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Bank of America notes that European investors, who were previously driving the USD rally earlier in 2024, have now shifted to short USD positions. This shift coincides with a recent EUR/USD breakout above 1.10.

Key Points:

• Shift in European Investor Behavior:

  • Earlier in 2024, the USD rally was significantly driven by demand from investors outside of US trading hours, particularly Europe-based investors.
  • As of August, foreign demand for the USD has decreased, with Europe-based investors unwinding their long USD positions and recently flipping to short USD.

• Impact on EUR/USD:

  • Both US and Europe-based investors are now cumulatively net long EUR/USD for the year. This shift has contributed to the recent breakout of EUR/USD above the 1.10 level.

• Market Dynamics:

  • The change in positioning among European investors highlights a significant shift in sentiment towards the USD, which could continue to impact currency markets in the coming months.

Conclusion:

BofA observes that the shift from long to short USD positions by European investors has played a crucial role in the recent EUR/USD breakout. This change in market dynamics suggests that investor sentiment has turned against the USD, potentially influencing further movements in the currency pair.

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

WTI crude oil futures settled 33-cents lower to $74.04 after falling as low as $73.50.

It’s the third day of losses and fifth in the past six days and also runs counter to growing optimism about the US and global economy, particularly in stock markets.

Then again, it’s tough to say which is the chicken and the egg. Yields are falling this week and that may be helped out by oil, which is going to be a drag on CPI in the very near future, given that last Sept-Oct prices ranged from $85-95.

The drop in oil lately has oil analysts scratching their heads given falling OPEC exports and draws in global inventories. A report at the start of the week also talked about consumption vouchers in China and larger borrowing limits, both of which could stimulate the struggling economy.

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

You would think that stock market bulls would throw in the towel today as markets turned south. The S&P 500 is riding a five-day winning streak, so there would be no shame in taking some profit or not buying the smallest dip.

But the bulls have stepped in again.

The S&P 500 has mostly erased a 20 point decline and is now nearly flat on the day. The Nasdaq is also near-flat.

What’s gotten my attention is the decline in yields at the same time. US 2s are down 6.3 bps to 4.00% today and have stayed low in the latest risk rebound.

That highlights a market that believes it’s getting an incredible combination of: Lower inflation, lower rates and solid growth. That’s a rare combo and the economy could always tip into recession but right now, that’s not the message from markets.

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

The Philly Fed released its latest non-manufacturing survey earlier today and most of the numbers weren’t headline grabbing. The main index was strong with a rise to +8.3 from -10.0 but there was a sharp break lower in full-time employment, particularly in firms that were planning to cut full time employment.

The drop raises some questions about the strength of the jobs market ahead of next week’s non-farm payrolls report.

Other highlights:

• New orders index nearly flat at -0.3
• Sales/revenues index rebounded to 6.8
• Full-time employment index fell to -14.9, lowest since May 2020
• Prices paid index steady at 30.0
• Firms expect 2.0% increase in own prices over next year
• Future activity index at firm level positive but declined to 19.4

Full report

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

The pound is higher for the fourth straight day today and reached a high of 1.3052.

That’s the best level since July 2023 as it narrowly rose above the July 2024 high of 1.3044. It’s since pulled back below that figure but not by much.

Cable has climbed in 8 of the past 9 trading days as the pair rides US dollar weakness and improving risk appetite. It comes as Treasury yields decline and the market grows increasingly convinced that the Fed can embark on an extended rate-cutting cycle to 3.00% or lower.

Next for the pound is the July 2023 high of 1.3142 and clearing that would mark the highs since March 2022. The post-pandemic high was 1.4240.

Zooming out to the weekly chart, there is a nice series of higher lows developing that could be supercharged with a break of the 2023 high. If that’s combined with a strengthening UK economy or some further stumble in the US and/or strong risk appetite, the pair could break higher in a big way.

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

Credit Agricole sees potential for a rally in USD/JPY this week, driven by market reactions to Fed Chair Jerome Powell’s upcoming speech at Jackson Hole, as investors position around US-Japan rate differentials.

Key Points:

• Current Market Positioning:

  • Investors are currently betting on a further narrowing of the US-Japan rates differential, anticipating a dovish message from Powell and a hawkish stance from BoJ Governor Kazuo Ueda.

• Key Driver:

  • The main driver of USD/JPY is expected to remain the UST yield side of the US-Japan rates spread, with Credit Agricole suggesting that the market may be overly aggressive in pricing in Fed rate cuts.

• Potential Rally:

  • Powell’s speech at Jackson Hole could prompt a correction in this aggressive pricing, potentially leading to a USD/JPY rally. The 150 level remains a significant hurdle for the exchange rate.

Conclusion:

Credit Agricole expects that the USD/JPY could rally following Powell’s speech at Jackson Hole, as the market may reassess its aggressive pricing of Fed rate cuts, with 150 being a critical resistance level.

For bank trade ideas, check out eFX Plus. For a limited time, get a 7 day free trial, basic for $79 per month and premium at $109 per month. Get it here.

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

The STOXX 600 was riding in a five-day winning streak and traded higher at times today but couldn’t hang on.

• Stoxx 600 -0.5%
• German DAX -0.4%
• Francis CAC 40 -0.3%
• UK’s FTSE 100 -0.9%
• Spain’s IBEX -0.2%
• Italy’s FTSE MIB -0.5%

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

One way to look at the drop in Treasury yields is that it’s signalling trouble in the US economy but with stocks working on an 8-day winning streak, that’s tough to square.

Maybe the answer is more-simple: The market sees no recession but steady rate cuts and a return to the low-inflation/cheap-money era.

That’s a great dynamic for both bonds and stocks and it’s underscored by the decline in 5-year breakevens back to 2%.

In addition, the market is pricing in a return to 3.00% Fed funds in 2026 but that leaves a strong ‘Fed put’ in place in case things in the economy deteriorate.

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

The latest New Zealand dairy auction results are out and prices rose 5.5% to $3920/MT. Whole milk powder prices rose 7.2%.

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

Goldman Sachs favors a tactical approach to buying EUR/USD on dips, with a focus on broader USD weakness driving the pair higher despite a lack of strong economic support for the euro.

Key Points:

• Tactical Buy Levels:

  • Traders are looking to add to EUR/USD positions on dips back towards 1.1030, with a target of reaching the 2023 highs just below 1.1140.

• Market Sentiment:

  • The strategy is driven by expectations of broader USD weakness rather than strong economic fundamentals in the eurozone.

• Downside Risks:

  • A significant downside surprise in Thursday’s European PMIs could challenge this outlook, though Goldman Sachs does not expect such an outcome.

Conclusion:

Goldman Sachs recommends a tactical approach to buying EUR/USD on dips, capitalizing on broader USD weakness, with an initial focus on 1.1030 as a buying level and a target of 1.1140.

For bank trade ideas, check out eFX Plus. For a limited time, get a 7 day free trial, basic for $79 per month and premium at $109 per month. Get it here.

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

A spokesman for the Islamic Revolutionary Guard in Iran today laid out an uncertain timeline for an attack on Israel in response to the assassination of Hamas’ political leader in Tehran.

“Time
is on our side and it’s possible that the waiting period for this
response will be long,” Islamic Revolutionary Guard Corps Spokesman Ali
Mohammad Naeini was cited as saying by Iranian state TV.

“It’s
possible that Iran’s response won’t be a repeat of past operations,” he
said, adding that Israel “must await calculated and precise strikes at
the appropriate time.”

Oil prices rebounded today by 66-cents after four days of declines. The market will undoubtedly turn its attention elsewhere now and has likely concluded that there won’t be an operation on the scale of the one we saw in April.

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