With August slowly coming to an end, we prepare to enter the next week and September. The week is expected to be turbulent and volatility in the markets increases slowly but steadily as traders return from their summer holidays as we’ve mentioned in our XM Live trading sessions.
Next week we tend to highlight the release of the US employment report for August a well as RBA’s interest rate decision, yet more financial data from around the world are expected to capture the interest of traders.
On the fundamental side the US -Sino relationships, Brexit as well as the recent resignation of Japan’s Prime Minister Abe could move the markets and alter the directions of currencies.
USD – US Employment report front and centre
Powell’s speech at the virtual Jackson Hole Symposium, may have been the main event for the markets in the past few days and could be characterised as a game-changer for the Fed in its future decisions.
The Fed’s Chairman has outlined the bank’s intention to let the economy ran at an inflation rate higher than 2%, which initially weakened the USD, yet afterwards also added that the inflation is to be allowed to be “moderately above 2% for some time,“ which caused the USD to regain momentum at least short-term.
Overall, the strategy, as described by Powell is expected to add substantial flexibility for the Fed’s actions, yet also implies a new era of low rates for the bank. On the other hand, the renewed demonstrations in the US created headlines, yet markets had little to no reaction to the issue.
Nevertheless, we expect the protests to play a role in the possible outcome of the US elections, as voters seem to be heavily polarised. Also, the course of the pandemic is a key issue for the markets and it’s no wonder that Fed officials directly linked the recovery of the US economy with it.
A possible deal on the new US fiscal stimulus is also a major issue for the recovery of the US economy and the delay in the US Congress to deliver the package tends to weigh on the USD.
On a different front, the US-Sino relationships could create volatility and not just the FX market, but also for Equity markets. It should be noted that it was characteristic that the US and China reaffirmed their commitment to the Phase 1 deal on Monday, which was a positive step. On the other hand, President Trump yesterday threatened to impose tariffs on companies that leave the U.S. to create jobs overseas, while also promised to end the US reliance on China once and for all.
As for financial releases we highlight the release of the ISM PMIs for August on Tuesday and Thursday, the factory orders growth rate for July on Wednesday and the weekly initial jobless claims figure on Thursday.
The main release for the week though is expected to be the US employment report for August due out on Friday. We tend to focus on the NFP figure and should it drop substantially, worries about the recovery of the US employment market could increase. At the same time, a possible drop of the unemployment rate could ease bearish reactions in the FX market for the USD, while volatility could extend to equity markets as well.
Finally, next week, two of the best-performing stocks are to split their shares, namely Tesla and Apple and could grab also the market’s attention, while major US stock-markets seem to find no end in their ascent.
US500 broke the all-time high, technically eyes are on the previous weekly high 3396.64 zones. A correction down to the mentioned zone of potential new support will cause a new buying appetite on traders and investors side.
EUR – Inflation rates and COVID cases eyed
The common currency seems to be on the rebound against the USD and even managed to close the week higher and still inside the formed daily “choppy range”.
The resurgence of COVID 19 cases in Europe is worrisome though, increasing doubts for the swift recovery of the zone. It’s characteristic of how Germany’s cases are on the rise, the country banned large gatherings and Chancellor Merkel warned that the coronavirus crisis may be setting a challenge for the finances of the largest economy in the Eurozone.
It should be noted that in the past few days data seemed to express some optimism on behalf of businesses and consumers for the Eurozone and especially Germany. On the monetary front, ECB officials are scheduled to deliver speeches and it would be characteristic of the bank’s stance what Philip Lane stated at the Jackson Hole symposium. The member of the ECB’s Executive Board stated that the ECB is monitoring markets and ready to boost buying of assets.
After J. Powell’s speech, we would not be surprised to see the ECB also adopting a similar inflation goal, which would allow it to remain accommodative for a longer period. As for financial releases, we highlight Germany’s and the Eurozone’s preliminary HICP (Harmonised Index of Consumer Prices) rates for August. It should be noted that the rates are at near-stagnation levels and pose a substantial headache for the ECB.
Any possible slowdown or even a decline into the negatives could weaken the common currency. Other than that, we also note the release of the area’s final PMI readings for August, on Tuesday and Thursday, while on Friday we get Germany’s industrial orders growth rate for July.
AUD – RBA and financial data
On Tuesday during the Asian session, we get from Australia RBA’s interest rate decision. The bank is widely expected to remain to on hold at 0.25% and currently, AUD OIS imply a probability of 95% for such a scenario. The bank’s rhetoric in the past clearly indicated the bank’s aversion to adopting a possible drop into the negative of its interest rate, while any considerations for a hike are far away.
In Governor Lowe’s statement, we expect the bank to maintain an accommodative stance, yet we would not be surprised to see the bank’s confidence being reiterated once again. Should the bank actually adopt such a tone, we could see the Aussie gaining some ground.
On a more fundamental level, as we also discussed on the XM Live stream analysis we could see the AUD also be influenced by any escalation of the frictions in the US-Sino relationships. Any indications of a slowing down of international trade could weaken the commodity currency, especially given that China is one of its main trading partners. That’s an additional reason why Aussie traders should keep a close eye on the Chinese releases next week.
On Monday we get China’s NBS manufacturing and non-manufacturing PMIs for August, while on Wednesday we get the Caixin manufacturing PMI and on Thursday the Caixin non-manufacturing PMI, all for August. The main release for the Aussie though could prove to be Australia’s Real GDP growth rate for Q2, which is expected to decline into the negatives and could weaken AUD on Wednesday, while on Thursday we get Australia’s trade.
However, we’re still bullish on AUD vs USD as we’re still following the clear Risk-on sentiemnt on the market.
Support levels: 0.7300, 0.72700, 0.7200
Resistance levels: 0.7400, 0.7500, 0.7700
GBP – Brexit in the forefront
With financial releases from the UK being very few, we expect fundamental issues to take a front seat for the pound. The recent headlines about EU head negotiator Barnier warning Downing Street 10, that the UK has two weeks to save the negotiations were indicative of the emergency of the issue.
The two main matters seem to be the state aid rules which are to apply after the end of the year as well as fishing rights. Mr Barnier told the UK government that negotiations may hit a halt until UK’s Brexit negotiator Frost explains what the UK’s policy in the future is going to be on industrial subsidies.
The tensions seem to escalate rapidly, and the scenario of a hard Brexit may return in the forefront. The Times, report that the two men are to hold emergency talks next week in an effort to save the negotiations and should they fail we could see the pound weakening substantially and vice versa. As for financial releases we highlight the release of the Nationwide House prices growth rate for August on Wednesday, as well as the final figures for the Services PMI on Thursday and the manufacturing PMI on Tuesday as well as the construction PMI on Friday, all for August.
We’re still pretty bullish on this currency pair. The price has reached a very key resistance zone 1.3350 – 1.3400. If buyers manage to break the mentioned zone of resistance that could be the door open for further price rise up to 1.3650 and 1.3800 next.
On the second scenario, if the market drops below 1.3300 near-term psychological support level we can witness a deeper pull-back down to 1.3250 support area.
JPY – Abe’s resignation-the end of an era?
Rumours had started to spread, after Shinzo Abe’s long hours’ visit to the hospital on Monday, that he may not be able to fulfil his term until September 2021. Early Friday’s morning Japans’ Prime Minister Shinzo Abe announced his resignation and stepped down to undergo treatment for a chronic illness. It should be noted that his resignation ends his run as the longest-serving premier of Japan.
The Prime Minister is expected to remain in place until a successor is appointed. The timeframe for a vote by the Liberal Democratic Party (LDP) for a successor who may take over, is still uncertain. The political void tended to sink Japanese shares and appreciate the Yen.
Worries tend to intensify regarding the Abenomics which were dominant in the past few years for Japan’s economy.
We expect that no drastic changes are to take place from next PM. On the contrary, any successor from the LDP may try to continue the approach of Abe regarding governing Japan. So safe haven flows are expected to move the Yen once again, this time from inside Japan. Any indications that the succession process is prolonged could increase uncertainty, thus supporting JPY.
On the other hand, any safe-haven flows deriving from the international markets should not be underestimated either. As for financial releases, very few are expected from Japan, yet we note the release of the preliminary industrial output growth rate for July during Monday’s Asian session, while on Wednesday we get the Jibun manufacturing PMI for August.
U.S. Dollar looks pretty weak against its a save-heaven colleague here. If the price breaks the support zone measured on the chart below we can witness a nice further drop down to 104.50 – 104.00 zone of technical support.
On the other hand, the Australian dollar looks strong against the safe haven yen. Strongly correlated with the equity market currency pair closed the week very bullish.
Eyes on 76.85 – 76.50 strong potential support zone for the current price.