Daily Outlook

U.S. Dollar Trading (USD) the USD has been under pressure via the USD/JPY selling and the beginning’s of a EUR/USD rally. The main catalyst has been a dovish shift by the market towards the FED’s willingness to raise rate’s this year. Interbank bond yields indicate chances of a September hike are down to 10% after the FOMC minutes from the July meeting showed most members looking to wait for more information before raising rates. Fedspeak has been more hawkish lately though with multiple speakers suggesting that the September meeting is live. The lack of USD strength after these comments however underpin the lack of credibility the market gives these warnings. Attention this week turns to the annual Jackson hole where FED Chief Yellen will be speaking on the future on monetary policy. Whilst a huge shift in policy is unlikely there has been rumblings across the economic world that inflation targeting in a low interest rate environment is not ideal and that moving to a nominal GDP targeting regime would help boost global growth. Any sense of this from Yellen would likely be very USD negative as it would naturally delay the rate hike cycle.

The Euro (EUR) the EUR/USD spent most of the week on the front foot breaking above 1.1300 and closing above the figure on the strong footing. Serious resistance is above with 1.15 to 1.16 holding for the last 2 years. A break above would trigger alot of stops and help momentum in most pairs rally against the USD. The feeling that the ECB is out of bullets and that the immediate Brexit risk is largely over is helping to improve sentiment. The Sterling (GBP) the short covering rally sparked by the surge in retail sales has the bears worried the UK economy would not be as hard hit as first thought. The weak USD creates a perfect opportunity for a larger rally and if we break above 1.3200 the door is open to 1.3500-1.3800. Still one data point is not enough so the market will be closely watching the PMI data in the coming week to see if the sentiment has improved.

The Japanese Yen (JPY) The USD/JPY has tested Y100 multiple times over the week and each time somehow found a way to rally. Friday was no exception and we have rallied sharply are the open on comments from the BOJ Governor Kuroda that the central bank can still lower the interest rate to even more negative levels. Trader’s are still keen to sell rallies and more talk from the central bank is unlikely to change the downtrend without action. The Australian Dollar (AUD) began to lose its shine last week struggling to break fresh highs even with all the USD weakness and marking lower highs nearly everyday. The recent uptrend has been relentless and the long positioning had grown stretched so the market was due for some profit taking which is all this latest bout of AUD/USD weakness should be seen as. Moody’s downgrading the outlook for Australian banks on Friday was the final straw that pushed the Aussie to 0.7600 with larger support seen at 0.7520-0.7550. A break below 0.7500 would threaten the larger uptrend but would likely require a shock from a hawkish Yellen on Friday.

Stocks Indices(DAX) the DAX was under pressure most of last week pulling back from year highs at 10800 to the previous resistance now support at 10500. The outlook is still bullish but given the size of the rally in recent months a bigger retracement is possible whilst still not change the larger uptrend in play. US Stocks (DOW) Continues to be the strongest index globally with the pullbacks last week only marginal and closing at 18540 within striking distance of fresh all time highs at 18620.

Pairs to watch

AUD/NZD back under 1.0500 but for how long?

EUR/USD will the rally get serious?

Economic Data Ahead

Friday FED Yellen Speach at Jackson Hole

By Anthony Darvall (TonyD)