S&P 500 futures are down 0.3% while Nasdaq futures are down 0.1% currently. Meanwhile, 10-year Treasury yields are down 5.8 bps to 3.909% as traders are staying more vigilant on the session. USD/JPY is down 0.4% to 146.15 but is off session lows of around 145.65, helped by another bounce off its 100-hour moving average.

European indices continue to be weighed down as well with the DAX down 0.7% and CAC 40 down 1.1%. That owes much to a catch up to Wall Street losses yesterday as well. It’s all still to play for on the day though, as markets are moving with a sense of caution. All eyes are on the US weekly initial jobless claims next at 1230 GMT.

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

Fundamental
Overview

The surprisingly weak US NFP report last Friday triggered risk-off flows. Interestingly,
while many major currencies weakened against the USD, the Euro strengthened a
lot which reminded the famous words from former ECB’s President Draghi when he
said “The Euro is like a Bumblebee. This is a mystery of nature because it
shouldn’t fly but it does.”

It might be due to yields
spreads shooting in favour of the Euro as the market priced in a very
aggressive rate cuts path for the Fed or just because it’s the second largest world’s
reserve currency. Anyway, at the moment the market is expecting the Fed to cut
rates by 50 bps in September and a total of 110 bps of easing by year-end.

For the Euro, the market is
seeing a 25 bps cut in September and a total of 68 bps of easing by year-end.
The ECB speakers hinted that the market’s path for interest rates is reasonable
but the recent events in the markets have been exaggerated for just a single
data point.

EURUSD Technical
Analysis – Daily Timeframe

On the daily chart, we can
see that EURUSD broke through the 1.09 resistance following the weak US NFP report
and extended the gains into the 1.10 handle. That’s where the sellers stepped
in with a defined risk above the level to position for new lows. The buyers
will want to see the price breaking above the 1.10 handle to increase the
bullish bets into the 1.1136 level next.

EURUSD Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can
see the strong bullish impulse that we got on the US NFP release that led to key
breakouts of the downward trendline and the 1.09 resistance. We have
now a nice support zone around the 1.09 handle where we can also find the 50% Fibonacci
retracement level for confluence.

If the price gets there, we
can expect the buyers to step in with a defined risk below the support to
position for a rally into new highs with a better risk to reward setup. The
sellers, on the other hand, will want to see the price breaking lower to
increase the bearish bets into the 1.0812 level next.

EURUSD Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can
see that we have a decent resistance zone around the 1.0940 level where the
price got rejected from several times in the past days. This might act as kind
of a barometer for the sentiment with the price staying above being more
bullish and staying below being more bearish. The red lines define the average daily range for today.

Upcoming
Catalysts

Today we get the latest US Jobless Claims figures which will likely be a
strong market moving release given the market’s focus on the labour market. The
market will also pay close attention to Fed members’ comments with Fed’s Barkin
scheduled to speak later in the day.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

Fundamental
Overview

Crude oil sold off pretty
heavily in the latter part of last week as we got some very weak US data
releases first with the ISM Manufacturing PMI and then with the NFP report. The
market eventually bounced back on Monday and extended the gains yesterday with
the appointment of the new Hamas leader being the likely catalyst as he’s seen
as more hard-line.

This follows the assassination
of the former Hamas leader Ismail Haniyeh in Iran with Israel being blamed for
the attack. The tension in the Middle East continues to be high as the world is
waiting for Iran’s retaliation and fears a wider escalation. This keeps the
supply side of the equation uncertain and raises the geopolitical risk premium.

Crude Oil
Technical Analysis – Daily Timeframe

On the daily chart, we can
see that crude oil dropped all the way back to the 72.50 low where we got a
bounce on Monday and then a stronger rally on Wednesday. The sellers will want
to see the price breaking below the 72.50 level to increase the bearish bets
into the 65.00 price region.

The buyers, on the other
hand, will look for a rally back into the 80.00 level although we will need some
key breaks on the lower timeframes to get the momentum going.

Crude Oil Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can
see that the price yesterday broke above a minor resistance
around the 74.50 level and extended the rally into the 76.00 handle. The price
is now pulling back to retest the level and that’s where we can expect the
buyers to step in with a defined risk below the level to position for a break
above the major trendline.

The sellers, on the other hand,
will want to see the price falling below the level to increase the bearish bets
into the 72.50 level targeting a break below it.

Crude Oil Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can
see that we have also the 38.2% Fibonacci
retracement level adding confluence to the support zone around the 74.50
level. If the price rallies into the major trendline, we can expect the sellers
to lean on it to position for a drop back into the lows with a better risk to
reward setup. The red lines define the average daily range for today.

Upcoming
Catalysts

Today we get the latest US Jobless Claims figures which will likely be a
strong market moving release given the market’s focus on the labour market. The
market will also pay close attention to Fed members’ comments with Fed’s Barkin
scheduled to speak later in the day.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

• It is desirable for currencies to move in a stable manner reflecting fundamentals
• Excessive volatility increases uncertainties, reduces predictability for businesses
• No change to Japan’s economic outlook despite recent market volatility
• Closely monitoring financial markets with a sense of urgency, and also calmness

A 2,000 pips range in a span of a month is probably more than what Tokyo bargained for when they decided to intervene in July. There is a calmer mood in markets right now but it doesn’t mean that volatility has died down. It will take a while for fears to abate further, provided that there aren’t any more shocks along the way. In that lieu, do be mindful of the US weekly initial jobless claims tomorrow as one a potential trigger on the economic calendar.

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

• It is not a reaction to fundamental issues with the economy
• If confidence in slowing trend of inflation strengthens, rate cuts can continue
• The path to inflation target is still bumpy

Even so, a repeat of the Friday and Monday rout in markets risks further tightening in financial conditions and could still prompt central banks into action. Or at least traders will wish for that to happen amid more kicking and screaming to come, that is.

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

• Market index 215.1 vs 201.2 prior
• Purchase index 133.9 vs 132.8 prior
• Refinance index 661.4 vs 570.7 prior
• 30-year mortgage rate 6.55% vs 6.82% prior

The average rate of the most popular US home loan took a plunge last week after the drop in yields on Friday, alongside signals from the Fed to cut rates. The massive plunge is enough to get mortgage applications back up with both purchasing and refinancing activity also climbing.

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

Fundamental
Overview

The weak US NFP report last Friday triggered risk-off flows.
Things got dire on Monday as the Japanese Nikkei dropped 12% overnight and we
saw a general selloff in global stock markets.

At one point, the markets
saw the Fed cutting rates by 136 bps by year-end and some chances of an
emergency rate cut. Although the volatility calmed down a bit and markets
recovered the Monday’s losses, the expectations haven’t changed much as the
market is still pricing a higher probability for a 50 bps cut by the Fed in
September and a total of 103 bps by year-end.

The GBP gained against the
USD on Friday due to the aggressive rate cuts pricing for the Fed but
eventually gave way to the greenback as the risk-off intensified on Monday
morning. We had another selloff on Tuesday morning although there wasn’t any
clear catalyst. The sentiment is still fragile, and flows are dominating the
price action.

GBPUSD
Technical Analysis – Daily Timeframe

On the daily chart, we can
see that GBPUSD dropped below the major trendline and extended the selloff into the
1.2677 level as the bearish momentum increased. The natural target for the
sellers should be the swing low level at 1.2615.

If the price gets there, we
can expect the buyers to step in with a defined risk below the level to
position for a rally into new highs. The sellers, on the other hand, will want
to see the price breaking lower to increase the bearish bets into the 1.25
handle next.

GBPUSD Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can
see that we have a downward trendline defining the current bearish momentum.
The sellers will likely keep on leaning on it to position for further downside,
while the buyers will want to see the price breaking above the trendline to
regain some control and pile in for new highs.

GBPUSD Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can
see that we have a decent resistance
around the 1.2720 level where the price got rejected from several times. The
buyers will want to see the price breaking higher to position for a rally into
the downward trendline. The sellers, on the other hand, will likely lean on it
to position for a drop into the 1.2615 level. The red lines define the average daily range for today.

Upcoming
Catalysts

This week is basically empty on the data front. The only notable economic
releases will be on Thursday when we get the latest US Jobless Claims figures.
The market will also pay close attention to Fed members’ comments given the
latest developments in the markets.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

The idea of the dollar smile theory is pretty much this:

But amid the unwinding of the carry trade since Friday, there is something worth noting about the dollar under these circumstances. The global selloff proved that even with risk aversion in markets, the dollar struggled for the most part. So, what gives?

As the boom meets a bust, traders are getting a reality check. The carry trade mostly depended on this one thing. Traders were borrowing yen at low interest to buy risky assets i.e. US stocks mostly. That’s the simplest way to put it. So, the BOJ hiking rates plus the yen surging led to a double whammy which shook markets since Friday.

That is not to mention with all the panic surrounding the state of the US economy with markets suddenly wanting to believe that the Fed has to step in with emergency rate cuts. Pfft.

So, looking at the state of things, markets are now figuring out the one thing that can really hurt it the most. And that is when leverage gets out of control and come back to bite at investors.

A flight to safety during such an event typically should bolster the dollar’s standing but considering the circumstances, the dollar seems to be the one caught on the opposite side of the unwinding too. It doesn’t help when the solution for investors is to go kicking and screaming, and asking help from the Fed.

Taking that as a case in point, the dollar smile theory may yet have changed to a dollar frown theory – at least for now:

That being said, with the Fed poised to cut rates, it will also keep a lid on any outsized dollar rally from hereon. But a more robust economy in general will at least keep the dollar in good standing and not exercise the Fed put too quickly.

But if other parts of the economy start to show more warning signs like the labour market, the dollar might quickly find itself in hot water once again.

And to pile on the misery, it will also trigger worries about the outlook for US stocks. In turn, that might bring us back to the episode from last Friday and this Monday again. That especially if USD/JPY also continues to plunge alongside a declining equities market.

In the normal case of risk aversion, the dollar is a comfort for traders in general. But when we’re now caught in the storm of the carry trade unwind, the dollar really needs a strong economy to work for it in order to stand its ground.

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

The big question circulating in investors‘ minds must probably be whether the recent market moves are just a foretaste of a larger downturn or simply a temporary correction.

The answer delves into the reasons for the sudden change in market sentiment. Once the latter is understood, it may become clear whether the same scenario will repeat itself.

Let’s start by saying that a prevailing theory is that investors suddenly fear that the US is headed for a recession, given the continued weakening of the labor market.

Similar news in the past would have sparked optimism by suggesting that the Federal Reserve might tighten monetary policy. But now, fears of a hard landing have surfaced.

However, Monday’s ISM services PMI data, which showed an increase of 2.6 points to 51.4 in July, cast doubt on the worst-case scenario (a deep recession).

Another factor cited by the media was the pullback in technology companies due to downbeat earnings reports and a generally uncertain outlook.

But there could be another element at play: a global margin call.

The trigger was the sudden strengthening of the Japanese yen, driven by the Bank of Japan’s more hawkish stance, which recently raised its interest rate to 0.25%.

In addition, the BOJ pledged to halve its bond purchases, reducing them to about 3 trillion yen ($19.9 billion) by the first quarter of 2026. In other words, goodbye Abenomics…

As a result, USD/JPY fell sharply to 150. It seemed that this was precisely the Bank of Japan’s target. So, how could this move have impacted international markets?

The problem is that investors have long been borrowing in the Japanese yen because of its lower rates, investing in assets in countries with higher rates, and engaging in carry trades.

With the Bank of Japan’s policy change, those borrowed in yen suffered losses, leading global investors to liquidate their positions in foreign assets and buy yen instead.

This led, on the one hand, to a massive sell-off of risky assets and, on the other, to a further strengthening of the yen. In other words, we witnessed a global margin squeeze.

Interestingly, the strengthening of the yen has had very adverse effects on other major markets worldwide in the past. So, such a phenomenon has occurred before.

What is the verdict?

Beyond macroeconomic indicators and geopolitics, investors will now closely monitor the yen. Thus, we can see a more emotional move in the coming days or even weeks.

The big question now is whether the Fed could call an emergency meeting or whether the recent improvement in market confidence will make them hesitate to take urgent action.

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

The recent events
in the markets reminded me of a great tip from the legendary investor Stanley
Druckenmiller. For those who don’t know him, he averaged 30.4% return per year
for 30 years with not even a single negative year.

In an interview he
was asked about what made him so successful in the markets and his answer was:

“Having an open mind.
I never get married to a position. I’ve had positions where I was sure I was
going to hold them for 2 years and a week later I didn’t have a position and I
was short. Because conditions change. If conditions change, you have to move immediately.
That was true 20 years ago and it is 10x now with the internet and everything.”

To explain this
concept better, I will use a recent example with the Nasdaq (this is of course hindsight analysis but it’s good for educational purpose).

Last Wednesday, after
a strong selloff caused by the deleveraging of the Yen carry trades, the market
started to bottom out going into the BoJ decision. At one point it looked
like the worst was behind us as the Nasdaq broke through key technical levels
and rallied almost 5% in a single day.

Unfortunately, the following day we got an ugly ISM Manufacturing PMI which
sent the market into risk-off and defensive positioning into the NFP report. The
US Jobs report worsened everything as the data surprised to the downside with
unemployment jumping to a totally unexpected 4.3% rate. The losses extended and
eventually we got a strong overnight selloff yesterday as the Nikkei crashed 12% in
a single day causing a global market rout.

In the bigger picture, there were certainly good reasons to expect a rally last week and eventually even a new
all-time high. But we can see from the chart above that the ISM Manufacturing
PMI was the catalyst for the selloff, and once the price fell back below the key
19400 zone, the bearish momentum increased.

In that case, conditions changed.

This is when you should take countermeasures to protect your capital.

You
could have closed out a long position altogether or you could have reduced your
risk if the conviction in your trade remained strong. In any case, it was the time to adjust and not getting married to your original idea.

This article was written by Giuseppe Dellamotta at www.forexlive.com.