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EURUSD may break 1.17 if the US July CPI indicates persistence in price growth

The dollar started the week on a positive note and on Tuesday continues to consolidate around the resistance at 93 points on DXY. Technically, there is a second retest in three weeks of the upper bound of the medium-term wedge pattern, which began to form about a year ago:

 Screenshot-2021-08-10-at-13-54-48.png

Most likely, this signals that buyers are gradually ramping up pressure ahead of the release of the US CPI in July, the upcoming conference in Jackson Hole, as well as against the background of an increase in the number of defensive deals due to the onset of the delta strain in certain regions. Also yesterday, the Fed representatives Rafael Bostic and Eric Rosengren made positive comments for the dollar. Their rhetoric came at a time when the market is quite certain that the Fed will begin to tighten policy this year, but they added a sense of urgency as they said they would prefer a fast approach. This means that the Fed may begin to wind down QE as early as September, if the employment recovery maintains the pace at about the same rate as in July (~1 million new jobs).


The speculation that the Fed may begin to wind down QE in September will definitely provide strong support to the dollar, since the scenario is far from the main one and yet to be factored in asset prices, including USD rate. Today's comments by Fed spokesman Loretta Mester on inflation risks may further clarify the possibility that the Fed will make a sharp hawkish shift in policy in September.


The only economic calendar report that deserves attention today is the NFIB Small Business Optimism Index. Therefore, the risk appetite in the market may now be driven by price movements in the commodity markets, which this week turned out to be significantly worried about demand outlooks. Oil began the week with a decline of more than 3% amid negative news from China related to the spread of the coronavirus. Industrial metal prices also reacted negatively to the heightened risks of new restrictions in China that could affect production. Nevertheless, we observe recovery in commodity prices on Tuesday as newsflow gradually improves. 


In addition, the release of the ZEW report on Germany is due today. It is unlikely that the positive surprise will be able to stop the downtrend in EURUSD, as investors are focused on the factor of the Fed's policy. The potential test of 1.17 level in EURUSD will coincide with a breakout of medium-term pattern in DXY, which looks logical, but development of this move will depend on whether the DXY price can gain a foothold above the boundary line:

Screenshot-2021-08-10-at-15-03-00.png

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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July US inflation failed to surprise markets as temporary drivers fade

Inflation in the US rose by 0.5% in July in monthly terms, which was in line with expectations, however, core inflation rose by 0.3%, which was less than the forecast of 0.4%. Annual inflation remained unchanged compared to June and amounted to 5.4%.


The data for the first time in several months indicated a sharp slowdown in the growth of used car prices. This CPI component showed an average growth of 10% MoM for three months in a row, making a significant contribution to the rise in overall inflation. In June, used cars rose in price by only 0.2%. In addition, prices for air tickets interrupted growth, sliding by 0.1% MoM. These two components were the main reason why core inflation fell short of forecasts:

Screenshot-2021-08-12-at-15-01-26.png

It can also be noted that the coverage of inflation has become broader - the number of categories of goods where the monthly price increase was zero or positive has increased. For example, prices in recreation category rose by 0.6% MoM, in housing services by 0.4% MoM. Price growth of medical services amounted to 0.3% MoM 

Judging by the behavior of the key CPI drivers (cars, air tickets, fuel), the annual inflation has most likely passed its peak and is now going to decline. Nevertheless, return to the comfortable for the Fed inflation range with an average of 2% may be delayed. The main reason is the stimulus-driven boom in the US economy. Demand continues to recover faster than supply and with the scars the pandemic has left on the economy, adjustment will take longer than the policymakers expect. This also applies to the labor market, where the demand for labor also exceeds supply, which is why inflationary pressure on wages persists. The latest US NFIB report indicated that a record high proportion of small businesses have unfilled vacancies. JOLTS data for June showed that the number of posted vacancies was 3.4 million more than the number of people hired. On the side of production ISM data still point to record low levels of inventories, and delays in the supply of goods and raw materials are also near extreme levels.


 All this leads to the fact that price pressures in the economy continue to be high. Thanks to strong stimulus-fueled demand, companies feel that their price power is increasing. According to the same NFIB report, the number of companies that have raised or are about to raise final prices are at their peak for 40 years. Therefore, the prospects for inflation persistence in the United States remain very high, even though its peak may have already passed.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Weak US consumer sentiment data hints at weak July Retail Sales print


Risk appetite in equity markets eased on Monday after release of disappointing data on Chinese economy. Industrial production rose 6.4%, missing expectations of 7.8%. Fixed capital investments also grew at a slower pace than expected (10.3% versus 11.3% expected). Manufacturing in China is also one of the key barometers of global recovery, so weaker-than-expected growth could be an early signal that either the global recovery is peaking or expansion of manufacturing continues to be constrained by rising commodity prices, supply disruptions and bottlenecks. By the way, not only China has faced this problem during current phase of the business cycle.

The rise in retail sales in China was also a big negative surprise. In annual terms, it amounted to only 8.5%, which was significantly lower than the forecast of 11.5%. Oil prices weakened after release of the report, as did the AUD and NZD, which are also guided by consumption picture in China. However, the NZD is now being underpinned by expectations that the RBNZ's rate hike this week will also leave room for further policy tightening if price increases or the labor market continue to surprise.

Long positions in the dollar and pound rose, the latest CFTC data showed. Data for the week ending August 10 showed that speculators continued to build up their dollar longs. The aggregate long position on the dollar against the currencies of the G10 countries rose 3% from open interest.

Nevertheless, there was a pretty strong dollar sell-off on Friday. The index slipped from 93 to 92.5 points on Friday, amid very weak data from U. Michigan. According to the organization's report, consumer confidence in August fell from 81.2 to 70.2 points:

Screenshot-2021-08-16-at-16-15-20.png

Weak data suggests that consumer momentum may have started to fade in July, which is likely to affect retail sales due tomorrow. The benchmark is expected to slow down by 0.2% on a monthly basis, a stronger negative surprise could lead to additional dollar sales, as in this case, the chances of the Fed's hawkish rhetoric should be noticeably reduced. This week the risks for the US dollar are shifted towards further easing:

Screenshot-2021-08-16-at-18-06-36.png


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Downbeat Retail Sales surprise could amplify negative impact of the Fed QT news, extending equity correction


Global equities are down for the second day in a row while USD stands firm ahead of release of the US retail sales report. Consumer optimism in the US dropped quite sharply in August, showed data from U. of Michigan on Friday laying the groundwork for downbeat surprises in US consumption while the latest Bank of America’s estimate of retail sales in July calls for a closer look at the possibility of further correction of risk assets. With market consensus of -0.2% MoM, the US bank did not skimp on pessimism, estimating that the monthly decline in retail sales could be as much as 2.3%:

 
retail-sales-comp-aug-2021-0.jpg


At the same time, core retail sales, which more accurately reflect consumer optimism, may decline even more - by 2.7%. This is in line with the deterioration in consumer data from U. of Michigan.

One of the main reasons for a weak headline print may be decline in car sales. Inflation data for July showed that price growth for used cars fell from 10% to 0.2% MoM, so the decline in sales in this sector is already largely priced in. However, markets will likely react on surprising reading in core sales, i.e., retail sales which doesn’t include cars and fuel.

The risk of emerging slack of the key driver of economic pickup in the US - consumer boom, overlays expectations that the Fed this week and next will start to provide details on curtailment of monetary stimulus, in particular monthly bond purchases. Obviously, this will not be the right moment for this news as investors may start to price in a policy error from the Fed. In this case, we may observe an increased demand for long-term Treasuries, i.e., falling yields. So far, moderate sales of risk assets may be just an expression of these concerns.

Tomorrow, the minutes of the July Fed meeting are due, which will likely reveal some technical details on how the Fed can conduct QT and how long this process can take. Obviously, if these details appear in the data, it will be a hawkish signal for the markets, while weak economic statistics today are likely amplifying the negative market reaction to the Fed policy report tomorrow.  The risk for equities especially US stocks are skewed towards further losses in the coming days as the data may reveal that the Fed picked wrong time for announcements regarding withdrawing monetary stimulus. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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Dollars surges on equity correction, markets fear Fed tightening

July Fed Minutes released on Wednesday hit risk appetite despite lack of clear hawkish shift in the tone of wordings. Markets saw renewed selling pressure albeit with more vigor thanks to synergy of selling catalysts – lackluster July US retail sales, growing hawkish bias of the Fed, growing dollar’s appeal as ultimate safe heaven, as well as seasonal weakness. Amid a surge of risk-off, greenback index soared to a 10-month high (93.50 level in DXY).

Small-cap and value stocks led declines with Russell 2000 futures falling 1.7% at the time of writing and European equity indices, populated mostly by value stocks, erasing 2% on average. SPX futures tanked 1% today, extending 1% loss of S&P 500 during NY session on Wednesday. There is a clear market bias to short stocks which upside is positively correlated with expectations of economic recovery suggesting a repricing of economic growth prospects is underway.  This bodes ill for potential depth of the current decline which may be the first serious market pullback after series of short-term dips earlier in the year whose depth was less than 5%.

Minutes of the July FOMC meeting showed that officials did discuss QE, but their opinions were divided over when to start phasing out stimulus. Some officials proposed to start this fall, others - at the beginning of next year. Nevertheless, the very fact that QE end is in sight and higher prospective interest rates on bonds will induce major equity-bond rotation dampened the mood in equities. After a brief upside bounce on the release of the Minutes, S&P 500 turned into decline:

 
 Screenshot-2021-08-19-at-14-35-52.png


But what’s really disturbing is that the Fed’s tapering story unfolds around the same time as US data started to show signs of fading growth momentum. Weak retail sales in July and consumer sentiment in August put a major dent on recovery hopes. There may be growing concern among investors that August data will extend the streak of downbeat US data surprises, which greatly adds to risk-off and makes current valuations fragile. 

Today there will be data on applications for unemployment benefits, which can somewhat ease bearish pressure if it shows that positive labor market trend remains intact. In addition, markets will watch on the Philadelphia Fed Business Outlook to see if US businesses are starting to feel any weakness of the economy. 

Considering DXY positioning, it can be seen that price made decisive breach of the upper line of the pattern:


Screenshot-2021-08-19-at-15-01-16.png


The previous idea of a false breakout appears to be defied by the latest price action as DXY has been given powerful boost by flagging support in equity which induced safe-haven flows. The prospects of further decline also imply additional upside potential of the US currency with EURUSD’s next closest target at 1.16 level. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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The rebound of EURUSD may be short-lived as Fed Powell speech is ahead

Oil prices escape the grip of sellers and stage rebound on Monday after spending almost entire last week in correction. Equity markets rebounded as well which drove sell-off in USD as risk-off flows ebbed. Long-dated bond demand eased in top economies as risk appetite appears to be on the mend. 

Last Friday, Fed representative Robert Kaplan said he may reconsider his call to wind down QE early, as the delta variant has shifted the trajectory of the economic recovery to a less favorable one.

There is slight but growing risk that the Fed may disappoint market hawks this week signaling about prolonged QE. The RBNZ was unable to raise rates last week, citing a slowdown in the economy due to the new lockdown. Weak economic data for July, in particular inflation and retail sales, thwarted the Bank of England's plans to tighten policy. Other central banks have also softened their rhetoric somewhat in recent times.

Strong Korean data and Thailand's covid data have drawn investors into Asian equities. In addition, Chinese stocks have also gone up, which has not happened often lately. The Central Bank of China continues to set the USDCNY reference rate below 6.50, which indirectly supports other EM currencies.

The news that Yellen supported Powell's candidacy as head of the Fed for the next term could also have a positive impact on the markets. Given how Powell is smoothing out the position of fellow hawks in the shop, the extension of his term will definitely positively affect the chances of a longer withdrawal of the Fed from soft credit conditions.

Eurozone business activity has remained strong this month, although it has declined from its 20-year high in July. The data released on Monday came slightly worse than expected, which, however, did not prevent the euro from strengthening against the dollar. Markit noted that the economy maintained impressive momentum in the third quarter, with supply chain delays continuing to curb expansion. It also suggests that firms have not yet finished raising prices in response to rising costs, which bodes well for short-term inflation outlook.

The euro was encouraged by the dynamics of the employment sub-index, which remains at a record level for the second month in a row (56.1 points in August).

The main source of volatility this week should be Powell's speech at the Jackson Hole conference in Wyoming, USA. It is unlikely that equities will be able to develop today's rebound closer to the meeting, as the uncertainty about Powell's remarks is very high. The positions of other Central Banks also add contradictions. Dollar buyers are likely to be found with the dollar index (DXY) at 93.20 while EURUSD should face stiff resistance near 1.1750 this week as the pair develops rebound from a downtrend line as breach of April support level failed to sustain:


Screenshot-2021-08-23-at-17-50-55.png


Disclaimer:  The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning:  CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Swift oil recovery could be a trap for bulls


Oil prices posted one of the strongest daily gains on Monday since March, with Brent benchmark closing 5.5% higher. Part of the rally reflected a surge in demand for risk assets, as doubts that the Fed will rush with hawkish QE announcements mount. These doubts put a dent on brisk USD recovery, which in turn also underpinned commodity prices, which are nominated in USD. The news that China apparently won the battle against the virus announcing zero cases first time since the start of latest outbreak also propped up sentiment in oil market. This improved outlook for reopening of some key parts of the global supply chain, in particular, large seaports in China, which partial closure during the outbreak contributed to supply chain frictions. 

Last week, the market was stormy and the weekly decline in prices was the strongest since last October. A technical rebound this week was also one of the ideas to buy oil.

Despite strong gains on Monday, futures spreads fluctuated in a narrow range. The difference between December and the nearest Brent contract even decreased slightly yesterday:

 
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A fire on a platform in the Gulf of Mexico forced shutdown of 125 oil rigs, which together reduced production by 421K b/d. This is about one fourth of Mexico's production. The operator plans to restore production in the near future, however a delay in the recovery of production will likely to provide additional moderate support for heavy oil grades.

The US Department of Energy announced a sale of 20 million barrels of strategic reserves between October 1 and December 15 this year. While it was assumed that the decision to sell was made due to good market demand and overall tightness, it is actually based on the recently passed US oil reserves phase-out bill.

Markit report on activity in manufacturing and services sectors in the US in July released on Monday indicated that US expansion could slow in August. The index of activity in services sector eased from 59.9 to 55.2 (forecast 59.5), in the manufacturing sector - from 63.4 to 61.2. This is another argument in favor that the Fed may not rush to change the pace of asset-purchases. Also, this could be a wake-up call for the oil market, as PMIs of other top economies - Germany and the UK - also indicated that rebound of activity both in manufacturing and non-manufacturing sectors eased, which together with US PMI data could worsen outlook for oil demand.

From a technical point of view, oil is in a downtrend and its rise this week should be seen as a rebound from the May support ($62 WTI level). The price recovery may run out of steam near the upper border of the current channel - this is the level of $68 - $68.5 in WTI, after which prices may again poke into intermediate support at $65 mark:


Screenshot-2021-08-24-at-14-54-49.png


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Demand for risk seems to hit ceiling before Powell's speech

The wave of risk-on that swept markets in the first two days of the week apparently ebbs. Dollar rebounded, commodities struggle to extend the bounce, bond yields ticked higher while equity markets stay range-bound after the biggest short squeeze in several months. Despite apparent persistence of “buy-the-dip” mood things could go sour quickly if Powell hints in Jackson Hole that the Fed inches closer to tapering as early in the week, we saw markets working hard to price in dovish bias in the Powell speech.  

Richmond Fed report released yesterday showed that expansion in US manufacturing activity slowed in August. The index fell from 27 to 9 points missing the forecast of 25 points. The poll showed that firms increased hiring and wages in August as the pay index hit fresh record:

Screenshot-2021-08-25-at-16-50-27.png

Firms reported that difficulties in finding workers persist and expect this to continue over the next six months.
The report basically shows that labor market shortages remained high in August and wage inflation is set to increase further, boosting hawkish outlook for August Non-Farm Payrolls report. 

The US House of Representatives approved a $ 3.5 trillion budget resolution which should help to push through the $ 550 billion infrastructure spending package. This is good news for US growth prospects. The news also triggered a 4bp increase in 10-year risk-free rate to 1.294% as bond traders priced in increasing pace of borrowing from the US Treasury.

Markets mood remains positive albeit vulnerable to sharp shifts. Earlier this week, investors were pricing in a dovish bias in Powell Jackson Hole speech, i.e., little information on the timing of policy tightening or rebuttal of market suggestions that transition to policy normalization will begin in September. This was primarily caused by the slack in soft US PMI data as well as deterioration in consumer figures - retail sales and consumer sentiment index from U. Michigan. By the way, the consumer survey also showed that high prices deter consumers from purchasing cars and houses - the index of those who do not plan to buy a car and real estate in the next 12 months because of excessive price growth reached a record level:

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The risk of decline in demand for long-term consumer goods and real estate in the United States suggests that a price correction is looming, so this can be one of the reasons why the Fed has less incentive to taper QE fast. 


Disclaimer:  The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning:  CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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ECB Minutes triggered minor Euro sell-off as the central bank’s dovish bias increased

The ECB didn’t address QE tapering at its July meeting, showed the Minutes released on Thursday. Instead, the policymakers worked to clarify forward guidance on path of the interest rates - how inflation should develop so that market participants can expect changes in the ECB policy. In fact, the Minutes indicated that policy divergence between the ECB and the Fed is set to widen further which should have implications for sovereign debt markets of the two countries and may negatively affect the EURUSD rate.

The publication of the Minutes triggered minor Euro sell-off - EURUSD halted rise towards a two-week high of 1.18 with the intraday rally fizzling out near 1.1775 mark:

 EURUSD.png

In addition, it can be seen that the pair met resistance near the upper border of the downward channel, in which the pair has been trading for about two months.

There is a growing risk of further Euro weakness especially if Powell speech in Jackson Hole turns out to be informative. If Powell speaks on the substance, then most likely he will drop some hints on reduction of monetary stimulus. In this case, the gap between the ECB and the Fed will widen even more, i.e., the differential of interest rates offered by bonds of both countries will potentially increase, and EURUSD may come under pressure due to the movement of investors into the instruments which offer higher yields i.e., Treasuries.


Disclaimer:  The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning:  CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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NFP report will decide the fate of September Fed QE announcement

Powell stuck to the hawk line in Jackson Hole last week, but avoided specifics to allow himself room for maneuver at future meetings. The Fed chair hinted at the possibility of QE tapering start this year, which the markets apparently interpreted as sure event. The question is when the QE announcement will be made - in September or towards the end of the year. September shift in the Fed policy is likely to require a strong upside surprise in the August Non-Farm Payrolls report.

Majority of Powell peers at the Fed spoke in favor of making an announcement on QE in September and saying goodbye to the asset-purchase program already in the 1st or 2nd quarter of 2022. However, Powell opted for cautious stance saying that it "might" be appropriate to start trimming the Federal Reserve’s activity in the Treasury and MBS markets this year, with a decision based on incoming data and delta strain dynamics in the US in the fall.

Powell acknowledged that the recovery is happening faster than expected and that inflation in the United States has taken off. At the same time, there is no guarantee that its temporary nature cannot change to a permanent one.

What cheered the markets and hit the dollar is comments of the Fed chair on employment, interest rate path and risks of a premature policy change. Powell said that in a weak labor market, early tightening could hit economic activity and employment, undermining all the gains from stimulus policy. In addition, he said that changes in QE shouldn’t be viewed as a signal of the Fed intentions regarding the timing of a rate hike, which also greatly disappointed proponents of the Fed hawkish policy stance. 

Relatively dovish position of the Powell last week led to broad dollar sell-off with EURUSD rising to two-week high of 1.18. The pair scored 8 winning days out of 9 as the liftoff began thanks to synergy of buyer interest as can be seen from the intersection of lower bound of the downside trend channel and strong annual support area 1.1650-1.17:

Screenshot-2021-08-30-at-15-56-17.png

This week the Eurodollar is to challenge the upper border of the short-term trend channel. Considering vast of unused upside momentum on 1D timeframe with RSI at ~ 52 points, support of both short-term and medium-term buyers, there are high chances of a breakout before the NFP The nearest target for bulls resides in horizontal resistance zone of 1.1880 - 1.19. However, in the medium term, the pair remains in a downtrend. This can be seen from the downward slope of the annual trendline starting from 2021. It follows from this that holding gains above 1.19 will be difficult as ECB outlook remains pretty dovish. A negative NFP surprise is likely to fuel dollar sales boosting EURUSD recovery towards 1.20 as expectations for the announcement of QE tapering will move to the end of the year.

Disclaimer:  The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning:  CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Record downturn in China's services sector could spark a new wave of risk-off


After spending a day in consolidation, greenback could find enough buying interest and continued to fall in price on Tuesday. The US currency index tests support at 92.50 level. Long-term US bond yields continue to pull back in disappointment after a slight surge ahead of Powell's speech, 10-year bonds offer 1.28% to maturity on Tuesday, compared to 1.35% at their peak last week. Fears of inflation, to which long-term bonds are particularly sensitive, appear to be weakening, and there is a growing risk that the Non-Farm Payrolls report will surprise this week from the negative side.

Sharp slowdown of activity in the Chinese services sector in August puts a deep dent on global recovery expectations. The corresponding official PMI gauge suddenly fell from healthy 53-56 points, landing in the depression zone at 47.5 points:


 Screenshot-2021-08-31-at-14-06-39.png


The pace of MoM deceleration was only higher only in February 2020, when China hit the economy with the lockdown. The strong negative surprise will likely make investors doubt that global economy will be able to maintain current pace of expansion and market bets for extension of stimulus measures may rise. Strangely enough, the dollar's sell-off intensified after release of the Chinese data:

Screenshot-2021-08-31-at-14-31-25.png
 


Activity in the manufacturing sector also fell short of expectations, albeit to a much lesser extent: PMI has been declining for the fifth month in a row and in August it barely remained in the expansion zone at 50.1 points. The forecast was 50.2 points. Continuing at this pace, the index may find itself in depression zone as early as next month.

Market participants associate the weak data with the dynamics of credit impulse in China, which has been weakening in the past few months entering contraction zone:


China-Credit-Impulse.png


Other fundamental factors include government crackdown on the tech and private tuition sectors (which should obviously suppress services sector activity), severe government response to the covid outbreak and reduced travel between provinces due to fears of being locked down in a non-hometown.


High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Big negative surprise from the Conference Board. What are the takeaways for the NFP?

 

Greenback struggles to take off from 92.50 support level ahead of US labor data for August. DXY rallied on Tuesday thanks to the outflow from Treasuries market as distant bond yields apparently rose in response to hawkish remarks of some ECB officials. The 10-year yield rose from 1.27% to 1.35% as the ECB policymakers hinted that it may be appropriate to start tapering of special asset purchase programs (the so-called PEPP). Given that the major central banks try to keep up with each other in terms of policy easing and tightening, this were interpreted as a hint that the Fed may be more eager to taper than previously expected.

More specifically, here is a statement by the head of the Danish Central Bank, Knot: "The inflation forecast in the Eurozone has improved markedly and justifies an immediate reduction in PEPP, a complete curtailment of the program in March 2022 and a return to pre-crisis discipline in policy."

 

However, Nomura's latest forecast does not anticipate a shift in PEPP until at least March 2022:

 

ECB-tapering-blueprint-0.jpg

 

The ECB is due to holding a meeting on Thursday, September 9 and based on emergence of hawkish rhetoric, there is growing risk that Lagarde will hint that PEPP cannot last forever. In anticipation of this surprise, the euro may extend gains against its peers, given that now the European currency has very low expectations for tightening, since the ECB until recently refrained from hawkish hints in every possible way.

Ahead of the NFP, markets are closely watching data that may indirectly indicate a change in employment in the reported month. Among important indicators, one can single out the consumer confidence indices, the dynamics of which is tied to income and income expectations of households. Yesterday was published a report on consumer confidence from the Conference Board, which decreased compared to the previous month (129.1 against 113.9 points). In addition, the index did not live up to expectations and also came below the most pessimistic forecast. We can recall the depressing dynamics of the index from U. of Michigan in August (drop by 10 points), which may also indicate a tipping point in consumer sentiment and expectations in August. In general, consumer sentiment is deteriorating and either this is the result of expectations of sharply increased inflation or worsening income outlook. By the way, one-year inflation expectations, calculated on the basis of the report, rose to 6.8% - this is the maximum since 2008:

 

inflation-exp-conf-board.jpg

Source: ZeroHedge

 

It is clear that high inflation starts to negatively affect consumer decisions, from this point of view, it is time for the Fed to curb stimulus measures, since it is more and more difficult to assert about the temporary nature of inflation and this may at some point result in a loss of confidence by market participants in the Fed's actions, which is fraught with increased policy costs.

The Conference Board report, together with the Michigan report, suggests that we will face moderate job growth in the United States. Nevertheless, inflation dynamics indicate that the Fed will not be profitable to deviate from its implicit QE promises made in Jackson Hole. The combination of these events - a weakening economic outlook and a course to cut stimulus from the Fed risk negatively affecting stock prices, inducing correction from ATH.

 

Disclaimer:  The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

 

High Risk Warning:  CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Key reasons why weak August NFP wasn’t a surprise. EURUSD weekly setup.


The odds of a September Fed shift in policy retreated further after release of August NFP report last Friday. The payrolls gain was a big miss as it was three times less than consensus of 725K. Judging by the greenback’s price action on Friday and Monday, there was no serious change in expectations: investors continue to expect that the Fed will taper QE this year, however expectations of the announcement completely shifted to November or December.

The US economy created 235K thousand jobs in August, against the forecast of 750K. If it had happened a month ago, traders would probably have crossed out the Fed's tightening from the list of expectations, but August was not easy for the economy due to the action of an exogenous factor - the delta strain of the coronavirus. Consumer mobility declined in early August, and the service sector in some states faced restrictions again. The peak of impact was just in the reporting week for the NFP. Therefore, with regard to the service sector, it is probably correct to say that job growth did not slow down, but was restrained.

Other aspects of the report also point to a temporary slowdown in job growth. For example, the growth of jobs over the previous month was revised up to 1.053 million, and wages rose surprisingly in both monthly and annual terms. For example, in August, the average hourly wages increased by 0.6% against the forecast of 0.3%:

 Screenshot-2021-09-06-at-17-00-07.png

It is unlikely that we would have seen such a dynamic if the demand for labor was weak. Also released on Friday, ISM's US service sector activity index exceeded forecast, with the hiring component only slightly changed from the previous month (53.7 vs. 53.8 points in July):


Screenshot-2021-09-06-at-15-40-29.png
 

Again, weak labor demand would send the index below 50 points, which as we can see didn’t happen despite the fact that hiring slowed down.

The dollar index tested the level of 92 after release of the NFP. Despite the attempt to break through, the price failed to gain a foothold below despite the large downbeat surprise in the data. Today buyers are developing an upward rebound amid weak trading activity. The rise will most likely fizzle out in the area of 92.40:

 Screenshot-2021-09-06-at-15-53-45.png

The main risk event this week will be the ECB meeting. Last week, some of the ECB's monetary policymakers said publicly that they are ready to discuss cutting asset purchases. Considering EURUSD, it is clear that the main events on the side of the dollar have been priced in, therefore, for some time the pair may be influenced by events related, among other things, to the position of the ECB.

This week, a meeting of the European regulator will take place on Thursday, and if Lagarde speaks about the possibility that in the near future it is worth starting to discuss cuts in anti-crisis measures, the euro will receive additional support amid expectations of an increase in European bond rates due to a decrease in ECB activity in the debt market.

In my opinion, the risks for EURUSD are skewed towards more upside this week due to the upcoming ECB meeting, targets above 1.19 remain relevant, especially if the European Central Bank offers hawkish surprise this week.

Screenshot-2021-09-06-at-17-06-04.png

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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The RBA gives green light to AUD decline, Euro waits for hawkish signals from the ECB

As market volatility continues to dwindle, investors are likely to favor currencies where central banks are raising interest rates. However, paths of monetary policy are still highly dependent on a country's success in the fight against the delta strain and the possible risks of a fresh autumn wave. Contrary to expectations, the Reserve Bank of Australia has become one of the first to indicate that it may be premature to scale back asset purchases.

FX liquidity continues to improve after Monday's Labor Day in the United States. Expectations that the Fed will postpone tightening the policy until the end of the year are holding back the development of corrective sentiment in US equity market. The Reserve Bank of Australia gave a positive signal regarding the prospect of keeping rates low in developed countries at its meeting today, deciding to extend QE by three months to mitigate the impact of lockdowns introduced in response to the delta strain outbreak. There are no broad expectations that other Central Banks will follow the case, but clearly RBA gave food for thoughts with its unexpected dovish move.

The prospect of developing the downside momentum in AUDUSD is becoming more realistic, given the fact that the RBA may start to lag behind the Fed in the tightening race after the US Central Bank meeting in mid-September. The nearest targets for the pair are the levels 0.735 and 0.73:

Screenshot-2021-09-07-at-17-10-12.png

European markets struggle to sustain gains today while futures for US indices are also tending to decline. The cryptocurrency market turned out to be even less stable and turned into a full-fledged correction. The US dollar is holding up and it is obvious that the support is provided by the growing risk-off.

Interestingly, the dollar advance is not uniform. The American currency rose against all major opponents (including commodity currencies) except the euro. This can be explained by expectations of a hawkish shift in policy at the ECB meeting on Thursday. A hint of PEPP tapering will likely trigger Euro rally above 1.19, but if this does not happen, there may be pullback in hawkish expectations, which are priced in the euro.

It should be tough for greenback to develop upward momentum given the technical resistance - the upper border of downward channel, which is guiding USD decline currently:

 

Screenshot-2021-09-07-at-16-11-39.png


Better-than-expected Chinese foreign trade data in August bolstered hopes that global expansion would not slow down much in the fourth quarter. At the same time, the index from ZEW on business sentiment in Germany came slightly worse than forecasted. Together with expectations that the ECB will make an announcement related to tighter monetary policy, this has led to a weak performance in European risk assets today, which is expected to continue until the ECB meeting.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Preview of the trading week: Watch out for FX and equity rotations before the Fed meeting

The beginning of the week turned out to be quite calm and measured for FX space as investors are making necessary rotations before a number of central bank meetings next week, including the Fed. The focus this week will be on US inflation and retail sales for August due out on Tuesday and Thursday. Strong prints could propel development of expectations that the Fed will follow in the footsteps of the Bank of England and the ECB, announcing that it is ending extraordinary support for the economy.

The dollar index retests last week's high (92.86) after a two-day downward correction with mixed success. Among the major currency pairs, the dollar shows the greatest gains against the euro, franc and yen, that is, where low interest rates prevail. This may indicate that investors are buying dollars in advance, on expectations of higher government bond rates in the United States. It is easy to guess that such expectations may be tied to the Fed meeting next week. Weak performance of the US technological sector this week may become another signal that the market undergoes rotation from long-duration stocks to its primary substitutes - long-term bonds (mainly influenced by the Fed's QE).

Since the beginning of August, the yield on the 10-year Treasury has consistently set lows above the previous ones, which may indicate a predominance of expectations for higher rates. However, the weakening of the US fundamental component still serves as an effective counterbalance to these expectations - the yield struggles to rise above 1.4%:

 Bond-yield.png


European markets and futures for US indices hover in positive territory within 1%.

In addition to preparing for the Fed, investors may also be preoccupied with a follow-through of infrastructure spending story in the United States. The Democrats said they plan to find means for the package by hiking corporate tax from 21 to 26.5% and the tax on capital gains from 20 to 25%. That's less than what was proposed earlier this year, but the Senate's push for the bill could once again spoil the mood of the stock market, as was the case with the initial tax hike announcements earlier in the year. 

The rebound of the European currency after the ECB meeting proved to be short-lived, since deeply negative rates allow the euro to maintain its status as a popular funding currency and, all other things being equal, increased demand for risk leads to a weakening of the euro. In addition, as mentioned above, expectations that the rate differential between bonds of European countries and the United States will widen after the Fed may now increase the supply of the euro.

Strong inflation and retail sales in August may increase the flow to dollars, as the chances of a hawkish shift in the Fed's position in this case will be higher, although the US Central Bank is now "a fan of employment data". According to the dollar index, one can count on a test of the area where resistance has been concentrated for the last month and a half - the level of 93.20:

Screenshot-2021-09-13-at-16-27-52.png


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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US August inflation: more price gains ahead but not enough for September Fed policy shift


US price pressures somewhat receded in August, reflecting mainly the cooling off in consumption hot spots which emerged after the lifting of social restrictions. These spots featured abnormal rise in prices, primarily driven by temporary factors, such as supply chain disruptions and bottlenecks and pent-up consumer demand. Overall, inflation has become more even, affecting more goods and services, while inflation expectations ticked higher, which may worry the Fed. 

US consumer prices increased by 0.3% MoM, which is slightly below the forecast of 0.4% while core inflation, which has higher significance for the Fed's policy, added just 0.1%, falling short of 0.3% expectations. The easing of core inflation was apparently the primary reason for disappointment and triggered sell-off of the US currency on Tuesday. Today sellers renewed pressure on the dollar while US bond yields trimmed down recent gains. 

Considering contribution of individual categories of goods and services, it can be seen that there is strong MoM deflation in the components, where prices have been recently rising at abnormal rates. Airline prices dropped 9.1%, used cars fell 1.5%, car and truck rentals tumbled 8.5%, and hotel bookings dropped 3.3%. These changes in prices basically made the key main contribution to the August slowdown in inflation.

The NFIB's report on firms' decisions to raise / lower / hold prices calls into question the prospects of easing of inflation in the near future. According to the latest data from the agency, 49% of enterprises are raising prices, and 44% expect to make additional price hikes in the future. Both are at their highest level in 40 years. This important indicator of inflation was also mentioned by the Fed in the latest release of the Beige Book, which suggests that the US Central Bank takes these data into account as well.

Another reason to expect persistence of inflation is the rise in house prices. In the United States, the dynamics of housing rent is about a year and a half lagging behind changes in real estate prices, given their sharp rise in 2021, rents’ upward adjustment in the future will likely lead to higher consumer inflation:

Screenshot-2021-09-15-at-15-39-22.png
 
Case Schiller US Home Price Index

On Friday, there will be data on consumer inflation expectations from U. of Michigan. The latest reading is 2.9%, however, if inflation expectations rose again in August, the Fed officials may start to mull over the need to communicate a chance of a rate hike next year, since one of the main goals of the Fed's policy is to not let inflation expectations drift from their inflation goals. Given that firms are still willing to transfer rising costs to consumers after positive experience with the pent-up demand, higher expectations of inflation US households may be quite justified, which may eventually trigger some Fed response. 

However, in the FX market, the bets for the Fed's early move towards policy tightening seems to be decreasing. On Wednesday, we see that the dollar suffers the biggest losses in pairs with EUR, CHF, JPY - by 0.24, 0.38 and 0.39%, respectively. On Monday, before the release of the CPI, the opposite trend was observed - the dollar posted the largest gain against these currencies:
 
Exchange-Rates.png

Taken together, these phenomena may indicate an inflow and then an outflow of investors from countries with low interest rates on expectations that the Fed will begin to tighten policy and raise rates on Treasury securities and subsequent disappointment after release of the August CPI.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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The Fed is about to unwind stimulus, but is the US economy ready for it?


Risk assets came under serious pressure at the beginning of the week, although the first signs of a sell-off appeared as early as last Friday. S&P 500 futures were down 1% on Monday, the first support line can be expected in the 4300-4320 area after a 50-day MA test:
 
Screenshot-2021-09-20-at-13-53-39.png


The flight from risk was more pronounced in European equities where major indices erased more than 2%. Hong Kong's Hang Seng fell more than 3% on Monday as China's Evergrande and its huge $300bn debt continue to fuel risk aversion not only in offshore China, but is also beginning to echo in overseas asset markets.

At the heart of risk aversion are investors’ doubts that the Fed picked the right time to signal that it moves to unwinding stimulus. This week the FOMC meeting is due at which the policymakers are expected to clarify the central bank position on QE tapering and interest rate outlook (aka dot plot). The likely shift in monetary policy may come at the time of slowdown in hiring pace and falling consumer expectations. Recall that employment gains in August was three times lower than projections, and consumer expectations, according to the report of U. Michigan, failed to rebound in September after falling to 70 points in August. The index of consumer expectations ticked higher just by 0.7 points, i.e., it remained for the second month in a row at the lowest level in almost 10 years:

Screenshot-2021-09-20-at-14-52-51.png

At the same time, it was a little strange to see retail sales rebounding by 0.7% August, but let’s make it clear that the survey data of U . Michigan consists primarily of leading indicators, therefore, retail sales may catch up with the decline in consumer expectations in the next months. 

And if expectations regarding the start of QE tapering are more or less priced in (respective announcement in November or December), changes in dot plot are far less certain. A number of FOMC members have already signaled that first rate hike could be done in 2022, if we see more peers joining their camp and the median of expectations shifts to 4Q of 2022, then the pressure on risk assets is likely to increase significantly. In addition, we cannot rule out medium-term strengthening of greenback against this background, since the US will pull ahead in comparison with other economies in terms of expected growth of bond yields.

Also, this week there will be meetings of a number of other central banks - England, Japan and Switzerland. The big uncertainty for the pound is that the Bank of England has given a signal that it is ready to raise rates earlier, but the data on the economy over the past month, in particular retail sales, began to deteriorate. Therefore, the Central Bank will have to choose a more cautious position, and the scale of disappointment for the Cable will depend on how much the pain the Bank is ready to deliver to the market. 


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Oil prices poised to challenge yearly highs before the OPEC meeting


The week of central bank meetings is over and the focus of market participants shifts to the US politics, energy markets, Treasuries sell-off and Eurozone inflation figures. If the US Congress cannot find a way out of the existing dilemma regarding the public debt ceiling, the demand for risk will probably alternate with a flight to quality, and USD may extend this rally on the back of risk-off. 

Risk assets started the week on a positive note, except for Nasdaq futures, which went into negative territory due to rotation of investors in falling Treasury bonds. On Monday, the yield on 10-year Treasury bonds continued to rise, which began last week after the Fed meeting, and reached its highest level since the end of June - 1.5%. The past meeting of the Fed showed that the number of FOMC members expecting that the first rate hike will take place next year has risen sharply - from 3 to 9 members. This circumstance forces investors to re-consider the likelihood of the first rate hike in 2022, which hits bonds with longer maturities. In addition, there are technical patterns that pointed to the risks of flight from Treasuries:


 Screenshot-2021-09-27-at-16-46-29.png


Congress needs to agree on a freeze or increase in the public debt ceiling to avoid a government shutdown in mid-October. So far, there are no signs that Senate Republicans are willing to cooperate on this issue, so risk assets may face several more weeks of nervousness. Congress will also discuss a $ 550 billion infrastructure spending package, but the amount of aid, as we can see, is much more modest than originally proposed.

The rise in energy prices is also attracting attention, be it oil, gas or coal. Oil prices are poised to retest yearly highs on the back of strong upside momentum. Extremely high gas prices are forcing consumers to switch to oil, which propels oil prices higher in the short-term. From a technical point of view, a new leg of the price rally can be in its early phase, since on September 10 the price broke correction channel and so far has slightly deviated from key moving averages on the daily timeframe, indicating modest risks of overbought:

 Screenshot-2021-09-27-at-17-22-02.png


Prices are likely to extend gains before the OPEC meeting on October 4, providing support for the currencies of the countries that export oil and gas - the Norwegian krone and the ruble. 

A number of Fed officials will speak this week and, judging by their interest rate projections expressed in dot plot, they are likely to advocate the benefits of an early rate hike. At the same time, the situation with Evergrande remains uncertain and the presence of a constraining factor of demand for risk is likely to provide support for the dollar. A retest of the annual high on the DXY (93.50 zone) and an exit to the target of October 2020 - the level of 94.00 is likely.

The first estimate of inflation in the Eurozone for September will appear on Thursday. On Thursday, there will be data on Germany, on Friday - a preliminary estimate for the entire Eurozone. Perhaps the release of inflation data will be the best chance for EURUSD to catch on to the 1.17 level. In addition, the ECB Symposium will be held in Sintra on September 28-29, where the regulator may shed light on plans to reduce asset purchases in December, which in turn may also support the euro.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Pullback in oil has well-defined support level

The rotation of investors from developed economies with low interest rates to the US continued on Thursday. The core driver of this trend is accelerating growth of real interest rate in the US economy:

Screenshot-2021-09-30-at-16-18-41.png

The dollar index struggled to extend gains near 94.50 resistance area. Recall that from this level, large-scale dollar dump began in November 2020 after US election and vaccine results were announced i.e., where strong shift in expectations occurred. It means that selling pressure will likely be particularly high near this level:
 
Screenshot-2021-09-30-at-17-07-52.png

Speaking on Wednesday, Powell acknowledged that heightened inflation prevents the Fed from using monetary policy to its fullest to stimulate employment growth. Thus, the Fed recognized that temporary inflation turns into permanent and starts to require tighter monetary policy.

The confrontation in the Senate on raising / freezing the public debt ceiling continues and fuels Treasuries sell-off as uncertainty related to possible government shutdown affects US sovereign risk. In case of progress on this issue, selling pressure in US bonds may ease what should have bearish implications for USD price. 

Data on Thursday showed that activity in China's factories eased, but services sector returned to recovery. The fact that factories in China are reducing output adds to concerns about global inflation, which is largely caused by delays in production and supply chain disruptions.

Risk aversion due to the threat of default by Chinese developer Evergrande persists. The company's shares plunged another 5.2% on Thursday, as the company was unable to pay interest on its foreign currency bonds on Wednesday.

Oil prices decline ahead of the OPEC + meeting. There are growing signs that supply growth is not keeping pace with demand, so OPEC+ may take the risk and announce a more aggressive output hike. The meeting of oil-producing countries will be held on October 4.

From the technical point of view, current leg of oil decline followed a retest of three-year high. Also, the pullback occurs within the short-term uptrend with its lower border acting as the next potential support. It means that the pullback may be completed near the level of $72 on WTI:


Screenshot-2021-09-30-at-18-08-51.png

Disclaimer:  The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning:  CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Inflation threat puts central banks on alert


Financial markets are increasingly discussing inflation surge as shortages arising in the commodity markets increase risk of price pressures being far more persistent that policymakers expect. After period of consolidation, commodity prices resumed rally in September and this coincided with major central bank becoming more hawkish in their guidance (including the Fed) with separate members increasingly voicing their concerns about “second round” of inflation effects:

 Screenshot-2021-10-04-at-13-42-38.png


It is clear that it is becoming more and more difficult to argue about temporary nature of inflation, and central banks are forced to adjust their guidance accordingly. The dynamics of exchange rates in the near future will be determined by expectations of how seriously local central banks will take price increases. Those central banks that continue to defend the old point of view (inflation is temporary and does not require policy adjustments) are likely to face more bearish pressure on their currencies.

By the way, the prospect of tighter Fed policy and associated growth in real rates in the US induced a soft downtrend in gold around the beginning of September. This week, expectations for US labor data and the report itself on Friday will most likely allow sellers to test the lower border of the downtrend and the key horizontal level:

 
Screenshot-2021-10-04-at-17-26-47.png


On Monday, the ECB official Guindos said that supply disruptions (one of the key supply-side inflation factors) saw emergence of a structural driver, which means there could be more than one "round" of consequences for wages and consumer inflation. Thus, the official hinted that the increased inflation could worry the ECB more than the markets had previously assumed, and perhaps one should expect some policy implications, in particular changes in duration of current asset purchases. The euro gained on the back of hawkish hints of the ECB official, in addition broad correction of the dollar contributed to rebound of EURUSD.

From a technical point of view, the EURUSD rebound from the November 2020 lows is unlikely to develop above 1.17, as key US data are expected this week:

Screenshot-2021-10-04-at-17-01-57.png

This week's Non-Farm Payrolls report should help the Fed to announce QE tapering at November or December meeting and move to policy tightening later. There is much uncertainty remaining about possible timing of the start of the Fed rate hiking cycle next year, and labor data may affect expectations related to the tightening. A strong Payrolls report may well allow EURUSD sellers to test 1.15 this week.

In the first half of the week, the markets will be focused on the OPEC+ meeting. An increase in production by more than 400 thousand barrels could pull oil prices lower, and NOK and RUB could erase their recent growth.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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ISM data may boost chances for hawkish NFP outcome

FX price action on late Monday showed that investors still favor dollar despite recent gains, and the story of China defaults weighs on demand for risk. Among the G10 currencies, NZD has the largest growth potential due to anticipated RBNZ rate hike tomorrow and possible hint of another hike this year. Lagarde's comments are unlikely to move the EUR, and the British pound seems to have become less responsive to the risks related to the UK divorce from the EU.

Yesterday, the US currency retreated on almost all fronts with the equities’ downside providing surprisingly little relief. The source of additional pressure on USD was OPEC+ decision to hike output by 400K b/d which was considered as a bullish outcome as recent energy shortages worldwide stirred market rumors of supply failing to catch up with demand growth. The rapid rise in oil prices was also perceived as a reflection of dwindling world reserves, to which OPEC+ could respond with a more aggressive increase in production and it might look perfectly reasonable move. The decision to modestly boost production pushed prices higher by more than 2% on Monday, limiting demand for risk assets somewhat amid heightened expectations that central banks will rush to tighten policy as commodity markets, especially energy, indicate more cost-push inflation is ahead.

Demand for safe haven assets was also boosted by news that another Chinese developer, Fantasia, was unable to pay $205M on its bonds on Monday. The news was a warning that China's real estate problems could extend beyond Evergrande. China's high yield bond yields posted its biggest jump since 2013, indicating strong investor outflows. In general, the junk debt market in China has become, in a sense, a barometer of the situation associated with defaults, and now correlates with the demand for risk in foreign markets. This also implies that the risks of default by large companies in China is a highly supportive factor for the US currency. Monday USD decline proved to be short-lived with the index rebounding back to 94 handle on Tuesday with a short-term uptrend line staying largely intact:


Screenshot-2021-10-05-at-16-49-25.png
 

In terms of eco data, non-mfg. PMI from ISM could revive bullish USD momentum, as a positive reading will boost chances of a strong Payrolls report, which in turn will weigh on Fed confidence in its exit from stimulus programs. It is worth paying special attention to the hiring component of this index, since a large share of employment in the US works in the services sector, and dynamics of the sub-index may shed light on possible direction of surprise of the NFP report on Friday.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Inflation threat worries US bonds

American markets closed with gains, but US equity futures today are on a slippery slope largely due to the pressure from rising Treasury yields. The yield on 10-year securities broke through the local high of 1.55%, signaling the resumption of the rally after a brief respite:


Screenshot-2021-10-06-at-09-36-15.png


After a short period since the Fed September meeting, during which the Treasury yields has been rising thanks to the rise of real interest rate (as seen from the recovery of TIPS yield), inflation premium apparently becomes again the main component of rally in yields. Yesterday, the 5-year average expected inflation premium jumped 6 bps. - from 2.53 to 2.59%. Since the start of 2021, intraday increments of the bonds’ inflation premium were stronger only in 5% of cases:


Screenshot-2021-10-06-at-12-36-56.png


Inflation expectations keep rising in the wake of rising energy prices, which set the stage for higher costs for firms, which may eventually be forced to transfer this pressure onto consumers.


After a short break, the dollar went on the offensive again. Higher US rates stimulate the inflow of foreign investors into fixed income instruments. Before the Fed meeting in November, in which the policymakers are expected to clarify the prospects for tightening next year, the current policy of the Central Bank is likely to be slightly stimulating, so bonds in the US are depreciating, sometimes taking short pauses. It follows from this that there is a high risk that risk assets will experience difficulties with growth due to the trend in bonds. As alternative investment instruments, they offer ever higher returns.


Yesterday's data showed that the US economy is doing well, the service sector PMI from ISM more than met expectations, showing an increase from 61.7 to 61.9 points (59.9 points forecast). Creation of new firms have slowed down, labor costs have risen, and labor shortages persist. Costs remained generally elevated, indicating the risk of higher consumer prices in the coming months, i.e. inflation. The corresponding sub-index rose from 75.4 to 77.5 points and is at its highest since 2008.


The biggest event of economic calendar today is ADP report which is the first part of US labor data in the NFP week. A gain of 428K is expected, but the number could easily beat forecasts given positive preliminary employment data and retreat of Covid in the US in early September, which, as recent history shows, creates the risk of underestimating the positive dynamics of hiring. In case of positive news, the dollar index will likely be poised to target resistance at the previous local high (level 94.50).

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.


High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Bond markets discount weak NFP, focus is back on inflation


Weaker-than-expected September NFP report put a drag on broad USD rally. On Monday greenback index struggles to resume advance, hovering not far from 94 points, forming a breakout “triangle” pattern. At the same time, the price continues to consolidate near September 2020 highs:
 
DXY-index.png

US job growth totaled 194,000 in September, with more than 11 million job openings in the same month. The labor supply deficit continues to restrain employment growth, which should translate into even greater wage inflation. By the way, the growth of wages again exceeded the forecast and amounted to 0.6% instead of the expected 0.4%.

Earlier NFIB reports showed that the share of small businesses with open vacancies and experiencing shortage of skilled workers is at record levels:

Screenshot-2021-10-11-at-15-19-40.png

The fact that the US government cut the number of jobs at once by 123K in September helped markets to discount the weak Payrolls figure.

The Treasuries market also ignored weak job growth as, after a short-term decline, bond yields began to rise again, signaling that the market was quickly discounting fears of a slowdown in economic activity due to the weak NFP print and again focused on inflation risks:

 bond-yield-after-NFP.png

Chances that the Fed will announce QE tapering in November remain high, supporting the dollar and keeping bonds under pressure.

It is difficult to expect inflation expectations to stabilize or turn into decline when there is a strong uptrend in the oil market and fears of possible deficits are not abating. On Monday, the WTI price tested $ 81.50, the highest since October 2014. Gas storage facilities in Europe are 76% full, with a 5-year average of 91% before the heating season. China is trying to ramp up coal production, but heavy rains in Shanxi are forcing some mines to suspend production.

Considering the recent rally, it was expected to see the growth of long positions of speculators in the COT data. The long position in WTI increased by 18K lots to 316K lots, but if you look at the July high of 426K lots, there is still room to build up long positions. On Brent, the growth in the net-long position of speculators turned out to be more modest - only 3.7K lots.

Also on the agenda of this week are OPEC and IEA forecasts for the growth of oil consumption. Investors will analyze growth forecasts, taking into account the demand that has arisen due to the transition from expensive gas to oil, because the stabilization and decline in gas prices could strongly affect the forced demand for oil and hit the prospects for a rally.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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UK employment report opens the door for Pound’s short-term gains

The pound battles for a place under the sun after release of the latest jobs report. British firms increased hiring at a record pace in August, shortly before the end of the government's furlough scheme. Favorable dynamics of the key macroeconomic parameter for the Bank of England's policy is likely to bring the date of the first rate hike closer, which the Central Bank may hint at the upcoming meeting.


The number of employees in UK companies rose by 207K, while unemployment fell 0.1% to 4.5%. The dynamics of employment may allow the Bank of England to be the first among the large Central Banks to raise the interest rate. This is also indicated by inflation, which is now almost double the target level of 2%. The growth rate of wages, which makes a significant contribution to inflation, has slowed down, but remains at an elevated level (6.0%).


The furlough scheme has been discontinued on September 30 and the key question is how negatively this will affect the level of unemployment. At least 1 million Britons have benefited from the program.


The BoE is rumored to make its first tightening step on December meeting. By this time, the pound has a good opportunity to rise on corresponding expectations especially against EUR. However, in regards to performance against USD, the key piece of the puzzle is the tightening path of the Fed, which will likely be clarified at the key November meeting of the Fed.


Considering GBPUSD technical setup, we can note a positive short-term disposition for the pound and slightly downbeat in the medium term. The chart below shows how the pair bounced from the lower bound of medium-term downtrend (1.345), currently trying to extend its short-term uptrend, with the help of which buyers intend to gain a foothold above 1.36


Pound.png


As part of the current short-term uptrend, there is a chance to make a short movement to the upper border of the channel with a potential spike to 1.37 area. Positive expectations for the upcoming meeting of the Central Bank should contribute to this.


From a technical point of view, this can also be facilitated by the movement of the dollar to the lower border of the current pattern - a triangle


 DXY.png


Nevertheless, the figure in the dollar indicates high chances of an upside breakout, so one should closely monitor the prospect of the dollar moving above the previous resistance zone - 94.50. From the steep slope of the lower bound of the pattern, we can see some solid bullish pressure of USD buyers which supports the outlook for trend resumption. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.


High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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