Headlines:

• Dollar stands its ground ahead of the Fed tomorrow
• European bond yields stay on the retreat
• EU countries reach deal on regulation for emergency gas cuts this winter
• EU energy policy chief: No technical reason for Russia to further cut Nord Stream flows
• UK July CBI retailing reported sales -4 vs -5 prior
• Japan raises overall view on economy for first time in three months

Markets:

• USD leads, EUR lags on the day
• European equities lower; S&P 500 futures down 0.3%
• US 10-year yields down 6 bps to 2.76%
• Gold down 0.1% to $1,717.41
• WTI crude up 1.6% to $98.27
• Bitcoin down 4.8% to $21,106

There weren’t much key headlines on the session as the dollar stood its ground while bonds were bid once again with all eyes on the Fed tomorrow. The jitters in Europe continues to reverberate as the region is set to face a gas crunch, even if there was a deal reached for emergency gas cuts during the winter. Do take note that the deal is a watered down version of the original proposal, so it is rather mehhhh.

The euro is the worst performer in trading today as the problems continue to mount for the single currency, with EUR/USD falling from 1.0220 to 1.0130. The pound also dropped as the dollar firmed, with cable falling from 1.2060 to 1.1975 during the session.

As risk sentiment remains rather sluggish, commodity currencies also retreated with USD/CAD moving from 1.2820 to 1.2880 while AUD/USD slumped from a high of 0.6983 in Asia trading to 0.6925 in European morning trade.

It looks like the dollar is standing its ground as we await the Fed tomorrow. It is going to be a big one for markets with bond yields looking to potentially crack lower and the greenback managing to keep a hold of key technical levels after the drop last week.

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

The recent bounce in stocks is not one that is too convincing and almost everyone seems to hold some belief that any decent rebound at this point screams a ‚bear market rally‘. So, what exactly will it take for the naysayers to go away?

At this point, I would argue that traders and investors have somewhat decently priced in odds of a recession. As much as central banks are closing their ears to stick with raising interest rates, it seems inevitable that we will experience some form of economic slowdown over the next 6-12 months.

The question is, how bad are things going to be and will it last longer than just a few quarters? In other words, a soft landing or a hard landing – particularly for the US economy?

As equities continue to brave the storm clouds of persistently high inflation, central bank tightening and recession risks, it is tough to find comfort for a major turnaround in sentiment. But if a recession is what it takes to put an end to interest rate increases, that might turn out to be a strong tailwind for stocks to really turn the ship in the other direction.

If the pandemic is any lesson, it is that markets love easy money. And while we are not going to see such over-stimulus again from major central banks, a U-turn in the direction to cut interest rates will surely be a welcome development for equities. So, is a recession really bad news for equities? It depends but if we are to experience a rather shallow one – which seems to be the case in point for markets now, I reckon that’s reason enough for investors to start to regain confidence in risk trades.

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

On the surface, it looks like the EU is finally showing some unity but this proposal has been watered down significantly with member states tweaking it so that there are exemptions and reductions to the gas cuts for certain countries and industries. The proposal is supposedly calling for EU countries to cut gas use by 15% from August through to March next year.

We’ll see about the details but the exemptions and such is pretty much another way of saying that it is every man for himself when it comes to dealing with the situation.

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

With key technical levels holding, the dollar is pushing back in trading today and is moving up to fresh highs since the end of last week. EUR/USD is now down 0.6% to 1.0155 as price threatens to fall back below its 200-hour moving average at 1.0161:

A drop below that will see sellers seize near-term control and will put pressure on minor support around 1.0140-55 next. If that gives way, the technical picture will turn more bearish for the euro with a look towards parity again perhaps. That said, it will all come down to the Fed tomorrow for any real conviction for such a move.

Meanwhile, GBP/USD is also trading down to just below 1.2000 and testing its 100-hour moving average at 1.1997 as outlined here.

Commodity currencies are also not spared from the dollar’s wrath with AUD/USD down 0.3% to 0.6935 on the day after the high earlier touched 0.6983 and testing the 50.0 Fib retracement level:

These are all key levels that were highlighted since the end of last week and the dollar is certainly showing that it is standing its ground. I wouldn’t chalk up the moves to any headlines on the day as this looks to be more like positioning plays ahead of the Fed tomorrow.

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

• Prior -5

The reading for the expected retail sales for August is seen down to -14 from -2 in the previous month. That’s the lowest since March 2021 as UK retailers are feeling rather downbeat about the outlook in the month ahead. The cost-of-living crisis continues to deepen and while retail sales balance edged up slightly as per the headline reading, it is hardly comforting when you weigh the report as a whole.

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

• 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.

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.

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.

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.