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by Charalambos Pissouros

USD Retreats on US-China Talks, Brexit Negotiations Resume

The dollar reversed some of its latest gains overnight, following reports that a Chinese delegation will visit the US later this month in order to discuss trade. As for today, EU and UK officials return to the negotiating table after a short summer break and thus, pound traders may be sitting on the edge of their seats in anticipation of any headlines over the talks.

US and China Willing to Resume Trade Talks

The dollar traded lower against all but two of the other G10 currencies on Wednesday. It gained only against CAD, while it traded virtually unchanged versus SEK. The main winners against the greenback were AUD, EUR and JPY.

USD performance G10 currencies

The Aussie gained the most against the US dollar after data showed that Australia’s unemployment rate slid to 5.3% in July from 5.4% in June. The Loonie was the sole loser perhaps due to the slide in oil, which came under selling interest after data showed an unexpected rise in US crude oil inventories.

Overall, the dollar may have reversed some of its latest gains, with DXY reaching a new 13-month high yesterday near the 97.00 mark, following overnight reports that a Chinese delegation will visit the US later this month in order to discuss trade. The news that the US and China are willing to return to the negotiating table may have reversed somewhat the broader market sentiment that’s been battered recently due to the ongoing conflict between the two nations as well as tensions between Turkey and the US.

During the Asian morning Thursday, Asian indices came off their lows following the reports, with Japan’s Nikkei ending its session fractionally in the green. The yen pulled back but given that it had been trading on the front foot for most of the day, its setback was not enough to push USD/JPY into positive territory.

With regards to Turkey, yesterday, the nation decided to raise tariffs on some US imports, responding to Trump’s decision on Friday to double the tariffs on steel and aluminum for Turkey, something that may have been the catalyst behind the risk-off environment throughout most of the day. Indeed, European bourses were a sea of red, while US equity indices closed negative as well, although they came off their lows after Qatar pledged to invest USD 15bn in Turkey.

As for the lira itself, it continued to recover boosted by the Qatar-investment news as well as the Turkish central bank’s liquidity moves. Apparat from the measures it announced on Monday, on Tuesday the Bank decided to provide liquidity at an overnight rate of 19.25% instead of the benchmark rate of 17.75%. A move by the nation’s banking regulator to limit FX swap transactions, which is aimed at preventing lira short-selling, may have also helped the wounded currency.

DAX – Technical Outlook

Yesterday, sellers hit DAX and pushed it down to close the day with a 1.58% loss. From the technical side, the index broke its medium-term upside support line, taken from the 26th of March. This is not looking promising for DAX in the near-term, as further declines could be seen.

After a prolonged drop yesterday, DAX found support just a few points above the 12100 zone, which held the price from moving lower on the 28th of June as well. We can see that the index is now retracing back up a bit, but this retracement to the upside could be seen as small correction before we could get another round of selling.

DAX could make its way to test the aforementioned broken upside line, where the bears could take advantage of that and drive the index lower to test the 12100 barrier again. A break of that barrier could set the stage for an even bigger decline, where we could start targeting the 11700 level, marked by the low of the 28th of March.

Alternatively, a strong move back up above the medium-term upside support line could bring buyers back to the table. We could then aim for the 12365 area, a break of which could open the way towards the 12490 hurdle, marked by the low of the 2nd of August. Further acceleration could lead to a test of the 12745 obstacle, which held the price from moving higher on the 7th of August.

DAX 4-hour chart technical analysis

Pound Traders Lock Gaze on Brexit Talks

The pound also gained against the US currency, but only modestly. The British currency remained under selling interest during the European day, even after data showed that headline inflation accelerated to 2.5% in July.

In our view, the pound moved little on the inflation data because they were in line with expectations. After all, the core rate remained unchanged at +1.9% yoy, a tick below the BoE’s 2% target. Bearing in mind that the main message we got from the latest BoE policy meeting is that the Bank may be done hiking for this year, we still believe that the main driver for sterling has been politics recently, and especially increasing concerns that the UK may end up leaving the EU without any deal.

Today, EU and UK officials return to the negotiating table after a short summer break and thus, pound traders may be sitting on the edge of their seats in anticipation of any headlines over the talks. Today, the main topic is likely to be the Irish border, while tomorrow, the talks are expected to center around the two sides' future trade relationships. As we noted on Tuesday, investors may want to see these talks bear some fruit before they start buying pounds again. Any further delays could add to “no-deal” concerns and could fuel further the pound’s latest downtrend.

As for the UK economic data, following the employment report on Tuesday and the inflation prints yesterday, today it is the turn of the nation’s retail sales. Expectations are for headline sales to have risen 0.2% mom after falling 0.5% in June, something that will drive the yoy rate up to +3.0% from 2.9%. Core sales are also expected to have rebounded on a monthly basis, to +0.1% mom from -0.6%. However, this will push the core yearly rate down to +2.8% from +3.0%. Bearing in mind that the BRC retail sales monitor showed that sales slowed to +0.5% from +1.1% in yearly terms, we view the risks surrounding the headline yoy rate as shifted to the downside as well. Having said all these though, as we already noted, we expect pound traders to turn most of their attention to Brexit talks and thus, we expect any market reaction on retail sales to remain limited.

UK retail sales

GBPUSD – Technical Outlook

Yesterday, GBP/USD managed to find good support near the 1.2660 level, from which the pair quickly reversed back to the upside. Now, we can see that the rate is testing the 1.2730 resistance barrier. GBP/USD continues to trade below its medium-term downside channel, which still puts a negative spin on the whole near-term outlook. That said, the pair could still continue correcting itself higher, where the bears could take advantage of that and start jumping in.

For the near-term, we will still stick to the downside and class any move higher, up until the lower bound of the aforementioned channel, as a corrective bounce. A break above the 1.2730 level could open the way up to test the previously mentioned lower bound of the channel, which could hold the rate down. This is where the sellers could start coming in again, in order to push the pair lower again towards the 1.2730 zone.

But if the 1.2730 level continues to hold, we could see a slide down to the yesterday’s support of 1.2660, a break of which could lead to a drop to the 1.2590 area, marked by the low of the 21st of June 2017.

On the other hand, if the lower bound of the abovementioned channel breaks and GBP/USD moves above it, this could be something of an interest for the bulls, who in their case, could drive the pair higher towards the next potential area of resistance at 1.2910, marked by the peak of the 9th of August. A further move higher could lead to a test of the 1.2975 line, which was near the high of the 7th of August.

GBPUSD 4-hour chart Technical analysis

As for the Rest of Today’s Events

During the European day, the Norges Bank decides on interest rates. At their latest meeting, Norwegian policymakers decided to keep interest rates unchanged at +0.50% and noted that “the key policy rate will most likely be raised in September 2018”.  On Friday, data showed that inflation accelerated more than expected in July, with the headline rate hitting +3.0% yoy and the core touching +1.4% yoy, both above the Bank’s projections for the month of +2.3% and +1.2% respectively.

Norway Norges Bank interest rates

That said, although inflation data is more than encouraging for Norges Bank officials, we don’t expect them to rush and hike at this meeting. After all, this will be one of the “smaller” meetings, which are not accompanied by updated economic projections and a press conference. We expect the Bank to maintain its upbeat tone and repeat that it is likely to push the hiking button in September.

As for the economic indicators, Eurozone’s trade balance for June, as well as US building permits and housing starts for July are due to be released.

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