Head of FX Strategy
Summary: EURUSD swooned well through parity yesterday, posting a new low this morning before surprisingly resilient August preliminary PMIs helped to stabilize risk sentiment in Europe this morning. After a powerful strengthening move for the US dollar on a repricing of the US yield curve, we may risk a bit of consolidation and cat-and-mouse until the Friday main event(s) of the US PCE inflation release and Fed Chair Powell speech.
FX Trading focus: Treading water until Friday?
Seeing some signs of consolidation in recent trends in places this morning as we see EURSEK rolling over after its steady recent ascent and EURCHF jerking back higher from new cycle lows on a stronger than expected set of preliminary August PMI’s, with Germany’s manufacturing survey at a solid 49.8, a nudge higher from the July level and far better than the 48.0 expected. The Germany Services survey was weaker than expected at 48.2 but is not the focus. For the Eurozone-wide survey, the manufacturing survey was likewise steady at 49.7 vs. 49.8 in July and vs. 49.0 expected. The resilient data didn’t suit the market action as EURUSD had plunged to new lows below parity yesterday and was posting fresh lows this morning just ahead of the releases. Given the scale and speed of the slide from above 1.0300 in EURUSD just over a week ago, it’s tough to argue that the USD will continue to move in a straight move higher as we await Fed Chair Powell’s speech at Jackson Hole. The title of the Jackson Hole conference is Reassessing Constraints on the Economy and Policy, which between the lines suggests the Fed is set to assess the reasons why it was so wrong and why it policy has little ability to affect the (a slightly more cryptic and academic version of the BoE’s recent throwing of the hands in the air at its own irrelevance, in other words).
Chart: GBPUSD
A rather steep pace of declines for GBPUSD since the pair peaked out above 1.2250 in the wake of the late July FOMC meeting and then on the retest higher after the slightly softer US July CPI release on August 10. Cable managed to test new lows for the cycle this morning below 1.0760 before rebounding slightly and UK rates are off to the races again to new highs for the cycle after a firmer than expected preliminary August Services PMI suggesting moderate expansion. If the US dollar treads water for a couple of sessions ahead of Jackson Hole, there may be some room for the price action to consolidate – certainly a tough area to initiate a USD long position here below 1.1800 in risk/reward terms. Eventually looking for the pair to challenge lower still until either Europe finds some sudden source of relief on its energy emergency or the market begins to price the Fed to ease again (too early for the latter).
Elsewhere, the USDCNH rally extended to new highs this morning as the pair trades passively to USD direction. USDJPY has not yest posted new highs for the cycle as the comeback in longer US yields has been a relatively sluggish affair and we are still near 50 basis points below the cycle high in the US 10-year treasury yield benchmark of 3.50%, a challenge of which might be required to set USDJPY on tilt for 140+ and an eventual showdown over the BoJ’s commitment to its yield-curve-control policy – but keeping an eye out nonetheless as the market absorbs whatever message the Fed delivers this week.
Table: FX Board of G10 and CNH trend evolution and strength.
The USD positive reading intensifying here – mostly at the expense of EUR, GBP and SEK, but keeping an eye on the traditionally risk-correlated FX if sentiment continues to dive. Note the NOK riding above the fray – one of its most remarkable positive divergences from a downbeat set of European complexes and obviously driven by record gas prices.
Table: FX Board Trend Scoreboard for individual pairs.
EURGBP flipped to positive on Friday, only to turn back lower yesterday on a sharp reversal – status looks confusing there. Elsewhere, watching AUDCAD for downside follow through while also watching whether USDCAD can break notably above the range or if it remains in the ugly choppy, rising channel of the last 12+ months (the closing price yesterday was the second-highest since late 2020). Look at NOKSEK at a reading of +7.1 – strongest trend within G10.
Upcoming Economic Calendar Highlights (all times GMT)
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
