UPCOMING EVENTS:
- Monday: US Labor Day Holiday.
- Tuesday: RBA Policy Announcement, US ISM Services PMI.
- Wednesday: BoC Policy Announcement.
- Thursday: ECB Policy Announcement.
Following the Jackson Hole blues, the risk sentiment in the last week remained on the defensive side. The US Dollar appreciated against most major currencies, failing to gain decisively only against the Euro. The Euro resilience is pretty much all caused by ECB members talking up the 75-bps hike coming at this week policy meeting. Nonetheless, the global slowdown, aggressive monetary tightening and energy crisis in Europe doesn’t bode well at all for the single currency.
Last week we also got two important economic reports: the ISM Manufacturing PMI and the Labour Market report. The ISM report surprised with an overall good reading, showing increases in components like new orders and employment and another big decrease in prices paid. That’s kind of a goldilocks print, although one good report after a series of bad ones has to be taken with a pinch of salt and it doesn’t change much for the Fed as the resilience may just give them comfort to “keep at it”.
The Labour Market report was also benign, beating expectations on jobs added but missing on the unemployment rate, which climbed to 3.7% from 3.5% although the participation rate increased as well, so all in all a good report. Wages data came out as expected and fears of a wage price spiral at this point may be overblown. Again, overall, this report doesn’t change anything for the Fed and the next big event will be the US CPI report on the 13th of September.
On Tuesday, the RBA is expected to raise rates by 50 bps bringing the Cash Rate to 2.35%. The RBA already stated several times its commitment to bring inflation down to target of 2%-3% range and that it will take further steps in the process of normalising monetary conditions. On the AUD/USD 4-hour chart below, the price broke down through the previous swing low support at 0.6869, which also looks like the neckline of a head and shoulders pattern. We may see the price pulling back to the neckline or the trendline ahead of the RBA meeting and then falling from there for a continuation of the downtrend with a possible break of the previous low at 0.6682.
We will also get the latest ISM Services PMI, expected to weaken further amid high inflation and tighter monetary conditions. The market will be obviously more focused on the prices paid component.
On Wednesday, the BoC is expected to hike by either 50 bps or 75 bps, with a bit more weight leaning to the larger move bringing the rate to 3.25%. As for the Fed, the BoC wants to frontload interest rates hikes and bring them to a restrictive level, which they estimate to be a bit higher than 3%. On the USD/CAD 4-hour chart below, the price has pulled back from the 2022 high at 1.3224 and looks like it could go back to the trendline before continuing its slow uptrend and break the 2022 high. We may see the price pulling back ahead of the BoC meeting.
On Thursday, there will be the biggest event of the week: the ECB monetary policy announcement. A couple of weeks ago the market was expecting a 50-bps hike by the ECB in September, but the expectations changed immediately when on the 26th August a report came out revealing that “some policymakers wish to discuss a 75 bps rate rise due to the deterioration in the inflation outlook, with the prospect of a looming recession not a justification for slowing or halting policy normalisation”. After that ECB members started to talk about a 75-bps rate rise in September as a likely move and Eurozone inflation data climbing further reinforced the bigger hike probability.
The bleak economic outlook for the Eurozone amid tighter monetary conditions, high inflation and energy crisis look like a win-win for Euro bears. If they hike aggressively, they will just worsen the economic outlook and if they chicken out, they will prolong the stagflation or worse lose any credibility as inflation fighters and lose control of inflation expectations. On the EUR/USD 4-hour chart below, we can see how once the price came to the 1.0350 strong resistance area, it faded completely not only the US CPI spike but also the one-month-long relief rally we saw in July and August. Right now, the price is contained in a roughly 200 pips range between the low at 0.9900 and the high at 1.0090. It’s been sort of a reliable pattern lately to see EUR/USD climbing into the ECB meeting and then selling off out of it. It’s very likely that we will see the same happening this week and once the price breaks decisively the 0.9900 low, it could be free fall until 0.9700, unless a very weak US CPI report spoils the party the next week.
This article was written by Giuseppe Dellamotta.
