips this week while JPY/USD traded 235 pips. JPY/USD 235 Vs DXY 178 is key to USD/JPY. USD/JPY big break for lower next week is located at 131.55 and the larger range trades from 136.12 to 133.83 then 132.69. Ranges inform next week 131.55 holds and we range trade. AUD/USD will trade exactly as this week: Caught between AUD/EUR and EUR/AUD. As written Sunday, AUD/USD targets higher at 0.7080’s or longs from 0.6887 to 0.6913. AUD/USD 0.7080;s traded 0.7047 then perfect to 0.6887. NZD/USD big break for higher is found at 0.6360. NZD/USD must break minimum 0.6325 for any chance at 0.6260 but then NZD/USD trades in no man's land and untouchable. AUD/JPY 92.01 and NZD/JPY 83.53 for lower. Deeply oversold CAD/JPY must break 102.43. EUR/CAD will trade next week from 1.3236 to 1.3088 while GBP/CAD trades from 1.5671 to 1.5499.

The US gained a whopping 528K jobs in July, far above expectations.  Strong wage growth adds to the notion of a 75 bps hike in September and is set to keep the dollar bid Only a drop in inflation could chang the course of the greenback beyond minor correction.  Help wanted, and much more of it – that is what the Nonfarm Payrolls report tells markets about the state of the hiring in America. Contrary to most Nonfarm Payrolls reports, the verdict on this one is clear – a monster report.  The US gained 528,000 jobs in July, more than double the early expectations of 250K, exceeding any upgraded expectations based on leading indicators – and on top of upward revisions. July's gain comes on top of 26,000 additional jobs updated for June. Despite rapid hiring, wage growth accelerated. It rose by 0.5% MoM in July, above 0.3% projected, and 5.2% YoY, beating early estaimtes for 4.9%. The only downside is a 0.1% slide in the participation rate to 62.1%. Neverhteless, the US is just 32,000 jobs short of pre-pandemic employment.  The impressive report seemed to have pushed away recession fears – at least for now – and substantially increased the odds for a third triple-dose rate hike by the Federal Reserve. The odds for a 75 bps hike in September are now around 60%, up from 40% before the NFP.  The boost to Fed expectations means a stronger US dollar. Will it last? First, some of the immediate reaction to the NFP tends to revert before the weekly close and this report is unlikely to be different. Nevertheless, I expect the greenback to hold onto more ofthe  its gains.  For stocks, good news is bad news – investors are focused on higher interest rates as discounting future valuations. However, markets have shown a new/old tendency to buy the dip and they may change their narrative. A strong US economy means higher corporate earnings.  What's next? The next big release is the Consumer Price Index (CPI). The fall in gasoline prices has undoubtedly pushed headline CPI lower, but there is uncertainty about Core CPI. If underlying inflation finally falls, it could change the narrative and send stocks higher and the dollar lower.  However, until that publication, the dollar is set to remain on top. 

Gold closed the third straight week in positive territory. $1,780 aligns as key technical level for XAU/USD. July inflation data from the US could trigger a strong reaction next week. Gold started the month of August on a firm footing and climbed toward $1,800 before erasing a portion of its weekly gains on Friday. The sharp decline witnessed in the US Treasury bond yields and the dollar’s uninspiring performance allowed XAU/USD to gain more than 1% during the first half of the week. Following the impressive July jobs report from the US, however, gold reversed its direction. The July inflation report from the US next week will be the next significant catalyst for the pair. What happened last week? The dollar sell-off continued at the beginning of the week and the US Dollar Index declined to its weakest level in nearly a month below 106.00. The data published by the ISM revealed on Monday that the Prices Paid Index of the Manufacturing PMI survey declined to 60 in July from 78.5 in June, revealing a significant softening in price pressures. Investors continued to scale back 75 basis points (bps) Fed rate hike bets in September on this data and gold closed the fourth straight day in positive territory.   With safe-haven flows starting to dominate the financial markets, however, the greenback regathered its strength and didn’t allow XAU/USD to preserve its bullish momentum. Reports of US House of Representatives Speaker Nancy Pelosi planning to visit Taiwan despite China’s stern warnings caused markets to turn risk-averse on Tuesday. Additionally, hawkish comments from Fed officials helped the USD continue to outperform its rivals. Chicago Fed President Charles Evans said that a 50 bps rate hike would be a “reasonable assessment” for the September meeting but left the door open for a 75 bps increase. Moreover, St. Louis Federal Reserve Bank President James Bullard said that he would want to get the policy rate to the 3.75-4% range by the end of this year and San Francisco Fed President May Daly argued that markets were getting ahead of themselves by expecting rate cuts next year. Nevertheless, investors breathed a sigh of relief after Pelosi landed in Taiwan and the dollar recovery lost its steam midweek. The ISM Services PMI improved to 56.7 in July from 55.3 in June but the dollar stayed on the back foot with the Prices Paid Index falling to 72.3, compared to the market expectation of 81.6, from 80.1. On Thursday, XAU/USD gathered further bullish momentum amid falling global bond yields. Following its August policy meeting, the Bank of England (BOE) announced that it hiked its policy rate by 50 bps to 1.75% as expected. On a concerning note, the bank said that it was now projecting the UK economy to tip into recession in the last quarter of the year and continue to contract throughout 2023. Although the dollar captured some of the outflows out of the British pound with the immediate market reaction, the fact that XAU/GBP gained more than 1% on a daily basis on Thursday showed that gold demand remained robust. The US Bureau of Labor Statistics announced on Friday that Nonfarm Payrolls in the US grew by 528,000 in July, surpassing the market forecast of 250,000 by a wide margin. Underlying details of the report revealed that the Unemployment Rate declined to 3.5% and the annual wage inflation, as measured by the Average Hourly Earnings, remained steady at 5.2%. The 10-year US Treasury bond yield gained more than 5% and climbed above 2.8% after these data, causing XAU/USD to make a sharp U-turn ahead of the weekend. Next week  Trade Balance data from China will be watched closely by market participants at the beginning of the week. In case there is a bigger-than-expected decline in the trade surplus, gold could find it difficult to gather strength and vice versa. Since early summer, disappointing data releases from China have been weighing on gold prices amid their potential negative impact on the demand outlook. On Wednesday, the US Bureau of Labor Statistics will release the Consumer Price Index (CPI) figures for July. On a yearly basis, the CPI inflation is forecast to edge lower to 8.9% from 9.1% in June. The market reaction to inflation data should be pretty straightforward with a higher-than-expected CPI print triggering a dollar rally and a soft reading forcing the currency to face renewed selling pressure.  The inflation report is likely to significantly affect the market pricing of the size of the Fed’s September rate hike. Currently, the CME Group FedWatch Tool shows that there is a 66.5% probability of the Fed opting for a 75 bps rate increase. Since Fed officials refrained from outright dismissing such a rate move, a CPI reading above 9% should allow hawkish Fed bets to...

GBP/USD snapped two straight weekly gains after dovish BOE hike. UK Q2 GDP could confirm a potential recession, US inflation is also crucial. Acceptance above 1.2200 is critical for GBP bulls to sustain the recovery. GBP/USD bulls faced exhaustion after two straight weekly advances and therefore, ended the week in negative territory. The Bank of England’s (BOE) dovish rate hike and persistent recession fears could be linked to cable’s underperformance. The impressive US July jobs report on Friday highlighted cable buyers’ hesitancy heading into the critical US inflation and UK quarterly GDP releases. GBP/USD: What happened last week? The US dollar’s weakness extended at the start of the week on Monday, as risk flows dominated amid a reduced probability of a 75 bps Fed rate hike in September. GBP/USD built on last week’s 150 pips gains and hit the highest level in four weeks at 1.2293, in anticipation of a 50 bps rate hike by the BOE to combat inflation. But the greenback sprung back to life towards the mid-week, as recession fears amplified alongside escalating geopolitical tensions. The safe-haven bids for the dollar resurfaced ahead of US House of Representatives Speaker Nancy Pelosi’s visit to Taiwan, despite China’s warning against the US going through with the visit. Meanwhile, investors assessed the mixed US ISM Manufacturing and Services PMI data, as the Treasury yields continued to struggle at lower levels, which signaled at an incoming recession. The hawkish commentary from Fed policymakers Charles Evans, James Bullard and Mary Daly jacked up odds for a 75 bps Sept lift-off back to around 50%, offering the much-needed support to dollar bulls. Further, upbeat US corporate earnings results eased recession fears while markets believed that the Fed could stick to its tightening path through the balance of this year. GBP/USD tested the 1.2100 demand area ahead of Thursday’s BOE rate hike verdict. The downbeat UK data undermined the pound further, as it showed that the country’s business activity service sector expanded at its weakest pace in 17 months. The UK final S&P Services PMI dropped to 52.6 in July from 54.3 in June vs. 53.3 expectations. The currency pair came under renewed selling pressure after the pound wilted on the BOE’s projection of a recession later this year. The central bank hiked the key rates by 50 bps to 1.75%, as widely expected but mentioned that it is not on a pre-set tightening path. The inflation forecasts were revised up to above 13% by October. Cable hit a five-day low of 1.2065 on the dovish BOE rate hike but managed to recoup some of its losses, as the US dollar lost ground alongside the yields after the weekly Initial Jobless Claims rose by 260K, hovering near an eight-month peak. On the final trading day of the week, the pair returned to the red amid pre-NFP anxiety. With the US Bureau of Labor Statistics reporting a 528,000 increase in NFP, compared to the market expectation of 250,000, the dollar gathered strength and forced GBP/USD to extend its slide toward 1.2000. Further details of the jobs report showed that the annual wage inflation remained steady at 5.2%. Week ahead: US inflation and UK GDP stand out The week ahead makes up for a slow start from an economic data release perspective leading into an eventful second half. Wednesday’s US Consumer Price Index (CPI) and UK quarterly GDP are likely to hog the limelight. Besides, US-China tensions over Taiwan, recession fears and Fed tightening expectations will continue to lead sentiment. Monday is absolutely data-empty on both sides of the Atlantic while Tuesday will see the release of minor US reports, in the Preliminary Unit Labor Costs and Prelim Nonfarm Productivity. The US monthly inflation will be reported on Wednesday, which will have a strong market impact, as the current inflation rate stands at the highest level since November 1981 at 9.1%, on an annualized basis. Hotter CPI figures will reinforce the need for a super-sized rate hike by the Fed at its next meeting, which could lift the dollar at the expense of the pound. Thursday’s US weekly Jobless Claims and Producer Price Index (PPI) data will also be critical to shaping up the Fed expectations. On Friday, the attention will turn towards the UK, as it publishes its monthly and quarterly GDP data. It’s the first estimate of the Q2 GDP and will hold utmost significance for the pound traders, especially given, the BOE’s latest gloomy economic outlook. The country’s manufacturing and industrial production data will also be released in parallel. On the US macro front, the Preliminary UoM Consumer Sentiment and Inflation Expectations data will wrap up another crucial week.  GBP/USD: Technical analysis GBP/USD broke below the ascending trend line coming from July 14 and the Relative Strength Index (RSI) indicator on the daily...

EUR/USD - 1.0240 Despite euro's retreat from Tue's near 4-week high of 1.0293 to 1.0124 (Wednesday), subsequent rebound to 1.0253 in New York yesterday on broad-based usd's weakness suggests choppy swings would continue ahead of key U.S. jobs report, above 1.0293 needed to extend rise from July's 0.9953 bottom to 1.0334, break, 1.0360. On the downside, only a daily close below 1.0209 signals intra-day top is made n heads back to 1.0161 (New York low), 1.0124. Data to be released on Friday: Australia AIG services index, Japan all household spending, coincident index, leading indicator. UK Halifax housing prices, France current account, trade balance, industrial output, imports, exports, non-farm payrolls, Italy industrial output. U.S. non-farm payrolls, private payrolls, unemployment rate, average weekly earnings, Canada employment change, unemployment rate and Ivey PMI.

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.