Headlines

* Dollar stands tall as US economic resilience trumps fiscal uncertainty

* China service activity surprisingly picks up in private survey

* BoE expected to make case for further policy tightening

* Gold nears three-week lows as US data points to another Fed hike

FX: USD is up for a sixth straight day this morning. The DXY is hitting fresh one-month highs after gaining 0.62% yesterday. Fitch’s downgrade has seen a haven demand for the buck. Higher long-term yields, the risk-off mood and firm ADP jobs data also helped. The 2-year yield continues to trade sideways above the 50-day SMA at 4.85%.  But again, the 10-year yield has surged higher to levels last seen in November 2022.The US Treasury announced a slightly bigger than expected refunding plan.

EUR is down for a fourth day in row this morning. Market positioning and uncertainty around the ECB policy outlook point to the EUR retaining a soft undertone.

GBP slipped 0.5% to below 1.27 ahead of a priced in 25bp BoE rate hike today. Long-term trendline support has been lost.

USD/JPY closed very marginally lower after a choppy day of price action. The yen initially was bid on safe haven demand. But the major was supported late in the session after the BoJ stepped in with emergency bond purchases.  

AUD has fallen over 2.6% in two days and is currently below 0.66. The late May lows sit just above 0.65. USD/CAD jumped up 0.52% yesterday. It is close to the early July highs around 1.3372/86. There has been no support from crude picking up to the $80 area.

Stocks: US equities ended lower weighed by the US credit downgrade. Semiconductor names got hit after the AMD earnings. There were also mixed results from PayPal and Qualcomm. The benchmark S&P 500 lost 1.38% to 4513. That was its worst day since late April. The tech-focused Nasdaq was the underperformer falling 2.21% to 15,370, its biggest daily drop since February. The Dow slid 0.98% to 35,282. Focus turns to Apple and Amazon who report after the closing bell. For the former, attention will be on iPhone sales and targets, plus Chinese production bottlenecks. Amazon streaming and advertising growth will be under the spotlight.

 Asian stocks were mostly lower following its global peers. Chinese stocks were choppy with some losses stemmed after the mixed Caixin Services and Composite PMI data. The Nikkei 225 underperformed as yields edged higher.

US equity futures are in the red again. European equity futures are lower (-0.86%). The Euro Stoxx 50 closed down 1.6% yesterday.

Gold is failing to make any meaningful recovery. Dollar strength and surging Treasury yields are not good for bugs.  

Day ahead – BoE ready to hike, tone key for GBP

Consensus expects a 25bp rate hike by the BoE at its Super Thursday meeting. Markets give around a 28% chance of a bigger half-point rise. This would be its 14^th consecutive rate increase. The softer June inflation data is reason for the MPC to not go large. But headline inflation is still nearly four times the BoE’s 2% target and wage growth remain a major concern.

A tightening bias is expected with the statement likely to keep the possibility of more hikes if price pressures are seen as persistent. That means a more neutral stance which is more heavily data dependent could be seen as dovish. That would hit GBP which is looking weak heading into the meeting. CPI forecasts and any talk around QT and a possible increase will also be in focus.

Chart of the Day – Cable looks to BoE for support

The risk-off environment is helping the dollar and pushing down cable. GBP/USD has lost long-term trendline support from the March lows. That sits above as resistance near the major Fib level (61.8%) of the 2022 decline at 1.2764. If Bailey acknowledges UK disinflation, then GBP could drop to 1.26 and the late June low at 1.2591. A more hawkish MPC will challenge that near-term resistance with 1.2848 above.