It’s been fairly one way traffic for equities since Asia trading. S&P 500 futures were lightly changed earlier in the day but are now up by roughly 0.5% ahead of US trading. Wall Street opened higher yesterday but surrendered gains during the session to close modestly lower. It can be argued that there was some pre-Powell angst perhaps but that looks to be clearing up now.

So, what exactly can we expect from the Fed chair later?

I won’t expect him to rock the boat amid fears of stirring up another volatility bout in markets. As such, it is likely that Powell should just reaffirm that they are looking to cut rates next month. But whether it be 25 bps or 50 bps, that is something that he won’t pre-commit to surely.

In other words, Powell will try to play it safe. The question is, will markets sense some relief for that? Or are they going to kick and scream again to force a 50 bps move? The current pricing shows that the odds of a 50 bps rate cut are priced at ~26%. So, there is some backpedaling to do there if the Fed doesn’t deliver.

That being said, there was no issue for risk trades when we went back from six rate cuts at the end of last year to just one by May. So, what’s a quarter pricing extra of 25 bps eh?

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

The pound has quietly been an outperformer among the major currencies in trading this year. Amid a more resilient economy and stickier inflation, the BOE has seen their rate cut plans pushed back. And that has helped to underpin the currency as most other major central banks are on track to cut rates further.

The latest to fall in that domino is the dollar, having endured a rather punishing last two weeks. In turn, GBP/USD has made significant progress in a push from 1.2800 to now above 1.3100.

And as we look to close out the week, buyers are taking aim at the 2023 high of 1.3142 currently.

Another notable development in August is that we are seeing price push above its 100-month moving average of 1.2926. GBP/USD has had a long history of struggle against its key monthly moving averages, stretching all the way back to 2008. And so, a firm break here could very well open up scope for a stronger upside push alongside the other technical levels highlighted above.

At the end of the day, it all comes down to the divergence between the BOE and Fed. And of course how quickly things will narrow once inflation pressures in the UK begins to come under control.

But with the dollar stumbling across multiple charts, it’s tough to argue against a softer backdrop for the US currency – at least for now.

All eyes will be on Fed chair Powell next to see if he will deliver another blow to the greenback before the weekend.

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

As the dollar bounced back a little, gold fell by 1% and more importantly back under the $2,500 mark. Price is still keeping above the previous triple top pattern around $2,480 but buyers will be hoping to clinch a more convincing push above the figure level to solidify the breakout status.

Instead, price action focus now turns towards the near-term chart as seen above.

The drop under $2,500 sees gold move back to test its 200-hour moving average (blue line) and buyers are holding for now. Keep above that and buyers will still be in it with a shout as we look to close out the week. But break below and sellers will start to resume near-term control for the first time since the start of August.

Fed chair Powell’s appearance is the key risk event to watch in the day ahead. That will matter for both dollar and bond market sentiment.

As such, gold will have to work with the reaction to that to wrap things up this week. For now, price action is sitting in a more neutral spot in the near-term. That considering we are seeing price trade back in between its 100 (red line) and 200-hour moving averages. And also with the $2,500 level in focus too.

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

• Eurostoxx +0.2%
• Germany DAX +0.2%
• France CAC 40 +0.3%
• UK FTSE +0.3%
• Spain IBEX +0.6%
• Italy FTSE MIB +0.6%

S&P 500 futures are up 0.4% as risk sentiment holds steadier to start the session. All eyes are on Fed chair Powell’s appearance later today to set the mood before the weekend. It is anticipated that he will confirm expectations of a rate cut in September. I wouldn’t expect him to be too explicit about it though. But we’ll see.

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

• Cable eyes the 2023 high with dollar in the doldrums
• ECB accounts: Next meeting widely seen as good time to evaluate policy restrictiveness
• France August flash services PMI 55.0 vs 50.3 expected
• Germany August flash manufacturing PMI 42.1 vs 43.5 expected
• Eurozone August flash services PMI 53.3 vs 51.9 expected
• Eurozone wages slow down in Q2 after running hot in the previous quarter
• UK August flash services PMI 53.3 vs 52.8 expected
• UK August CBI trends total orders -22 vs -25 expected
• BOJ reportedly considering to add wage-related items to quarterly Tankan survey

Markets:

• GBP leads, JPY lags on the day
• European equities higher; S&P 500 futures up 0.2%
• US 10-year yields up 6 bps to 3.835%
• Gold down 0.4% to $2,500.54
• WTI crude up 0.4% to $72.25
• Bitcoin flat at $61,301

The focus finally turns back to the economic calendar today and we got a round of PMI data from the euro area and UK to work through.

The French numbers were a beat on the services side but it is likely a one-off, owing much to a demand boost from the Paris Olympics. The German numbers were bad and that tempered with the euro a little on the release. But as markets are already pricing in a rate cut by the ECB for next month, the reaction has been rather minimal overall.

EUR/USD caught a brief algo spike from 1.1150 to 1.1165 before turning lower to 1.1128, then now trading just 0.1% lower at around 1.1135.

The dollar had been weaker throughout the week but is finding a bit of a footing today. That comes as bond yields are also bouncing back, erasing the drop from yesterday. And that is underpinning USD/JPY, with the pair now up 0.5% to around 146.00. The less dovish comments from the Fed’s Schmid here is also helping somewhat.

Besides that, GBP/USD is still marching forward and helped by a stronger UK PMI data. The pair is up just above 1.3100 as it looks to the 2023 high next at 1.3142.

In other markets, equities remain steady after regaining some composure yesterday. S&P 500 futures are up 0.2% with European indices also sitting modestly higher so far on the day.

All eyes now turn towards more US data to come, before moving on to Jackson Hole and Fed chair Powell’s appearance ahead of the weekend tomorrow.

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

• Quite strongly believe that we have to sustainably get inflation back to 2%
• There is still work to do on that
• We’ve seen some cooling in labour market conditions but it is still generally pretty strong
• On the NFP revision, „it doesn’t change a lot“ to the outlook
• Rates are not overly restrictive
• There is room to consider where we go from here

It’s not exactly the type of softer language that markets would like to be hearing from the Fed. The narrative that traders want right now is that ‚labour market is bad, we want rate cuts now‘. So, this doesn’t quite fit with that. USD/JPY is now up just above 146.00 with 10-year Treasury yields at the highs for the day at 3.835% – up by 6 bps.

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

• Medium-term outlook had not changed overall relative to June meeting
• Short-term outlook has become somewhat more „stagflationary“
• But weaker activity is likely to dampen inflation over time
• Economic balance remains lopsided, mostly still driven by services activity
• Labour market remains tight
• The persistence in services inflation remains the central element shaping the inflation outlook
• Inflation could turn out higher than anticipated if wages increased by more than expected
• Monetary policy transmission was unfolding according to expectations
• Extensive new data will be available by the time September meeting takes place
• The meeting is seen as a good time to re-evaluate the level of monetary policy restriction
• But should be approached with an open mind, which also implies data dependence
• Full accounts

They still have about three weeks to guide markets the other way if they so choose not to cut again next month. But given the balance of probabilities and the prevailing language at the moment, a 25 bps rate cut is pretty much locked in.

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

Currency dynamics and inflation is always a tricky ordeal to debate and/or navigate through. But for most major economies, currency movements are rather controlled and arguably play a small role in terms of influencing price pressures. The same goes for the euro area, or so at least that is what the ECB has been preaching over the years.

If we put that aside, what does the recent rise in the euro mean for the central bank and also the economy in general? Let’s take a look.

First off, let’s check on how the euro is performing in 2024 as a whole. With the dollar as the benchmark, the single currency is actually the second best performer among the major currencies.

And even so, the euro is just up nearly 1% only against the greenback. It feels rather surprising to see that, no? That especially given the dark outlook surrounding the dollar recently.

Going back on topic, how does this really impact the euro area economy if at all?

Well, considering the state of the manufacturing sector – especially Germany – a stronger euro is not exactly a helping factor in that regard. Demand conditions are weak and foreign demand is also struggling, not least with China’s worries. But with manufacturing already struggling, a stronger currency will make for more expensive exports and not help with the industry plight.

It’s certainly not too strong a factor yet considering the changes as seen above. However, every small thing counts especially when the economy is starting to show signs of a struggle again in Q3.

The ECB having to cut rates at a quicker pace might help to limit this as a factor in general. But their main battle is still on the inflation front, unlike the Fed.

As such, a stronger euro might be welcome slightly especially since it looks like we’re encountering a couple of bumps along the way in the disinflation process. That despite the argument above from the ECB that the exchange rate isn’t quite as important a factor in influencing prices.

Anyway, the latest CPI report in July here shows that price pressures aren’t exactly worsening but they’re not coming down all too quickly and convincing either.

If there is a tick up in inflation, even if due to base effects, towards year-end then that could give reason for the ECB to pause once again.

And that might invite further strength to the euro, with traders having now priced in ~66 bps of rate cuts in the next three meetings to December.

In turn, that feeds back into the cycle of putting more pressure on the manufacturing industry. And it all circles back to heaping pressure on the ECB again in having to chase rate cuts amid a stuttering economy.

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

• Prior -32

UK factory orders fell once more this month but less than July at least. The output expectations balance remains positive at least, though down to 9 from 25 in the month before. CBI notes that „the stop-start recovery seen in recent months continued in August but it is encouraging that manufacturers still remain confident that output will tick up over the autumn“.

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

• Prior +16.8%
• Market index 225.8 vs 251.3 prior
• Purchase index 130.6 vs 137.7 prior
• Refinance index 754.4 vs 889.3 prior
• 30-year mortgage rate 6.50% vs 6.54% prior

After the surge in mortgage applications in the week before that, we are seeing things moderate back last week. The surge in activity in the week before owes much to the sharp drop in rates, with it weighing on the average rate of the most popular US home loan once again.

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