• Hopes that TPI will not need to be used

This will be more of a focus as we get closer to the Italian elections in late September. In any case, the ECB has bigger problems to worry about as the latest data out of Europe has been rather abysmal. Can they keep hiking through to year end with a recession looming large?

This article was written by Justin Low at www.forexlive.com.

After the ECB last week, there was a strong bid in bonds although that has eased today with yields sitting higher. Some slight hawkish remarks by the ECB today here is helping slightly but overall, it seems like traders are waiting in the wings ahead of the Fed as there are some key levels approaching.

Let’s take a look at 10-year Treasury yields first.

The Friday drop saw yields fall back below the 100-day moving average (red line) but the previous lows at 2.70% to 2.72% is still very much holding and that will be a key spot to watch in case we see an extension to the bond bid from the end of last week. It’s all down to the Fed now and if there is reason for bonds to rally, a big drop in yields taking out the levels above will materially impact broader markets surely.

At the same time, 10-year German bund yields are also approaching a key level:

The drop on Friday took out the recent lows near 1.07% and saw yields fall to its lowest since the end of May. But more notably, it is approaching a test of the 100-day moving average (red line) again – a level which held in March. A drop back below the 1% mark and the key technical level should coincide with a broader bid in bonds and that may see markets react more strongly.

If we are to see a material drop in yields breaking the key levels as highlighted above, expect yen pairs to feel the gravitational force and be weighed lower as well. If this comes as a result of a Fed fail this week, expect that to drag the dollar down as well.

This article was written by Justin Low at www.forexlive.com.

The dollar was steadier to start the session but is finding itself on the backfoot as stocks turn positive with European indices seen up around 0.2% to 0.4% while US futures are up 0.3% on the day. That comes after a tepid start to proceedings but I wouldn’t look too much into the risk advance as the Fed will ultimately be the key driver of sentiment this week.

In any case, the dollar is losing some ground but key technical levels are still holding and they are well worth watching in case we do see traders make any sudden moves before the Fed this week.

EUR/USD is up 0.4% to 1.0250 but is still a bit away from contesting the 50.0 Fib retracement level at 1.0283:

Meanwhile, GBP/USD is also up 0.4% on the day to 1.2050 but is facing some short-term resistance around 1.2033-45 with the Friday high at 1.2063 also potentially limiting an upside push for the time being. But if buyers can push through that, the next key level to watch would be a potential push towards 1.2200.

Another big pair to watch is AUD/USD as it is up 0.4% to just above 0.6950 at the moment:

The 50.0 Fib retracement level at 0.6982 is a key level to watch alongside the 0.7000 handle, with large option expiries also seen at the figure level today. That is likely to keep gains in check but a break above will make for an interesting technical situation with the 16 June high at 0.7069 a potential target before the 100-day moving average above 0.7100 currently.

This article was written by Justin Low at www.forexlive.com.

Stocks are leaning more positively to start the day and bond yields are also higher as we get into the thick of things in European morning trade. S&P 500 futures have advanced to be up 0.3% now after being down slightly by 0.1% at the start of the session.

In turn, that is seeing the dollar slip a little alongside the yen. EUR/USD has moved up from around 1.0200 to 1.0250 while GBP/USD has pulled higher from 1.1980 to 1.2045 and are trading at session highs at the moment.

This article was written by Justin Low at www.forexlive.com.

Last week the ECB raised rates by 50
bps and the markets are still evaluating the change, but the raise is not
likely to impact the EUR/USD’s trajectory and prevent it from further
depreciating which is the expected scenario.

The main events of the week ahead are:
For the USD, the consumer confidence data, the FOMC Meeting and the Core PCE
Price index q/q; for the AUD, the CPI q/q; and for the JPY, the Japan
(Tokyo) Inflation which is not expected to have a major impact but could give
an insight into how nationwide prices are evolving. The BOJ is not showing
signs of joining the hawkish camp, at least for now.

The political crisis in Italy, the
battle for the next Prime Minister in the UK that’s expected to be over in
early September and the headlines about the war in Ukraine will continue to add
uncertainty in the market over the coming weeks. The unprecedented heat waves
hitting Europe are expected to impact the energy market in particular.

The W.H.O declared monkeypox a global
health emergency and it remains to be seen if the market will react in any way
to this development. And finally, the month end rebalancing is also something
we should keep an eye on.

As we’re heading into the last month of
summer, market conditions could be tricky due to low liquidity. Traders will be
taking a closer look at this week’s FOMC minutes. After Waller recently backed
a 75 bps rate hike the USD entered into a correction, but the market is now
pricing in a 100 bps hike. A lot can happen until Wednesday, of course.

Nomura expects a 100 bps hike, even
though the consensus among analysts is now for 75 bps, as it adjusted its view
after the last CPI print data. Nomura’s main argument is that given the
inflation increase it feels like the Fed could be behind the curve and this
will help them catch up.

This week’s meeting will set the tone
for the USD for the next month as there won’t be another FOMC meeting in
August; just the Jackson Hole Symposium.

Nomura analysts believe that after a
100 bps hike in July, the Fed will likely slow down to a pace of 50 bps in
September’s meeting, then three consecutive 25 bps hikes in November, December
and February.

For the AUD, all eyes will be on the
CPI data which will set the tone for the next RBA meeting on August 2nd. It is
hard to believe the data will be low enough to keep the RBA for hiking rates by
50 bps as expected, but if inflation exceeds expectations considerably, a 75
bps hike could come into play.

USD/CAD expectations

In the short term, the USD/CAD looks
good for selling opportunities targeting 1.2785. On the H1 chart the pair
closed the week near the 1.2945 level of resistance which, if rejected, will
move the next target to the 1.2830 support. On the upside the next resistance
is at 1.3040.

The CAD had a positive week, but it’s
possible that USD selling will see some restraint before this week’s FOMC
meeting. According to analysts from Scotiabank the CAD’s correlation with crude
oil and commodities strengthened in recent weeks. This is a sign that the
commodity market prices are stabilizing following the recent slide, but they
won’t resist the global growth slowdown over the longer term. The CAD might
have the opportunity to gain some ground on the USD over the short term.

It’s worth noting though that the
outcome of the Fed’s meeting could influence the pair direction.

The Dollar Index expectations

While the next FOMC meeting will set
the tone for the USD, there are concerns about the impact the continued USD
strengthening has on vulnerable countries with a considerable portion of their
sovereign debt in USD. Wells Fargo warns about potential repayment issues, sharp
economic slowdown in the developing world and a rise in the probability of
default.

On the H1 chart the DXY is flat and
it’s possible to enter a period of consolidation until Wednesday. From a
technical perspective there are a few levels to watch for: The DXY is near the
106.05 support. If broken, the next level of support is 105.10. On the upside
the next level of resistance is at 107.35 and 108.70.

I believe the USD correction is not
over yet and could continue over next month. In the long run the prospects for
the USD are bullish.

This article was written by Gina Constantin.

This article was written by ForexLive at www.forexlive.com.