No Clear Follow Through Buying in Euro Yet

The markets are generally quiet in Asian session today. Euro surged notably yesterday as traders raised their bets on ECB rate hike next week, with some expecting a 75bps increase. But there is no clear follow through buying for now. While Dollar is paring some recent gains, loss is also limited. For now, Sterling, Swiss Franc, and Yen are on the softer side. Traders are waiting for upcoming data including Eurozone CPI and US non-farm payroll to make a bigger bet.

Technically, while Euro looks strong, it hasn’t clear out near term resistance level in some pairs yet. The levels include 1.0094 minor resistance in EUR/USD, and 0.9698 minor resistance in EUR/CHF. These two levels need to be decisively taken out to confirm the come back of Euro. Otherwise, momentum in other crosses could be somewhat capped.

In Asia, at the time of writing, Nikkei is up 1.19%. Hong Kong HSI is down -0.90%. China Shanghai SSE is down -0.57%. Singapore Strait Times is up 0.52%. Japan 10-year JGB yield is down -0.0093 at 0.234. Overnight, DOW dropped -0.57%. S&P 500 dropped -0.67%. NASDAQ dropped -1.02%. rose 0.073 to 3.110.

Fed Kashkari: Only relax on compelling evidence that inflation on its way down

Minneapolis Fed President Neel Kashkari said yesterday, “By many, many measures we are at maximum employment and we are at very high inflation. So this is a completely unbalanced situation, which means to me it’s very clear: We need to tighten monetary policy to bring things into balance.”

“When inflation is 8% or 9%, we run the risk of unanchoring inflation expectations and leading to very bad outcomes that would cause us to have to be very aggressive — Volcker-esque — to then re-anchor them,” he said.

“We definitely want to avoid allowing that situation to develop. So with inflation this high, for me, I’m in the mode of we need to err on making sure we’re getting inflation down, and only relax when we see compelling evidence that inflation is well on its way back down to 2%,” he said.

ECB Lane: Meeting-by-meeting approach suited as policy move away from lower bound

ECB Chief Economist Philip Lane said in a speech yesterday that the upcoming September monetary policy meeting will be the “start of a new phase” for the central bank. This new phase consists of a ” meeting-by-meeting (MBM) approach” to setting interest rates.

At a basic level, the transition from rate forward guidance to the MBM approach is in line with our monetary policy strategy, which assessed that forward guidance was primarily an appropriate response to the lower bound constraint,” he said. “As policy rates move away from the lower bound, the inherent flexibility of the MBM approach is better suited to calibrating monetary policy in a highly uncertain environment.”

Lane also explained that the MBM approach essentially has “two elements”, the terminal rate, and the speed to close the gap between prevailing interest rate and the assessed terminal rate.

On the data front

Japan unemployment rate was unchanged at 2.6% in July, matched expectations. Australia building permits dropped sharply by -17.2% mom in July, versus expectation of -2.8% mom.

Looking ahead, Swiss KOF economic barometer, UK mortgage approvals and M4 money supply; Eurozone economic sentiment indicator, and Germany CPI flash will be released in European session.

Later in the day, US will release house price index and consumer confidence.

EUR/CHF Daily Outlook

Daily Pivots: (S1) 0.9629; (P) 0.9664; (R1) 0.9714; More….

EUR/CHF is staying in range of 0.9550/9698 and intraday bias remains neutral first. Further decline is still in favor. On the downside, break of 0.9550 will resume larger down trend to 100% projection of 1.1149 to 0.9970 from 1.0513 at 0.9334. On the upside, however, firm break of 0.9698 will confirm short term bottoming. Bias will be turned back to the upside for rebound, towards 55 day EMA (now at 0.9838).

In the bigger picture, long term down trend from 1.2004 (2018 high) is still in progress. Next target is 138.2% projection of 1.2004 to 1.0505 to 1.1149 at 0.9033. On the upside, break of 0.9970 support turned resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish in case of strong rebound.

Economic Indicators Update