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.

• To maintain reasonable and sufficient liquidity
• To effectively prevent and fend off financial risks in key areas
• To maintain stable operation of foreign exchange market
• Will strengthen and improve provision of foreign exchange policy

This is just a timely reminder for markets that Chinese authorities are continuing to keep a watchful eye on things at the moment and that they are going to keep up measures to prop up the economy.

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

It is being said that China’s currency regulators have in recent weeks asked some commercial banks to either reduce or delay their dollar purchases. This is an informal instruction (of course, naturally) that was meant to slow down the pace of depreciation in the Chinese yuan.

One source added that regulators were even adamant that banks should put off any dollar purchases under their proprietary trading accounts. There has been some stabilisation of sorts in the yuan since the middle of July but if this is all intended just to slow down the drop, it will eventually come one way or another. Indirectly, this is something to watch out for the aussie and kiwi in case there are any spillover effects moving forward.

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

• Eurostoxx -1.0%
• Germany DAX -1.0%
• France CAC 40 -1.0%
• UK FTSE -0.6%
• Spain IBEX -1.0%
• Italy FTSE MIB -1.2%

It’s not a good look for European indices either as seen above, with US futures also tilting lower on the session. There aren’t any major catalysts but the turn of the month can be a little tricky sometimes. As for August as a whole, it’s not exactly the best month for stocks in general as outlined in the seasonals by Adam here.

The softness in equities today is keeping the dollar in a steadier spot while the commodity currencies are continuing to be punished. AUD/USD is looking to inch towards its end-June and July lows near 0.6600 now, down 1.3% to 0.6630 on the day.

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

Technical analysis is one of the most powerful weapons in a trader’s arsenal to grasp market opportunities. It allows you to predict price moves of the asset of your choice by studying past price patterns and current market conditions. One of the most popular ways to do this is with Japanese candlesticks. In this article, Fxview analysts take a deep dive into the origin of candlesticks, candlestick patterns and how they can help traders understand trends.

The Origin of Candlestick Analysis

Although Steve Nison’s book, Japanese Candlestick Charting Techniques, popularised using candlestick patterns for trading, he wasn’t the creator of this technical analysis tool. Homma Munehisa, a Japanese rice trader, pioneered the technique as far back as the 18th century. Candlestick patterns are considered the oldest price charting technique today.

Munehisa recorded the price of rice every day for 15 years. He would compare the price of the previous day and assess whether it had increased or decreased. He also discovered that trader psychology influenced prices. Using his knowledge, he created a trading system. Munehisa’s system was based on assessing whether the price had moved up or down during a certain period, which led him to create candlesticks. He used candlesticks to assimilate the entire range of price movement through opening and closing prices. Candlesticks formed patterns that he used to assess trends (‘Yin’- uptrend or ‘Yang’ – downtrend) and rotations (retracements).

While other traders were merely buying and selling rice, Munehisa was tracking and understanding how the price moved. He worked with 3 principles.

1. Price Considers Everything

Homma Munehisa believed that price changes were the result of several factors. These factors include supply, demand, traders’ fear or greed, news or rumours, politics and weather (critical for agricultural products like rice). For this, he used a team of about 100 messengers between Osaka and Sakata to learn how prices changed from one place to another.

2. Price Movement Creates Trends

Regular gains or declines in prices result in the formation of trends. Any disruptions due to news events, supply/demand changes or any other factor may cause the trend to change. Munehisa also identified factors that could lead to trend reversal.

3. History Repeats Itself

The Japanese rice trader also understood that markets are cyclical. This helped him add important dates and times of the year as critical parametres to his price speculation. He used available records of price history over the past 100 years to discover more patterns and cycles.

Munehisa’s technique benefited him and he became one of the greatest market analysts of his time. He is known for introducing the Sakata Rules, the principles used to develop his trading techniques and strategies based on clear candlestick patterns. These rules gained so much attention that the then-Japanese government recognised his success and hired him as a financial aide. He was also awarded the honourable position of a Samurai and is still often referred to as the “Father of Price Action Trading” among Japanese trading communities.

Candlesticks Patterns

Homma Munehisa’s system forms the basis of present-day technical analysis using candlesticks. A trader can gauge complete price action with a single glance at candlesticks. There are two types of candlesticks – bullish and bearish.

Bullish Candlestick

A bullish candlestick is green or black in colour, indicating that the price rose during the chosen period. The width of the candlestick is the duration of the price action. The bottom of the bullish candle is the opening price and the top is the closing price. The top and bottom wicks or shadows of the candle indicate the maximum and minimum price points for the period.

Bearish Candlestick

A bearish candlestick is either red or white in colour. The top of the bearish candle is the opening price and the bottom is the closing price. The width and the wicks represent the same duration of price action and maximum and minimum price points, just like bullish candles.

Benefits of Using Candlestick Charts for Technical Analysis

● Candlesticks are the simplest-to-read price indicators to identify entry and exit points.

● Using candlestick patterns gives traders a comprehensive view of the price movement for the time frame under consideration.

● Candlestick charts can be easily combined with other indicators for greater accuracy.

Bullish Candlestick Patterns

Candlestick patterns can be single, double, triple and multi-stick patterns. These patterns help traders discover trends and predict reversals. Based on their prediction, these patterns are also classified as bullish or bearish patterns. Traders identify bullish patterns to take long positions. Some of the most popular bullish multi-candlestick patterns are:

Head and Shoulders

Head and shoulder chart is widely used for reversal patterns. The normal head and shoulders is a bearish reversal pattern, indicating, with varying degrees of accuracy, that an uptrend is about to end. Comparatively, an inverted head and shoulders is a bullish reversal pattern, which signals that the downtrend is approaching an end.

The inverted head and shoulders pattern is formed when the price makes three consecutive valleys after a downtrend. This pattern forms when a security’s price reaches three consecutive lows separated by temporary rallies. The main characteristics of the inverted head and shoulders are:

1. An initial price decline to a trough (left shoulder) followed by a rise
2. A second price decline below the previous trough followed by another rise
3. A third price drop, yet not as low as the previous trough (right shoulder)
4. Once the last trough is reached, the price will start climbing towards the resistance point (neckline), which usually forms near the top of the previous troughs.

The trend reversal is confirmed when the next candle after the right shoulder breaches the resistance and the price begins to rally, as shown below.

Falling Wedge

A wedge pattern is formed when two trendlines converge. It indicates that the strength of the price movement is fading and could lead to a pause or reversal of the current trend. A falling wedge is considered a bullish candlestick pattern that occurs during a downtrend. Here, the price hits consecutive lower highs and lower lows, such that the trendlines for the high and low prices slope downwards to converge.

Ascending Triangle

Triangle patterns are used to identify trend continuation or reversal. When the trendlines form an ascending triangle, it is considered a bullish signal, regardless of whether it occurs during an uptrend or a downtrend. For an ascending triangle to form, the asset price needs to make higher lows, indicating that the number of buyers is increasing. As buyers take control of the market, the former resistance level becomes the new support level as the price continues to rise.

Candlestick charts are one of the most popular tools for effective technical analysis. Mastering these charts can help traders build a robust trading strategy and a decision-making system to discover and act on entry and exit points. To learn all about technical analysis and trading candlestick patterns, head to Fxview’s rich library of video tutorials.

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

• Prior 6.5%; revised to 6.4%

The euro area jobless rate holds steady in June after the revision to the May reading and that continues to hint that labour market conditions are still holding up well in the region. That is at least a positive development for the ECB in spite of the intensifying economic slowdown as we head into Q3.

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