Headlines

* UK pay grew more quickly than expected adding to inflationary pressure

* ZEW German investor confidence poised for further drop  

* RBNZ set to leave rates unchanged after 12 straight hikes

*Asian shares rise as investors eye end to Fed hikes, China stimulus

FX: USD is falling for a fourth day in a row. The DXY has dropped below the late June swing low around 102. Major support is at 100.82. The 2-year yield plunged and is trading below 5%.  It posted a high last seen in June 2007 on Thursday. The 10-year yield also fell sharply from its recent top, close to 4.10%. It is currently trading below the key psychological level of 4%.  

EUR is climbing for a fourth straight day this morning. It is now nearing the early February top at 1.1032 where it has struggled in previous months. GBP made new cycle highs above 1.29 after stronger than expected wage growth. Overnight, BoE Governor Bailey and Chancellor Hunt pledged to see the job through and do what is necessary to return inflation to the target.  USD/JPY has sold off further and is approaching the 50-day SMA at 139.90. Narrowing yield differentials are driving the pair lower. AUD is range bound and trading around long-term SMAs below 0.67. USD/CAD moved sharply lower on Friday after strong employment data. The 50-day SMA at 1.3377 capped the upside.

Stocks: US equities closed in the green stopping a two-day decline. The benchmark closed marginally higher at 4,409. The tech-heavy Nasdaq closed 0.06% higher. The Dow outperformed, bouncing off the 50-day SMA at 33,664 and rising 0.62%. The small-cap Russell 2000 also performed well amid promising inflationary signs ahead of tomorrow’s US CPI report.

Asian stocks were mostly positive as investors digested China’s new support measures. The Nikkei 225 was the laggard and gave back most of its early gains as the upside was capped by currency strength. The Hang Seng was upbeat as fresh stimulus measures targeted the real estate sector.

US equity futures are very modestly in the green. European equity futures are better bid (+0.3%). The Euro Stoxx 50 closed up 0.5% yesterday.

Gold looks like it could be building a base around $1900/20. A falling USD and yields would certainly help bugs. Focus will be on tomorrow’s US inflation data. Soft numbers will buoy those eyeing the end of the Fed’s tightening cycle very soon. The 100-day SMA at $1949 is initial resistance. But sticky core figures will encourage the “higher for longer” rates crew and see a retest of $1900 again.

Day Ahead – Closer to end of the Fed tightening cycle

The dollar has kicked off the week on the soft side. Interest rates and inflation are the key themes currently. Ahead of the US CPI data, the Manheim used car priced index tumbled further in June which could be crucial for bringing down core inflation in the months ahead. Furthermore, there was plenty of fanfare around the fall in the New York Fed’s 1-year ahead consumer inflation expectations survey. This fell to the lowest levels since April 2021. But there was surprisingly little focus on the rise to series peaks for the 5-year ahead inflation expectations.

Markets also ignored several Fed speakers who all stuck to the relatively hawkish script. They said the policy rate would probably need to be hiked another 25bps or 50bps this year. This market divergence which questions two 25bp hikes could be addressed soon with the US CPI release.

Chart of the Day – GBP/USD up to new highs

GBP has extended recent gains after the hotter than expected pay growth data out earlier today. Cable made a fresh 15-month high at 1.2913, its highest level since April last year. Further pressure was heaped on the BoE to keep raising rates after earnings ex bonuses were 7.3% higher. That is the biggest increase outside of the pandemic and above forecasts of 7.1%. The peak terminal rate is now very close to 6.5%. But many economists believe we will only see a couple more hikes.

In the soft dollar environment, GBP/USD could extend gains closer to 1.30. Trend momentum remains solidly bullish across several timeframes. Key support is now the previous mid-June cycle top at 1.2848.