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by Charalambos Pissouros

Dollar Rebounds Following Last Week’s Tumble; EZ PMIs in Focus Ahead of the ECB Decision

The dollar rebounded on Monday to recover a small portion of the losses it posted last week due to Trump’s remarks. The yen stabilized after gaining on the back of reports that the BoJ is discussing changes to its monetary policy, while the yuan slid to its lowest in more than a year. Today, euro traders are likely to pay attention to Eurozone’s PMIs ahead of Thursday’s ECB policy decision.

USD Rebounds After Getting Shot by Trump; JPY Stabilizes After Gaining on BoJ Reports

After tumbling during the second half of last week, the wounded dollar rebounded on Monday to recover some of its lost ground. It ended the day in the green against all the other G10 currencies, with the main losers being AUD, NZD and EUR.

The greenback had been under massive selling interest on Thursday and Friday, and responsible for that was US President Donald Trump. The chorus began after, in an interview for CNBC, Trump noted that he is not happy about higher interest rates, for which he continued expressing his discomfort on Friday via his twitter account. “Tightening now hurts all that we have done” the President noted in one of his tweets. He also appeared concerned over the strength of the US dollar. He accused China, EU and other nations for manipulating their currencies and interest rates lower, while the US is raising rates and the dollar gets stronger.

As if all these comments were not enough to keep investors busy, in the second part of his CNBC interview, which was published on Friday, the US President said, “I am ready to go 500”, referring to tariffs over the whole USD 500bn worth of Chinese goods imported to the US on an annual basis.

The combination of all Trump’s remarks resulted in a tumble in USD, but also a surge in the safe-haven JPY, which was also boosted by reports that the Bank of Japan is discussing possible changes to its monetary policy in order to make its ultra-loose program more sustainable as the cost of prolonged easing is getting “hard to ignore”. The outcome of all the above was a 240-pip slide in USD/JPY from Thursday up until the Asian trading Monday. That said though, the pair began to recover during the European session and managed to end the day in the green.

In our view, there is the potential for the pair to continue to recover and resume its prevailing uptrend. On the one hand, we expect the Fed to continue with raising rates as the last thing the Committee may want now is to hurt investors’ faith over its independence.  On the other side of the equation, the yen could continue giving back its latest speculative gains. The BoJ report said that any changes will intend to make its policy program more sustainable, not tighter. With all inflation metrics, even the Bank’s own core CPI, well below its 2% objective, it’s hard for us to imagine the Bank taking a step towards normalization, at least at its upcoming gathering scheduled for the 30th and 31st of July. It will be a hard task for policymakers to justify allowing long-term yields to rise, even if this will ease the pain of local banks. As for Trump’s threat, it’s once again old news. He first threatened to impose tariffs to all Chinese goods imported to the US at the beginning of July and thus the yen is unlikely to continue attracting flows only due to that.

The Aussie and the Kiwi were the main losers perhaps due to the yuan’s slide to its lowest in more than a year. Both the Australian and New Zealand economies are heavily dependent on exports to China, and thus any developments regarding the Chinese economy could impact on those two nations, and thereby their currencies.

The slide in the offshore yuan came after the People’s Bank of China (PBOC) set the onshore central rate at its weakest since the 11th of July last year. Although Chinese officials repeated yesterday that they have no intention to devalue the yuan in order to fight a trade war, and that the slide is due to market forces, the continued devaluation of the onshore yuan by the PBOC remains food for though.

USD/JPY – Technical Outlook

Last week, USD/JPY was met with heavy selling, which led the pair to test its mid-term upside support line, taken from the low of the 25th of March. USD/JPY rebounded firmly from that line and made its way higher to find the 111.55 level, which now acts as a good resistance area. For now, until the upside support line is broken, we remain positive over the short-term outlook.

A good confirmation for further upside could be a break and a close above the previously mentioned 111.55 area. A move higher could open the path towards the next potential area of resistance at around the 112.05 zone. If that zone is not able to withhold the rate from accelerating further, then the next stop for USD/JPY could be near the 112.65 hurdle, marked by the high of the 20th of July. If the bulls continue driving the pair higher, then there is a strong chance to reach the highs around the 113.10 level, which held the rate from moving much higher on the 17th and 19th of July.

In case USD/JPY moves lower, for us to get comfortable with the downside scenario, we would need to see a strong move below the aforementioned upside support line and a good close below the 110.75 hurdle, marked by yesterday’s low. This is where we could start examining lower levels like the 110.30, which could act as an initial good area of support. A drop below could open the way towards the 109.70 barrier, or even the 109.35 zone, which held the rate strongly on the 25th and 26th of June from dropping further.

Eurozone PMIs in Focus Ahead of Thursday’s ECB Decision

The euro traded lower or unchanged against all but one of its G10 peers. The common currency underperformed against USD, CHF, SEK, CAD and NOK, while it traded virtually unchanged versus GBP, JPY and NZD. It gained only against the AUD.

Today, euro traders are likely to turn their attention to PMIs. We get the preliminary manufacturing and services data for July from several European nations and the Eurozone as a whole. Expectations are for both the bloc’s manufacturing and services indices to have slid somewhat, something that will drive the composite PMI a tick down to 54.8 from 54.9 in June.

At the latest ECB policy meeting, officials signaled a QE-tapering after September and a clear end to the program in December, but the decision was subject to incoming data. What’s more, they noted that interest rates are expected to stay untouched “at least through the summer of 2019 and in any case for as long as necessary”, which came as a disappointment to those expecting a hike in mid-2019. According to Eurozone’s overnight index swaps (OIS), the market anticipates a 10bps hike in the deposit facility rate in October 2019.

In our view, a small slide in the PMIs is unlikely to raise concerns as to whether asset purchases will end in December or alter expectations with regards to interest rates. We believe that market participants may need a much larger fall in order to start worrying that the latest signs of stabilizing economic growth were just temporary.

On the other hand, upside surprises could be pleasant news for market participants and ECB policymakers, as they could support further the case that the Euro area economy has stabilized following the slowdown since the turn of the year. That said, although something like that may prove positive for the euro, we don’t expect investors to bring their rate bets forth ahead of the ECB policy decision. We expect them to stay cautious as the statement accompanying the decision and Draghi’s press conference may play a much bigger role in shaping market expectations.

EUR/AUD – Technical Outlook

EUR/AUD continues to trade within an around 200-pip range since the pair got into it during the last week of June. Certainly, the prevailing trend is to the upside, but until EUR/AUD makes a clear move out of that range, we will remain neutral.

If the bulls decide to make a run for the 1.5890 level, which is the upper bound of the range, and then succeed in breaking it, this move could attract even more buyers. We could then see EUR/AUD travelling higher towards the next key area of resistance at 1.5965, marked by the high seen on the 9th of May. If the rate doesn’t stop there, the pair could eventually test the 1.6055 barrier, which held EUR/AUD down on the 30th of April.

Alternatively, a move below the 1.5780 hurdle, could lead EU/AUD towards the lower side of the aforementioned range, at the 1.5700 mark. This is where the pair could meet the upside support line, taken from the 4th of June. The area could prove to be an important battleground for the bulls and the bears, as they could fight over the faith of EUR/AUD.

For us to become comfortable with the downside, we would need to see a break and a close below the lower bound of the range and the upside support line. This is where we could start looking at 1.5655, as the next potential area of support, a break of which could open the door for a potential drop to the 1.5545 hurdle, marked by the low of the 18th of June. If it doesn’t hold, then the next stop for EUR/AUD could be the 1.5445 zone, which was the low of the 12th and 14th of June. 

As for the Rest of Today’s Events

Besides Eurozone’s PMIs, we get preliminary manufacturing and services PMIs for July from the US as well. The manufacturing index is anticipated to have declined to 55.1 from 55.4, while the services index is expected to have remained unchanged at 56.5. In any case, we believe that the market tends to pay more attention to the ISM prints, due out on the 1st and 3rd of August.

Tonight, during the Asian morning Wednesday, we get Australia's CPI data for Q2. Expectations are for the headline CPI rate to have entered the RBA’s 2-3% target band after staying slightly below the lower end for a year. Specifically, headline inflation is expected to have accelerated to +2.2% yoy from +1.9% in Q1. The trimmed mean CPI rate is expected to have remained unchanged at +1.9% yoy. If the forecasts are met, the headline rate would be above the RBA’s latest projection of 2%, but the trimmed rate would be just a tick below the Bank’s forecast for underlying inflation, which is also at 2%.

The latest meetings of the RBA were proven non-events, with the Bank keeping rates unchanged at +1.50% and proceeding with little changes in the accompanying statements. According to the Bank’s latest quarterly Statement on Monetary policy, the cash rate is expected to increase around the middle of next year. Although accelerating headline inflation could prove positive for the Aussie, we would like to see underlying inflation pressures picking up notably as well before we start examining the chances for that timing to come forth.

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