U.S. Dollar Trading (USD) USD Strength continued into the new week ahead of the all important FOMC meeting Wednesday. OIL/USD weakness is helping the USD strength intensify against the commodity currencies. The FED is likely to remain on hold but many see risks that recent stock market gains and strong economic data will lead to a more hawkish tone. Doves argue the Brexit uncertainty will lead to a more cautious wait and see approach but the risks are definitely skewed towards a hawkish FED.
The Euro (EUR) the EUR/USD was capped at 1.1000 but the downside has also been slow going with no follow through yet from the break down last week. The FED has the power for more aggressive move lower but also the ECB Bank stress tests on Friday are eagerly awaited giving the ongong European banking crisis now focused in Italy but more broadly manifesting itself in falling Bank equity prices. The ability of banks to lend when capital falls is of great concern to ECB President Draghi and one of the worst hit lately is the huge Deutsche bank falling below 2008 lows. The Sterling (GBP) the weak GBP on Friday after the recession level service PMI's jolted the Pound back to post brexit reality. The downside was limited Monday however and we saw a small recovery to 1.3150 and left 1.3000 in tact for another day. BOE is likely to cut in August and if data continues to weaken they may be forced into some sort of QE
The Japanese Yen (JPY) Saw some sharp buying at the beginning of trade in Asia on Tuesday as leaks from the Goverment stimulus draft underwhelm the market who was looking for some very big numbers up to 20-30 trillion Yen. The huge rally from Y100 to Y107 was due for pullback and we have broken below Y105 and searching for support. EUR/JPY and GBP/JPY are also in play to the downside retracing substantial parts of the recent rally.The Australian Dollar (AUD) struggled to rebound after breaking below 0.7500 on ongoing RBA interest cut expectation and a stronger USD in the back drop of weakening commodities. The outlook is 100% determined by the all important inflation numbers on Wednesday early Asian session with forecast of 0.4% Q/Q critical for whether the RBA will cut in August or wait. The AUD has been dragged down by the frenzy of RBNZ rate cut speculation as the Australian neighbor's CPI data came in weaker than forecast last week. NZD/USD has been orbiting the 0.7000 level since it collapsed from 0.7300 but will be swayed by the Australian data on Wednesday as well.
Stocks Indices(DAX) Surging above 10200 for fresh post brexit highs we struggled to hold onto these gains as US stocks fell in a rare reversal yesterday. Still technically strong we target pre brexit levels of 10400 this week. US Stocks (DOW) Fell for a 2nd day paring back the 9 day rally and looking for support under 18500. The key downside level is the previous all time high at 18350 and is a now a good buying level for those looking to get long. The FED's dovish or hawkish tone may derail the rally and some caution is advised Wednesday.
Pairs to watch
AUD/USD Selling Rallies into CPI as downside still significant if RBA cuts
USD/JPY retracing rally, support seem at Y104.20
Economic Data Ahead
US June New Home Sales forecast at 560k vs. 551k
AUD Q2 CPI forecast at 0.4% vs. -0.2% Q/Q previously.
By Anthony Darvall (TonyD)