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by Charalambos Pissouros

Markets Calm Somewhat, UK Jobs Data in Focus

Both the dollar and the yen retreated yesterday as financial markets calmed somewhat following the turmoil triggered by Turkish lira’s collapse. As for today, pound traders are likely to fix their gaze on the UK employment data for June, but given the uncertainty surrounding Brexit and the cautious stance by the BoE, we doubt that any upbeat numbers could lead to a sustained recovery in the British currency.

Financial Community Calms Somewhat as Lira Stabilizes

The dollar traded lower against most of the other G10 currencies on Monday. It underperformed the most against SEK, NOK and NZD in that order, while it gained only against JPY. The greenback traded virtually unchanged against AUD and CHF.

USD performance G10 currencies

The pullback in the dollar and the fact that the safe haven yen was the G10 currency that lost the most ground yesterday suggest some calmness in the financial community following the turmoil triggered by Turkish lira’s collapse. AUD/JPY, one of our favorite proxies among currency pairs for tracking changes in risk sentiment, rebounded after it hit support near the round figure of 80.00. The lira itself, although it fell to a new record low against the dollar at the opening, it eventually stabilized slightly higher.

As for the equity markets, although major US indices ended their session in the red, their losses were more modest than Friday’s, while during the Asian trading Tuesday, Nikkei edged up around 2%. Australian and New Zealand bourses also closed in the green. Shanghai’s Composite ended slightly in the negative zone, but this may have been due to weaker than expected Chinese data. The nation’s fixed asset investment, industrial production and retail sales, all rose by less than anticipated in July.

The catalysts behind the relative calmness may have been the Turkish central bank’s decision to provide liquidity into the market as well as rumors that the American pastor may be released by the 15th of August, even though the latter was denied by the US embassy in Ankara later in the day.

Nevertheless, having said all these, our view remains the same as yesterday. With the S&P’s sovereign rating over Turkey due to be updated this Friday, further downgrading could give another push down to the Turkish currency. We believe that a clear resolution over the pastor’s case, alongside a massive rate hike by the Turkish central bank are needed for the lira to reverse and recover more of the huge losses it posted lately. Further weakening in the lira could make Turkey’s high debt, which is priced in dollars, even more expensive, and may thereby raise more concerns over the Turkish economy and the spillover effects around the globe.

AUD/JPY – Technical Outlook

Last week, AUD/JPY sold off due to the “risk off” sentiment that hit the market on Thursday and Friday. Although it rebounded on Monday as market calmed somewhat, the pair continues to trade well below its downwards moving resistance line, taken from the high of the 19th of July. Overall, we will stick to the downside, but with a possibility to see some more correction to the upside.

The pair is currently sitting below its key resistance level of 80.70, which held the rate down yesterday from moving higher. Also, this barrier acted as strong support on the 19th and the 28th of June, from which AUD/JPY made a move higher. This just points out the importance and strength of that level and if it continues to hold AUD/JPY down, then we could see the pair traveling back lower again towards the psychological 80.00 zone, which yesterday acted as a strong area of support. A break below could open the door to the next good level of support at 78.90, marked by the low of the 4th of November 2016. 

As we mentioned above, let’s not exclude a possibility of seeing a bit more retracement to the upside, before AUD/JPY could turn south again. But for that, we would need to see a good strong break and a close above the previously mentioned resistance at 80.70. This way we could target the 81.25 zone, which was the low of the 5th of July. Above that sits another good potential area of resistance at 81.80, marked by the low of the 24th of July. Even if that level doesn’t stop the rate from rising, then this correction could get held at the aforementioned downside resistance line.

For us to take the bull-side, we would need to see a strong break and a close above that downside line. Only then we could start examining much higher levels for the near-term. One of the good resistance areas to watch out for could be the 82.80 zone, marked by the high of the 8th of August. Further acceleration in the rate could send AUD/JPY to test the 83.25 obstacle, which was the high of the 31st of July.

AUDJPY 4-hour chart technical analysis

GBP-Traders Turn Attention to the UK Employment Report

The pound was also able to gain some ground against its US counterpart yesterday but stayed near its 13-month low as uncertainty over Brexit and the cautious stance by the BoE continued to weight on the currency.

As for today, pound traders are likely to turn their attention back to the economic calendar and the employment report for June. Expectations are for the unemployment to have remained unmoved at its 42-year low of 4.2%, while average weekly earnings, both including and excluding earnings, are expected to have risen at the same rates as in May (2.5% yoy and 2.7% yoy, respectively).

UK real wage growth

According to the IHS Markit/REC Report on Jobs for the month, inflation of salaries for permanent-placed staff held close to a three-year high, while temporary pay rates stood near their two-year peak. So, having this in mind, we see the risks surrounding the earnings forecasts as tilted to the upside.

That said, even if we see upside surprises in the earnings rates, we don’t expect any pound gains to be significant. The key takeaway we got from the latest BoE meeting was that officials are probably done hiking this year and thus, we doubt that some acceleration in June’s wages will be enough to change that. Investors may also prefer to refrain positioning themselves heavily ahead of tomorrow’s inflation prints.

On top of that, EU and UK officials are expected to return to the negotiating table on Thursday and thus, market participants may want to see progress on that front before they start buying pounds again. With the clock ticking towards the 29th of March 2019, the official date of the EU-UK divorce, further delays between the two sides to find common ground could increase investors’ concerns over a no-deal Brexit and could bring the pound under selling pressure again.

GBP/USD – Technical Outlook

Important day for pound traders as we get employment numbers from UK. GBP/USD is currently sitting quietly in a tight range, between 1.2790 and 1.2730, probably waiting for the news to come out in order to make a move. Overall, last week’s decline forced the pair to exit the downwards moving channel through its lower bound. GBP/USD was trading there since around the beginning of May. This could be seen as an indication that there could be more weakness to come.

For now, we will aim to the downside, especially if we see a break below the 1.2730 level, which is the lower side of the abovementioned tight range. This drop could open the way towards the next potential strong area of support at 1.2590, marked by the low of the 21st of June 2017. This is the area, where the rate could stall for a while, until the bulls and the bears decide on who takes the driver’s seat from there.

Even if GBP/USD exits that tight range through the upper side of it, still it could meet good resistance at the lower bound of the downside channel that we mentioned earlier. The pair could easily hit that area and then quickly reverse back down towards the previously discussed levels for another test of those.

For us to start considering higher levels, we would need to see a close above the lower bound of the downside channel, which could open the path towards the 1.2910 area, marked by the high of the 9th of August. Above that lies another good potential area of resistance at 1.2975, which held the rate down on the 7th of August.

GBPUSD 4-hour chart Technical Analysis

As for the Rest of Today’s Events

During the European morning, Germany’s final CPIs for July, the nation’s preliminary GDP for Q2, as well as the ZEW survey for August are coming out. The final inflation prints are expected to confirm the preliminary estimates, while the preliminary growth estimate is expected to show that Eurozone’s largest economy accelerated to +0.4% qoq in Q2 from +0.3% in Q1. As far as the ZEW survey is concerned, the current conditions index is forecast to have ticked down to 72.3 from 72.4, while the expectations one is anticipated to have risen to -20.1 from 24.7.

We get GDP data from the Eurozone as a whole as well. Specifically, the 2nd estimate of the bloc’s GDP for Q2 is due to be released. As it is usually the case, it is expected to confirm the 1st estimate and show that the Euro area economy slowed to +0.3% qoq from +0.4% in Q1. Eurozone’s industrial production is also due to be released.

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