Articles

Headlines:

• Cable eyes the 2023 high with dollar in the doldrums
• ECB accounts: Next meeting widely seen as good time to evaluate policy restrictiveness
• France August flash services PMI 55.0 vs 50.3 expected
• Germany August flash manufacturing PMI 42.1 vs 43.5 expected
• Eurozone August flash services PMI 53.3 vs 51.9 expected
• Eurozone wages slow down in Q2 after running hot in the previous quarter
• UK August flash services PMI 53.3 vs 52.8 expected
• UK August CBI trends total orders -22 vs -25 expected
• BOJ reportedly considering to add wage-related items to quarterly Tankan survey

Markets:

• GBP leads, JPY lags on the day
• European equities higher; S&P 500 futures up 0.2%
• US 10-year yields up 6 bps to 3.835%
• Gold down 0.4% to $2,500.54
• WTI crude up 0.4% to $72.25
• Bitcoin flat at $61,301

The focus finally turns back to the economic calendar today and we got a round of PMI data from the euro area and UK to work through.

The French numbers were a beat on the services side but it is likely a one-off, owing much to a demand boost from the Paris Olympics. The German numbers were bad and that tempered with the euro a little on the release. But as markets are already pricing in a rate cut by the ECB for next month, the reaction has been rather minimal overall.

EUR/USD caught a brief algo spike from 1.1150 to 1.1165 before turning lower to 1.1128, then now trading just 0.1% lower at around 1.1135.

The dollar had been weaker throughout the week but is finding a bit of a footing today. That comes as bond yields are also bouncing back, erasing the drop from yesterday. And that is underpinning USD/JPY, with the pair now up 0.5% to around 146.00. The less dovish comments from the Fed’s Schmid here is also helping somewhat.

Besides that, GBP/USD is still marching forward and helped by a stronger UK PMI data. The pair is up just above 1.3100 as it looks to the 2023 high next at 1.3142.

In other markets, equities remain steady after regaining some composure yesterday. S&P 500 futures are up 0.2% with European indices also sitting modestly higher so far on the day.

All eyes now turn towards more US data to come, before moving on to Jackson Hole and Fed chair Powell’s appearance ahead of the weekend tomorrow.

This article was written by Justin Low at www.forexlive.com.

Currency dynamics and inflation is always a tricky ordeal to debate and/or navigate through. But for most major economies, currency movements are rather controlled and arguably play a small role in terms of influencing price pressures. The same goes for the euro area, or so at least that is what the ECB has been preaching over the years.

If we put that aside, what does the recent rise in the euro mean for the central bank and also the economy in general? Let’s take a look.

First off, let’s check on how the euro is performing in 2024 as a whole. With the dollar as the benchmark, the single currency is actually the second best performer among the major currencies.

And even so, the euro is just up nearly 1% only against the greenback. It feels rather surprising to see that, no? That especially given the dark outlook surrounding the dollar recently.

Going back on topic, how does this really impact the euro area economy if at all?

Well, considering the state of the manufacturing sector – especially Germany – a stronger euro is not exactly a helping factor in that regard. Demand conditions are weak and foreign demand is also struggling, not least with China’s worries. But with manufacturing already struggling, a stronger currency will make for more expensive exports and not help with the industry plight.

It’s certainly not too strong a factor yet considering the changes as seen above. However, every small thing counts especially when the economy is starting to show signs of a struggle again in Q3.

The ECB having to cut rates at a quicker pace might help to limit this as a factor in general. But their main battle is still on the inflation front, unlike the Fed.

As such, a stronger euro might be welcome slightly especially since it looks like we’re encountering a couple of bumps along the way in the disinflation process. That despite the argument above from the ECB that the exchange rate isn’t quite as important a factor in influencing prices.

Anyway, the latest CPI report in July here shows that price pressures aren’t exactly worsening but they’re not coming down all too quickly and convincing either.

If there is a tick up in inflation, even if due to base effects, towards year-end then that could give reason for the ECB to pause once again.

And that might invite further strength to the euro, with traders having now priced in ~66 bps of rate cuts in the next three meetings to December.

In turn, that feeds back into the cycle of putting more pressure on the manufacturing industry. And it all circles back to heaping pressure on the ECB again in having to chase rate cuts amid a stuttering economy.

This article was written by Justin Low at www.forexlive.com.

• Prior -32

This article was written by Justin Low at www.forexlive.com.

For some context, the Tankan survey is released by the BOJ once every quarter. And it is a general economic indicator of sorts with it being a survey on several thousand Japanese firms, ranging from small to big companies. It also covers a wide range of industries and provides some idea about overall sentiment. The latest one in Q2 can be found here.

Jiji Press is now reporting that the BOJ is thinking about adding wage-related items to the survey in order to gauge wage trends among industries. The central bank will then analyse the data and reflect on it when considering their monetary policy steps.

If anything, this will make the survey just a little bit more important than it already is when accounting for where the BOJ is at in the current cycle. That considering that this is a report that isn’t typically impactful even on the best of days given the time of the release and its generic data set.

This article was written by Justin Low at www.forexlive.com.

Well, the Q1 reading was largely impacted by a one-off from Germany and that was also confirmed by the Bundesbank earlier this week here. Given the circumstances, this should allow the ECB to breathe easier as wage pressures are beginning to turn around now. This just further solidifies the narrative for a rate cut next month and tees up the potential for more in the final quarter of the year.

This article was written by Justin Low at www.forexlive.com.

The dollar is struggling across multiple charts on the week and USD/CAD is no exception. The loonie might be pinned down by falling oil prices this week but it still has been outperforming the dollar. And the slight fall so far today sees USD/CAD fall to its lowest since April on a break below its May and July lows.

Not only that, the drop is also taking out its 200-day moving average (blue line) at 1.3597. That helped to arrest the decline in the pair last month. However, it is giving way now and that puts sellers back in charge of the controlling bias.

From a technical perspective, the break lower here threatens a much steeper drop especially after another failed attempt by buyers to clear the 1.3900 mark earlier this month. That’s three years in a row now that the pair has at least tested the key level and failed.

The 100-week moving average at 1.3543 will be one to watch in the sessions ahead. But if the dollar keeps under pressure across the board, we might soon be arguing about a test of the late December lows near 1.3200 next. Or at least there is certainly plenty of room for discussion as far as price action goes.

This article was written by Justin Low at www.forexlive.com.

• Prior 52.5
• Manufacturing PMI 52.5 vs 52.1 expected
• Prior 52.1
• Composite PMI 53.4 vs 52.9 expected
• Prior 52.8

The resilience in the UK economy is certainly commendable and this will ease pressure on the BOE to force rate cuts. But the good news in the report here is that price pressures have also eased on the month. Input cost inflation fell to its lowest in just over three-and-a-half years, so there’s that. However, service providers did note that wage inflation remains elevated so it’s not all plain sailing just yet. S&P Global notes that:

“August is witnessing a welcome combination of stronger
economic growth, improved job creation and lower
inflation, according to provisional PMI survey data.

“Both manufacturing and service sectors are reporting
solid output growth and increased job gains as business
confidence remains elevated by historical standards.

“Although GDP growth looks set to weaken in the third
quarter compared to the impressive gains seen in the first
half of the year, the PMI is indicative of the economy
expanding at a reasonably solid quarterly rate of around
0.3%.

“Inflationary pressures have meanwhile moderated further
in August, including notably in the service sector, which
has been a key area of concern for the Bank of England.
“The latest survey data therefore help lower the bar for
further interest rate cuts, although the still-elevated nature
of inflation in the service sector suggests that policymakers
will move cautiously.”

This article was written by Justin Low at www.forexlive.com.

• Prior 51.9
• Manufacturing PMI 45.6 vs 45.8 expected
• Prior 45.8
• Composite PMI 51.2 vs 50.1 expected
• Prior 50.2

The beat in the French services sector is arguably what is driving the business expansion this month. So, again the caveat is that it is likely a one-off owing to the Paris Olympics. As such, the momentum might not carry on for the months ahead. Meanwhile, the slowing picture in the German economy is certainly something to be wary about as manufacturing conditions overall continue to suffer. HCOB notes that:

“At first glance, this looks like a pleasant surprise: activity in the Eurozone picked up in August. But a closer look at the
numbers reveals that the underlying fundamentals might be shakier than they appear. The boost largely comes from a surge
in services activity in France, with the Business Activity Index jumping by almost five points, likely linked to the buzz
surrounding the Olympic Games in Paris. It’s doubtful this momentum will carry over into the coming months, however.
Meanwhile, the overall pace of growth in the services sector has slowed down in Germany, and the eurozone’s
manufacturing sector remains in rapid decline.

“It’s a tale of two worlds. The manufacturing sector remains mired in recession, while the services sector still appears to be
growing at a decent clip. But with the temporary Olympic boost in France fading and signs of waning confidence across the
Eurozone’s service industry, it’s likely only a matter of time before the struggles of the manufacturing sector start weighing
on services too.

“Manufacturers raised their selling prices for the first time since April 2023, a response to three straight months of rising input
costs. Despite weakening demand, firms seem to have had little choice but to pass on some of these higher costs to
customers. On the bright side, this suggests there’s still some pricing power in the market.

“The ECB might find some reassurance in the latest price indices. Input costs in the services sector, which are closely
watched by monetary authorities due to the significant role wages play, rose at the slowest pace in 40 months. So, even
though output prices in the service sector climbed faster than they did in July, the easing of cost pressures strengthens the
case for an interest rate cut at the ECB’s September meeting.”

This article was written by Justin Low at www.forexlive.com.

The algos were at work when it comes to the reaction to the PMI data in the past half hour. The French numbers saw a strong beat on the services print as seen here. However, it owes to a major caveat of it being a boost in demand from the Paris Olympics. The details were less rosy, with employment conditions falling and output expectations also weakening further.

Then, we got a set of poor readings from Germany as seen here. That puts the business activity further in contraction territory as things are starting to unravel in Q3, following the more resilient showing in the first half of 2024.

EUR/USD caught a spike from the French data initially from 1.1153 to 1.1165 but quickly gave that back. And the pair is now turning lower to 1.1128 after the German data as seen above.

So, what’s next?

Well, any weakness in the euro currently shouldn’t be outsized – especially in EUR/USD. Traders have already more or less fully priced in (~99%) a 25 bps rate cut next month. And the data today pretty much reaffirms that.

Looking out to the remainder of the year, traders are seeing ~67 bps of rate cuts to follow with three meetings left to go. There might be scope to expect consecutive rate cuts from hereon but it would be preferable for the ECB if inflation data also gives them something to work with.

The July report here proves that the road is still bumpy at the moment. However, if the economy weakens further, that’s still an incentive to force the ECB’s hand in the months ahead.

This article was written by Justin Low at www.forexlive.com.

Robert F. Kennedy Jr will make a speech in Phoenix on Friday morning, according to his campaign.

There is no detail about what he will speak about but his campaign said he will ‘address the nation’.

On Tuesday, his running mate said the campaign is considering whether to ‘join forces’ with Trump, who is also holding a rally on Friday in Arizona.

Should he drop out, it would be a boost to Trump’s election chances.

Update: ABC News now reports that Kennedy plans to drop out by the end of the week.

Sources say Kennedy is leaning toward endorsing former President Donald Trump, though the sources cautioned the decision is not yet finalized and could still change, with one source adding Kennedy’s hope is in part to finalize things quickly in order to try to blunt momentum from the DNC.

This article was written by Adam Button at www.forexlive.com.

• Prior 43.2
• Services PMI 51.4 vs 52.3 expected
• Prior 52.5
• Composite PMI 48.5 vs 49.2 expected
• Prior 49.1

German business activity continues to contract in August and the services sector is also starting to weaken further in Q3. The contrast highlights how much of the boost in France owes to the Paris Olympics. In any case, this just reaffirms market expectations for a rate cut by the ECB next month.

EUR/USD got a brief spike to 1.1165 after the French data but is now trading to fresh lows on the day at 1.1132 after the German data.

HCOB notes that:

“These numbers are a real mess. The recession in Germany’s manufacturing sector deepened in August, with no recovery
in sight. In fact, new orders took a sharper dive than last month, mainly due to a significant drop in foreign demand,
signalling more trouble ahead. Given this, it’s hardly surprising that companies are ramping up staff cuts and slashing
inventories of inputs even more aggressively than before.

“The struggles in manufacturing are starting to spill over into the otherwise steady services sector. For the third month in a
row, services activity growth has slowed down. New business is barely growing, and backlogs declined once again. The
export side of services, including tourism, isn’t offering much support either, shrinking at an even faster rate than in July.

“The anticipated recovery in the second half of the year is failing to take shape. There were good reasons to be hopeful —
lower inflation and higher wages seemed like the perfect recipe for increased consumption. Plus, global industry had started
to bounce back, something Germany typically benefits from. But it appears that uncertainty around economic policy has put
a damper on consumer spending, while the global manufacturing upswing turned sour before German companies could feel
the boost. Instead, the odds of a second straight quarter of negative growth have gone up, meaning we might be back to
talking about a recession in Germany soon.

“After such a prolonged slump that began in mid-2022, the renewed optimism among manufacturers seen earlier this year is
fading fast. Manufacturers’ expectations towards future output have now been below the long-term average for two
consecutive months, mirroring the continuous decline in outstanding orders, which have been shrinking for an uninterrupted
27 months. The anticipated interest rate cuts by the ECB, expected by most analysts, might lift spirits a little, but it’s clear
that the overall mood remains poor.”

This article was written by Justin Low at www.forexlive.com.