Espresso Morning Call: USD gains on pause, GBP volatility

What we are looking for

• USD gains ease off: USD is just giving back some recent gains versus major forex this morning.
• GBP remains volatile: A sharp swing lower yesterday on comments from the Bank of England Governor Bailey has swung around contradictory reporting in the Financial Times. 
• Indices find support: Sharp selling pressure since Friday’s US payrolls has eased into more of a consolidation. US futures are around +0.5% higher, with European markets mixed.
• Commodities consolidate: A quiet morning so far on precious metals and oil.
• Data trading: EUR traders will be watching the Eurozone Industrial Production but also any leading comments that ECB President Lagarde might give. USD traders will look to the PPI and perhaps take a view ahead of the more important CPI data tomorrow.

Overview

After a sell-off in the wake of the Nonfarm Payrolls report, market sentiment has begun to look more settled. USD gains have eased overnight and are unwinding slightly this morning. Indices and commodities are also looking more settled. FOMC minutes are tonight, but it will be interesting to see if this is a settling that is coming ahead of important US CPI inflation data tomorrow.

However, GBP is bucking the trend. Volatility remains elevated and the price has been swinging around in the past 24 hours. Comments from the Bank of England Governor Bailey, that could be described as incendiary (is he another “unreliable boyfriend”?) sent GBP spiking lower last night. He warned that financial institutions have three days to organise their liquidity for the end of emergency BoE Gilt purchases. Since then an article in the FT has rowed back on this, sending GBP spiking back higher this morning. Add in a sizeable miss on August GDP, this also adds to the volatility.

The economic calendar has second-tier Eurozone and US data today. Eurozone Industrial Production is expected to grow slightly in August. However, as an enormous decline of August 2021 drops out, the year-on-year growth is expected to jump back into positive. US factory-gate inflation, the US PPI, is expected to show a slight decline in the headline but core pricing pressures are expected to stay around current levels. For central bank speakers scheduled, ECB President Lagarde will certainly be watched.

Today’s news

Market sentiment is more settled: Major markets look more settled today, with forex, commodities and indices all with limited direction into the European session.

Treasury yields are a shade lower: Yields have calmed their advance (for now). This is playing into the broader consolidation.

UK GDP shrinks in August: August GDP fell by -0.3% after the cnosensus was expecting it to be flat. The three-month period to August shows GDP down by -0.3%.

Bank of England rolls back on Bailey’s comments: The Bank of England has an emergency short-term £65bn facility to buy longer-dated UK government bonds. BoE Governor Bailey last night insisted that financial institutions had just three days to sort out their liquidity positioning before the Friday cut-off. However, this is seen as being very forthright and could steepen the cliff edge for the Gilt markets. According to the Financial Times, Bank of England officials have signalled privately to institutions that they could extend beyond Friday if required. GBP initially sold off on the Bailey comments but has since stabilised.  

Cryptocurrencies find support: Crypto has seen a mild tick higher this morning. Bitcoin is +0.4% at $19100, whilst Ethereum id +1.0% at $1294.

Two Fed board members speak today: Michael Barr (permanent voter, centrist) speaks at 17:45 GMT, with Michelle Bowman (permanent voter, hawkish) speaking at 22:30 GMT.

ECB President Lagarde speaks: The ECB President is due to speak at 13:30 GMT. She will be a good gauge for where the Governing Council is positioned coming into another important meeting in two weeks.

Economic Data:

• Eurozone Industrial Production (at 09:00 GMT) The consensus is expecting growth of +0.6% in August which would improve year-on-year production to +1.2% (from -2.4%. 
• US PPI (at 12:30 GMT) Headline PPI is expected to reduce slightly to 8.4% in September (from 8.7% in August). Core PPI is expected to remain at 7.3%
• FOMC meeting minutes (at 18:00 GMT) 

Major markets outlook

Broad outlook: Market sentiment is fairly settled. There are mild losses on European indices, but US futures are slightly higher. Forex is showing little direction, along with mixed moves on commodities. 

Forex: USD is a shade lower, with AUD continuing to underperform. GBP is volatile. 

• EUR/USD has stopped the rot a little in the past 24 hours. The selling pressure of recent sessions has eased and the market has picked up from a low of 0.9670. This near-term respite is just consolidation for now, and there is plenty of overhead supply for sellers to restrict any upside.  Initial resistance is at 0.9735/0.9775. We also continue to see near-term rallies as a chance to sell. We favour an eventual move back under 0.9670 and a retest of the September low at 0.9535.
• GBP/USD has been choppy in the past 24 hours. On the daily chart, another big bear candle saw a close below 1.1000. We see this as a continuation of the negative move that could now see a retreat into the next support band 1.0760/1.0915. Momentum indicators remain negatively configured and rallies are seen as a chance to sell. Overnight volatility aside, there is now a lower high at 1.1180 and we favour further downside in due course.

• AUD/USD continues to drive lower within what is now effectively a one-month downtrend channel. The previous support at 0.6363 is now a basis of initial resistance. The move to a new two-and-a-half-year low continues to test historic support at 0.6250. The daily RSI is below 30 and is arguably stretched but we see any near-term technical rallies as a chance to sell.

Commodities: The recent sell-offs on precious metals and oil are consolidating.

• Gold has seen a five-day decline and now begins to find support around $1660. The concern for the bulls is that there is resistance once more in place around $1680. We favour using near-term rallies as a chance to sell A break below the $1659/$1660 support opens $1641. The old pivot band is now initial resistance between $1680/$1690. 
• Silver has just eased off on the sharp retracement of the past week. There is more of a mixed near to medium-term outlook on silver, but there is a pivot at $19.90/$20 which is resistance. The support at $19.00/$19.25 is acting as a near-term floor.
• Brent Crude oil has dropped back in the past couple of days, but for now, the old pivot band between $93.25/$96.60 is holding as a basis of support There is also an uptrend of the past two weeks that is also holding. The RSI is above 50 still and this lends a mild positive bias still to the near to medium-term outlook. With the mixed moving averages, we are neutral for now. Resistance at $99.50 is growing in importance.

Indices: Sharp selling pressure has eased on Wall Street. This is also helping to steady European markets.

• S&P 500 futures have seen the selling pressure ease off overnight. This is maintaining the support at 3571 from the early October low. On the four-hour chart, a sharp downtrend is being tested and momentum is turning a corner. Perhaps there is room forming for a near-term rebound. This would need to move above 3650/3667 resistance to engage a technical rally. We continue to favour using rallies as a chance to sell.
• German DAX has just seen the selling pressure ease off, for now. A consolidation has taken hold over the past 24 hours between 12083/12270. However, there is still a negative bias to trading and there is more considerable resistance around 12400 to restrict an attempted rally. We continue to favour selling into near-term strength for a test of the recent low at 11796.
• FTSE 100 remains under bear control despite a near-term basis of support forming at 6850. With a negative momentum configuration, rallies remain a chance to sell and we favour a test of the October low of 6781 in due course. Resistance is mounting between 6970/7025.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.