FX Trading focus: US data in focus through next Friday
In the wake of the FOMC (see my wrap below which I was unable to upload yesterday for technical reasons), the USD has softened, particularly against the euro and sterling, where there is considerable further leeway for EURUSD to consolidate without threatening a fully bullish reversal (at least 1.2000), while GBPUSD is already bumping up against key resistance in the 1.4000 area. Note that today is month-end, with some price action today smacking of end-of-month flows. Later today we get US PCE inflation data, where the bar is perhaps high for upside surprises to move the needle after the Fed looked through the blistering June CPI print before the FOMC meeting this week. Still, the PCE data series is the Fed’s preferred inflation measure. St. Louis Fed president Bullard, a non-voter this year, will be out speaking later today and is a known hawk in favour of tapering now rather than later – if he hints in any way that other Fed members share his views, this may move the market today.
Please have a listen of this morning’s Saxo Market Call podcast, featuring our Chief Investment Officer Steen Jakobsen, who expresses a considerable sense of foreboding on the market backdrop here. We also have a look at the US Q2 GDP estimate and the implications from the internals of that report. If we are set to see a more significant equity market correction, the Japanese yen could find itself strongly back at the lead of the pack as was the case during the volatility episode mid-month, in particular if safe haven sovereign bond yields continue to drop.
On the macro calendar, note that Vice Fed Chair Clarida is set to speak next Wednesday. And the week also brings the usual blitz of first week of the month US data, including the ISM’s on Monday and Wednesday and the July jobs data on Friday, where we’ll have a look at whether Powell’s prediction of a strong comeback in payrolls is in play yet (if the extended benefits issue is the one holding back labor supply amidst the signs of enormous demand, the risk is that a more significant surge in payrolls won’t arrive until the September and even October data cycles.
Outside of the US, Australia sees an RBA meeting on Tuesday of next week and Governor Lowe is set to testify next Friday before a parliamentary committee and the Bank of England meeting looks important for the latest signaling on its intentions as Covid is now clearly retreating in the UK despite the recent opening up. Note the anticipation of further hikes from EM central banks that are moving against inflationary risks rather than waiting, including an expected 100-bps hike from Brazil next Wednesday and the second 25 bp hike for the cycle from the Czech central bank.
Interesting to see the lack of interest in hotter than expected German and EU inflation prints yesterday and today (3.8% year-on-year for the German July headline figure out yesterday and 2.2% for the EU print today, although the core EU CPI estimate for July was as expected at +0.7% year-on-year.
GBPUSD has pulled back sharply from its near-death experience below the prior major lows around 1.3670 and is now pushing up close to . Given its tight correlation with the risk-off, risk-back-on episode starting around mid-month in July, the 1.4000 level could prove a tough nut to crack if the sense of foreboding we discussed in today’s podcast turns into a significant rout in risk sentiment, although there are other supports for this move, including the generally widening spread in short rates in the UK’s favour in recent months, which has the spread near the cycle highs and the highest level since….2015. Note that the 1.4000 level is not only a big round level and pivotal in a prior episode but is also right near the 61.8% retracement of the entire sell-off sequence from the June 1 top near 1.4250 to the July 20 low below 1.3600.