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Cable falls to fresh one-month lows, nears 1.3600

  
Analysis, Forex

GBP/USD sellers set their sights on the July lows

GBP/USD D1 20-08

It hasn’t been a good week for commodity currencies amid the hit to risk but the pound itself is also not faring too well, with cable experiencing a sharp drop yesterday by over 100 pips. And that downside momentum is continuing to today.

The drop in cable price action below the 200-day moving average (blue line) signified a break favouring sellers and now they are riding that wave towards the 1.3600 mark.
Buyers managed to hold daily closes above that level in July and it will be a key area to watch as the downside momentum extends. The July lows @ 1.3572-91 adds to the line of defense but a break below that could open up a slippery slope in cable.
The case for the pound is that all the good news is essentially already priced in for the currency. The BOE will look towards ending asset purchases by year-end and while a taper may follow next month, it is hardly significant considering the timeline.
As such, any such announcement by the central bank will be one more for the optics.
Adding to that is the UK economy looking like it has peaked on reopening demand going into the summer as economic conditions starts to wind down.
Inflation is still on the high side but it seems like the BOE is more than content to stick with the ‘transitory’ narrative, at least for as long as they can get away with it.
Meanwhile, the case for the dollar is rather interesting as the latest wave of strength owes much to a technical push in my view. The more sour risk tones in the market is also helping amid a flight to safety this week.
That said, the dollar may face some risk going into Jackson Hole where I would expect Powell & co. to stick with a similar narrative on tapering as we heard in July i.e. nothing hawkish and nothing to suggest an imminent announce in September or November.
Also, just be mindful in case the Fed does highlight growing risks on the delta variant as part of their outlook. That could keep the market more on edge going into September.

Three charts that point to trouble ahead for global growth

  
Analysis, Forex

A rundown of some of the sore spots

The charts aren’t always right but they should never be ignored, especially when so many dominoes are falling together — and just six weeks after the bottom began falling out of Treasury yields.
There are still many risk-positive charts out there and many more that are hanging by a thread (EUR/USD is one). These ones are the most-worrisome:

1) WTI Crude Oil

Oil chart
Little has changed in the supply picture since OPEC firmed up its agreement so I think it’s safe to say the latest drop in crude is all about demand worries. Today WTI broke through a double bottom at $65.00 to the lowest since May.

2) AUD/JPY

AUDJPY daily
AUD/JPY is a classic rick trade proxy and it’s not telling a great story at the moment. Delta has broken down pandemic safety measures all over and nowhere is that more clear than in Australia, where the great success in the first year of the pandemic has given way to lockdowns and a strategy of total suppression that appear doomed.
This week AUD/JPY broke the July lows and is now threatening the lows of the year. If those levels give way, then support is increasingly scant. Note that the July Australian employment report is due at 0130 GMT.

3) NZD/USD

NZDUSD daily
The New Zealand dollar has been the focus of trading this week after the outbreak and surprise RBNZ decision to hold rates. An upbeat performance from Orr yesterday despite holding rates gave the kiwi a lift but souring sentiment globally unwound the bounce and NZD/USD closed right at the July low.
The good news is that the bad news is already out in the open. The lockdown is ongoing and the rate decision is over. That was a big blow to the bulls but they haven’t capitulated…. at least not yet. We’ll be watching carefully for signs of more covid cases today and for the remainder of the month.
The best hope for the bulls is that the covid charts in the US and elsewhere starts to look more like India, where the delta strain was first identified:
India covid cases

ALERT. EURUSD breaks to new 2021 low and bounces

  
Analysis, Forex

The lows between 1.17013 to 1.17053 was broken and the price scoots to 1.16929

The EURUSD broke below the old lows from March 31 and July between 1.17035 and 1.17053 earlier today, but only to 1.17013 before bouncing higher.
The lows between 1.17013 to 1.17053 was broken and the price scoots to 1.16929 
The price then traded between the 1.17054 level and 1.17292 until the last hour or so of trading.  The price broke below the swing levels, cracked 1.1700 and moved to a low at 1.16929.
Looking at the five minute chart below, the price has bounced back up to retest the 1.17053 level. The 38.2% retracement of the move down in the New York session was also tested near that level.
We currently trade at 1.1702.  The pair sits on an edge.
If the price can stay below 1.17053, the sellers remain in full control intraday.  If the price move above that level, there could be more disappointment on the failed break (for the 2nd time today).

Mexican central bank hikes benchmark interest rate to 4.50% from 4.25%

  
Analysis, Forex

Highlights of the Banxico decision

Previously the Mexican central bank surprised markets with a 25 basis point rate hike to 4.25%.
A hike was expected but the decision was tighter than the market was expecting with 3 votes for a hike and two votes for a hold. That’s given USD/MXN a small lift.
USD/MXN has been stuck around 20.00 for nine months after a great run lower from 25.00 coming out of the depths of the pandemic. There’s still plenty of work to do to get back to pre-pandemic levels around 18.50.
Highlights of the Banxico decision
The central bank said risks related to rising infections persist but that the recovery in the economy is expected to endure for the remainder of the year.
Regarding inflation, headline and core inflation projections call for a decrease, particularly one year out and beyond. They call for price convergence at the 3% target in Q1 2023.
They said that although the shocks that have increased inflation are expected to be transtory, the magnitude and extended horizon may post risks to the price formation process.

New dollar highs vs the GBP, CHF, and NZD

  
Analysis, Forex

Dollar edges higher

As the London 4 PM fixing approaches (11 AM ET), the USD is making new highs verse the GBP, CHF and NZD in the last few minutes.
The dollar the strongest of the major currencies today.
The USDCHF traded up to a high price of 0.9236 and moves closer to the high price from yesterday (and highest level since July 8) at 0.92416.
The GBPUSD moved briefly below its 38.2% retracement of the move up from the July 20 at 1.38255. The low price reached 1.38218, but has bounced back to 1.3827 currently. Earlier, the price fell below its 100 hour moving average at 1.38552 and stay below that level over the last 4/5 hours of trading.

AUD/USD still largely caught in a consolidative range for the time being

  
Analysis, Forex

AUD/USD trims losses to flat levels on the day but price action since mid-July suggests a more consolidative range for the pair

The aussie traded down to 0.7317 against the dollar in Asia Pacific trading but has pared the decline to 0.7333 now, back to flat levels on the day.
There isn’t much happening leading to the slight nudge higher as the general mood among major currencies and the dollar stays more subdued, with little change observed. Meanwhile, risk remains tentative as US futures are still down 0.1%.
That’s just suggestive of some push and pull with the aussie dragged a little lower earlier by some flows on the data front and Australia’s virus situation.
AUD/USD D1 10-08
Going back to AUD/USD price action, the pair continues to be largely trapped between 0.7300 and 0.7400 as evident on the daily chart after having seen a series of lower highs and lower lows dragging the pair to the current range since June trading.
For now, there is more of a defined area that price action is settling in and there needs to be a break on either side to suggest any fresh directional movement in the pair.
Adding to that from a technical perspective, a ‘death cross’ looms on the daily chart with the 100-day moving average (red line) looking to cross over the 200-day moving average (blue line) in the pair for the first time since August last year.
That will be a bit of a blow to buyers, especially if the dollar continues to keep more resilient and we see a push below 0.7300 and the July low of 0.7289.
Such a play will leave little in the way of a push towards 0.7000 next, especially so if the virus situation in Australia continues to dampen the RBA/economic outlook.

The bond market reaction remains key going into the FOMC meeting later today

  
Analysis, Forex

Can yields break the series of lower highs, lower lows?

USGG10YR
It’s all about the Fed now as the market counts down to the main event later in US trading.
As much as there will be implications on all asset classes, the reaction in the bond market is arguably the one to watch after the unrelenting bid since May.
There will be two things to watch in terms of how the market may react to the Fed.
The first being the economic outlook and if there are any changes to that given the latest virus trend/delta variant spread. The second being how deep discussions surrounding tapering will be revealed in the statement and via Powell’s press conference.
On the former, even if the Fed acknowledges added risks to the outlook, I reckon they will stick with projections that the economy is still going to perform robustly in 2H 2021.
That will keep the taper momentum on track but then it boils down to how quickly the Fed will want to start moving on that front. And as things stand, I’d argue they are in no rush to really jolt the market so expect more talk on “patience”.
Yields may gather a tailwind on taper considerations but I reckon bond sellers will still have a tough time stemming the tide as the squeeze is likely to continue.
There are still more questions than answers on the unrelenting bid in Treasuries and I don’t see that clearing any time soon until either the virus situation improves dramatically globally and/or the Fed communicates more clearly on normalising policy.
One might even say that the two goes hand-in-hand so that should set the tone for how the market reaction may pan out in the days/weeks ahead.
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