Headlines:

• A more cautious mood after Fitch cuts US credit rating
• USD/JPY pushed lower amid safety flows for now
• What is priced in ahead of the BOE policy decision tomorrow?
• BOJ’s Uchida says may step in before 10-year yields hit 1%, depending on speed of the move
• BOJ’s Uchida: Decision to make YCC flexible not a move towards ending ultra loose policy
• Switzerland July manufacturing PMI 38.5 vs 44.0 expected
• Switzerland Q3 consumer confidence -27.1 vs -29.7 prior
• US MBA mortgage applications w.e. 28 July -3.0% vs -1.8% prior

Markets:

• JPY leads, NZD lags on the day
• European equities lower; S&P 500 futures down 0.5%
• US 10-year yields down 3 bps to 4.017%
• Gold up 0.3% to $1,950.98
• WTI crude up 0.7% to $81.96
• Bitcoin up 1.1% to $29,550

The big news on the day is Fitch downgrading the US‘ credit rating from AAA to AA+ here.

That is leading to risk aversion in markets as equities are lower and bonds are more bid. As European traders entered, the risk-off wave intensified but has abated somewhat now in the last few hours. S&P 500 futures were down around 0.5% early on before deepening losses to 1.1% but are now back down by 0.5% on the day.

European indices observed a poor open but have also trimmed declines, though are still down by around 0.7% to 0.9% roughly at the moment.

In FX, it was the Japanese yen that found a bid on the session with USD/JPY from 142.90 to a low of 142.25 before reversing that to 142.80-90 levels again now – still down 0.3% on the day.

The dollar was steadier throughout, keeping little changed against the European currencies while the aussie and kiwi bore the brunt of the selling today.

AUD/USD is marked lower to its lowest in two months – down to 0.6575 at the moment – amid the more cautious risk mood and break below 0.6600 in Asia trading.

All eyes are now on US traders to see how they take to the key news but I reckon it won’t be long till markets turn their attention to the US jobs report on Friday. In that lieu, we do have ADP employment data later to provide a bit of a teaser – even if it has not been an accurate indicator of what to expect from the non-farm payrolls.

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

The Fed hiked interest rates by 25 bps as expected and kept everything
unchanged. Fed Chair Powell reaffirmed their data dependency and kept all the
options on the table. The US data since the FOMC meeting has been supporting
the soft-landing narrative as the labour market indicators remained strong
while the inflation data missed expectations.

The RBNZ, on the other hand, kept its official cash
rate unchanged while stating that it will remain at the restrictive level for
the foreseeable future to ensure that inflation comes down back to target. The
recent New Zealand inflation data though surprised to the upside
which might put some pressure on the central bank at the next rate decision,
although they are more likely to keep rates steady.

NZDUSD Technical Analysis –
Daily Timeframe

On the daily chart, we can see that NZDUSD has sold
off heavily since the tap into the key 0.6389 resistance. The
target for the sellers should be the 0.5987 low, but we will need more strong
US data to keep the bearish momentum going.

NZDUSD Technical Analysis –
4 hour Timeframe

On the 4 hour chart, we can see that we are
starting to see a divergence with the
MACD which is
generally a sign of weakening momentum often followed by pullbacks or
reversals. In this case, we might see a deeper pullback into the downward trendline where we
can also find the 61.8% Fibonacci retracement level.
The sellers are likely to step in there with a defined risk above the trendline
to target the low. The buyers, on the other hand, will want to see the price
breaking above the trendline to increase their conviction and target the 0.6389
resistance again.

NZDUSD Technical Analysis –
1 hour Timeframe

On the 1 hour chart, we can see that we
have another strong short-term resistance zone at the minor trendline where
there’s confluence with
the previous swing low level, the 50% Fibonacci retracement level and the red
21 moving average. Aggressive sellers may step in here already to target
another selloff into the low. The buyers, on the other hand, will pile in more
aggressively if the price breaks above the trendline and target the break above
the major trendline.

Upcoming Events

Today we have the US
ADP report, which is a less reliable labour market indicator, but it can be a
market moving piece of data. Tomorrow, the market will focus on the US Jobless
Claims and the ISM Services PMI. On Friday, we will finally see the latest US
NFP report. Strong data should support the US Dollar, while weak readings are
likely to weigh on the greenback.

This article was written by FL Contributors at www.forexlive.com.

S&P 500 futures have pretty much more than halved losses now, being down just 0.4% after having been down a little over 1% earlier in the session.

It’s been a gradual recovery after a dip in the opening hour of European morning trade. Dip buyers are certainly making themselves known and are we going to see a stronger turnaround when Wall Street steps in later? We shall see.

Just in case you missed the big headline earlier today, Fitch moved to cut US‘ credit rating from AAA to AA+ and that triggered a risk-off wave in markets. That led to some more selling in Europe before the latest turnaround here.

I would think that there would be a further pullback on equities in light of the news and after a strong run of gains in July. But as mentioned here, this is a market that can quickly brush off almost anything and this latest news is arguably no exception to that matter of fact.

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

• Prior -1.8%
• Market index 200.7 vs 206.9 prior
• Purchase index 154.1 vs 159.2 prior
• Refinance index 433.6 vs 444.5 prior
• 30-year mortgage rate 6.93% vs 6.87% prior

US mortgage applications slumped further in the past week as both purchases and refinancing activity declined strongly. Higher rates are continuing to pressure the housing market and this will likely drag further until there are signs of a stronger policy pivot by the Fed.

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

As inflation continues to be a problem and wages data remain strong, the BOE will have not have much of a choice but to raise the bank rate by another 25 bps this week. The decision tomorrow is pretty much a given but the question will be how much more does the central bank need to curb inflation pressures?

Ultimately, that will come down to the data but it needs reminding that the expectation going into tomorrow is one that has been watered down after the UK June CPI figures here. At the time, traders were even considering a decent likelihood of a 50 bps rate hike by the BOE but now the pricing suggests that a 25 bps move is the most likely outcome.

According to the OIS market, a 25 bps rate hike is fully priced in with traders even over-compensating with odds for a 50 bps move being at 37% currently. As such, the expectation is that traders are going to hope for the BOE to continue with the recent policy language – in that they will leave the door open to tighten further in the months ahead.

Here’s a look at the OIS curve in pricing in the future path of rate hikes:

That has fallen off quite a bit from the near 6% pricing of the peak previously and a lot of that owes to the softer UK inflation numbers last month. But the fact is, traders are still pricing in at least three more rate hikes by the BOE for year-end and therein lies the risks for the pound.

The currency may have a bit more of a muted reaction tomorrow if the BOE delivers as expected and offers no pushback on the current market pricing. But if the central bank hints that they may be nearing the end of the tightening cycle, there is going to be a heavy backlash against the pound considering the pricing above.

If markets are looking for at least three more rate hikes and the BOE isn’t going to deliver on that, a pullback is overdue and that is going to weigh strongly on the pound. So, that’s a key risk to consider and I would say on the balance of things, the risks are skewed to the downside.

Because alternatively, if the BOE alludes to being more data dependent, then markets do not have to try and work out pricing in more than what they currently are doing until we get to the next UK inflation report on 16 August.

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