EUROPEAN FX UPDATE: DXY remains underpinned while JPY reverses overnight losses and GBP eyes the BoE

Analysis details (09:43)

DXY

• Another session of gains thus far the Buck, driven by an upside in bond yields as debt futures continue to trundle lower in a continuation of recent price action. DXY found overnight support around 102.50 before edging higher in early European trade to a 102.84 high at the time of writing.


• Fresh fundamentals have been light in the European morning but the focus for the Dollar (barring the Bank of England) will be on today’s ISM Services PMI, and less so the Jobless Claims (given the survey week falls outside of the NFP survey period). “Barring a significant rise in claims or a big dip in the services ISM, it looks like the dollar will hang onto recent gains into what should be a decent US July nonfarm payrolls report tomorrow”, says the desk at ING.


• From a technical standpoint, the index has topped yesterday’s 102.78 high and sees the next resistance level at the psychological 103.00. Above that, the 7th of July high at 103.19, then the 5th of July peak at 103.39, then the 30th of June high at 103.54. On the downside, the 50 DMA (102.43), 100 DMA (102.34), and yesterday’s low (102.01) could all provide support.

JPY, CHF

• The traditional haven currencies see a divergence in the early European hours, with the backdrop of risk-averse markets more evident in the Japanese Yen.


• JPY now stands as the outperforming currency amid haven flows following overnight weakness sparked by another unscheduled BoJ JGB purchase operation – the second intervention since the policy announcement on Friday. USD/JPY was propelled higher by some 50 pips overnight upon the announcement and thereafter gained ground to a 143.89 peak before reversing the whole move and some more as sentiment continued to deteriorate after the European cash open. USD/JPY now sits around session lows (143.87 at the time of writing). It’s also worth noting that participants remain on intervention watch as USD/JPY resides near levels Japan previously intervened.


• In terms of technicals, the pair could see support around the 142.19/22 region which marks the lows from Tuesday and Wednesday respectively, whilst upside levels include the psychological 144.00 and thereafter the 7th of July peak at 144.19. Looking at OpEx, USD/JPY sees USD 1bln rolling off between 143.60-65 and USD 1.2bln between 143.90-95.


• The Swiss Franc is on a softer footing following the Swiss CPI metrics which cooled from the prior reading and printed in line with forecasts at 1.6%. The print was below the SNB's Q3 CPI YY forecast of 1.7%, a forecast which was set at the June gathering. However, recall that the SNB expects headline inflation to lift back above the 0-2% target band from Q1-2024 onwards and remain above this for the entirety of the forecast horizon, currently until Q1-2026. USD/CHF trades in a tight 0.8768-98 range with upside capped by the risk aversion.


• Analysts at ING suggest “higher risk-free rates are providing greater headwinds to risk asset markets - including equities. We are also seeing some slightly higher cross-market volatility readings which may prompt investors to partially de-risk from carry trade strategies (good for the Japanese yen and Swiss franc on the crosses, bad for the high yielders).”

EUR, GBP

• Both are softer against the Dollar with the Single Currency digesting the Final PMIs for July while the Sterling gears up the Bank of England policy decision.


• The EZ PMIs underscored the “eurozone economy started the third quarter with the fastest contraction in business activity since November last year”, with services activity growth also cooling off following the slump in manufacturing. The PMIs also showed divergence – “While the French service companies have put the brakes on their activity, Spanish companies are still expanding at a rather healthy pace, despite a considerable slowdown since the first quarter. Spanish companies are also still in a hiring mood, while Italian firms have started to cut employment. The contrasting economic performance is making the already-difficult job for the ECB even more challenging.” - EUR/USD saw little immediate reaction to the PMIs.


• Over in the UK, the BoE’s MPC is expected to hike rates by 25bps (vs. prev. 50bps increase), bringing the Base Rate to 5.25%, as forecast by 42/62 economists surveyed by Reuters, an outcome that is anticipated by markets with a 60% probability. Expectations of a smaller hike than previous have stemmed from June’s CPI report showing a decrease in Y/Y inflation to 7.9% from 8.7%, matching the Bank’s May MPR forecast. Elsewhere, the focus will be on how the Bank guides future rate expectations with forecasts in the accompanying MPR set to show inflation materially below target over the medium-term. (Full preview available in the Research Suite).


• In terms of technicals, EUR/USD dipped under its 100 DMA (1.0915) from a 1.0949 session high, falling under its 50 DMA (1.0928) in the processes. The next levels to the downside include the psychological 1.0900 level, then the 7th of July low at 1.0865. The nearest upside level is yesterday’s high at 1.1019. It’s also worth being aware of several mammoth option expiries for today’s NY cut: 1.0895-1.0905 (EUR 4.1bln), 1.0915 (EUR 1.6bln), 1.0920-30 (EUR 1.8bln), 1.0950-60 (EUR 825mln), 1.1000-15 (EUR 2.7bln).


• GBP/USD found resistance and printed its intraday high near its 50 DMA (1.2726) at 1.2728. To the downside, yesterday’s 1.2678 low could prove to be support before the 6th July low at 1.2672, then the 3rd July low at 1.2656 ahead of the psychological 1.2650.

NZD, AUD

• Antipodeans are all modestly softer on the day amid the firmer Dollar and broader risk aversion, but losses are stemmed by the overnight Chinese Caixin Services PMI which topped forecasts, whilst Australian Trade Balance printed at a slightly wider surplus than expected, although Imports and Exports both contracted.


• Looking at technicals, AUD/USD eyes 0.6500 to the downside with the next support level the 1st of June low at 0.6483. NZD/USD fell under 0.6100 and eyes the psychological 0.6050 for some support before the 29th of June low at 0.6048 and thereafter the lows seen on the 7th and 8th of June – both at 0.6028.

03 Aug 2023 - 09:51- ForexData- Source: Newsquawk