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by Charalambos Pissouros

Risk Appetite Stays Supported Ahead of NFPs, GBP Continues to Fly

Equity indices continued to gain yesterday and today during the Asian trading, as investors continued cheering the prospect of a new round of trade talks between the US and China. Today, market participants are likely to turn their attention to the official US employment report for August and to a speech by Fed Chair Powell, as they try to figure out how the Fed intends to move after potentially cutting rates in September. In the UK, focus will turn on whether the House of Lords will approve the delay bill, and thereby turn it into law, while for CAD traders, attention could fall on Canada’s jobs data.

“Risk On” Prevails, Spotlight turns to the US Employment Report

The dollar traded lower or unchanged against the majority of its G10 peers on Thursday and during the Asian morning Friday. It underperformed against GBP, SEK, NZD and NOK in that order, while it was found virtually unchanged against EUR, AUD and CAD. The greenback gained only against JPY and CHF.

USD performance G10 currencies

The weakening of the safe-havens yen and franc suggests that investors continued trading in a risk-on mood yesterday. Indeed, major EU and US indices ended another session in positive territory, with the only exception being UK’s FTSE 100 which slid 0.55%. This may have been due to the pound extending its recent rally. Remember that many companies of the index generate profits in other currencies, so in a strengthening GBP environment, if those profits are converted to pounds, they worth less. The positive sentiment rolled over into the Asia trading today, with Japan’s Nikkei and China’s Shanghai Composite closing 0.54% and 0.46% up respectively.

Major global stock indices performance

It seems that investors continued cheering the prospect of a new round of trade talks between the US and China next month, with upbeat US economic data suggesting that the world’s biggest economy is not performing as bad as many have been afraid. The ADP employment report revealed that the private sector has gained 195k jobs in August from a downwardly revised 142k in July, beating expectations of 148k and raising speculation that the NFP print, due out today, may also exceed its forecast. On top of that, factory orders for July accelerated to +1.4% mom from +0.5%, while the ISM non-manufacturing PMI rose to 56.4 from 53.7, instead of just edging up to 54.0.

The aforementioned data contained somewhat the prevailing slide of the US dollar and prompted market participants to reduce slightly their Fed-cut bets. Ahead of the reports, they were fully pricing in a 25bps decrease for the upcoming gathering, and they were also assigning a 10% chance for a double cut. Today, even a quarter-point decrease is not fully priced in. The probability slid to around 91%, with the remaining 9% suggesting that the Committee could refrain from acting. Although this does not change much the picture of what the financial world expects from the Fed when it gathers next, it confirms the reduced concerns with regards to the state of the US economy.

Today, market participants are likely to turn their attention to the official US employment report for August, as well as to a speech by Fed Chair Powell. With regards to the data, expectations are for non-farm payrolls to have increased 160k, slightly less than July’s 164k, while the unemployment rate is anticipated to have remained unchanged at 3.7%, just a tick above its 49.5-year low. Average hourly earnings are forecast to have risen +0.3% mom, the same pace as in July, which barring any deviations to the prior prints, could keep the yoy rate unchanged at +3.2%, as the monthly print of August 2018 that will drop out of the yearly calculation was also +0.3%.

US Average earnings vs core CPI

Overall, the forecasts point to a decent report, consisting with further tightening in the labor market. However, we don’t expect them to alter drastically market expectations with regards to a September Fed cut. At the Jackson Hole, Fed Chair Powell said that the Fed would "act as appropriate” to keep economic expansion on track, comments suggesting that he is indeed leaning towards a September cut. That said, combined with the latest optimism surrounding the US-China trade saga, decent employment numbers may allow investors to price out some of the basis points they expect to be cut after the September gathering. According to the Fed funds futures, apart from a September quarter-point cut, investors anticipate another one by year end.

Fed funds futures market interest rate expectations

We will also have the chance to get an updated view with regards to the Fed’s future course of action, as the Fed Chief is scheduled to step up to the rostrum today. That said, we don’t expect him to deviate much from what he said at Jackson Hole. Despite the latest optimism surrounding the US-China sequel, headlines are far from suggesting that a deal is imminent, and we cannot rule out things falling apart again just after the negotiations are over. After all, we already saw this happening in the past.

USD/JPY – Technical Outlook

After yesterday’s strong push higher, USD/JPY broke above its key resistance barrier, at 106.69, which kept the rate down from around mid-August. The pair moved up, but got held near the 107.10 area, which is now acting as another strong resistance. We may see a slide back down soon, but if USD/JPY stays above the short-term tentative upside support line taken from the low of August 25th, we will continue targeting slightly higher levels, at least for now.

As mentioned above, a small correction back down is possible, as the pair already had a good run higher from the beginning of this week. If USD/JPY moves down, but struggles to fall below the 106.69 zone, or even the previously-discussed upside line, the bulls might take advantage of the lower rate and push to the upside again, potentially targeting the aforementioned 107.10 hurdle. If that hurdle is just seen as a temporary obstacle on the way up, a break of it could send USD/JPY to the 107.56 level, marked by the lows of June 28th and July 3rd, and also by an intraday swing high of August 1st.

Alternatively, a break of the aforementioned upside support line and a rate-drop below the 106.37 area, could interest some new sellers to join in and drive the pair lower. This is when we will aim for the 106.13 obstacle, a break of which may lead USD/JPY to the 105.73 zone, marked by the low of September 3rd. Slightly lower sits another possible support level, at 105.58, which held the rate from falling on August 27th.

USD/JPY 4-hour chart technical analysis

UK Lords Decide on the Delay Bill, Canadian Jobs Data in Focus as Well

Elsewhere, the pound continued to register gains against all the other major currencies, buoyed by easing fears over a no-deal Brexit. On Wednesday, British lawmakers passed a bill that forces the government to request a new Brexit delay, at least until January 31st, and rejected PM Johnson’s request for general elections. Today, the House of Lords will vote on the bill, which if succeeds will take a legislative form, thereby allowing GBP-bulls to stay in the driver’s seat.

GBP performance G10 currencies

This will also open the door to new elections. Remember, Johnson’s request was rejected as MPs held the position that they would like to see their bill turning into law before voting for election. The prospect of a new government that may adopt a softer stance than Johnson on Brexit could be another set of good news for GBP-traders. That said, even if we reach that point, and the new government requests a new delay, we repeat that a no-deal Brexit would not be out of the equation yet. For the delay to take flesh, consent from all the remaining 27 EU member-states is needed.

Flying from the UK to Canada, the nation’s jobs numbers are coming out, at the same time as the US ones. The unemployment rate is forecast to have held steady at 5.7%, while the net change in employment is expected to show that the economy gained 15k jobs after losing 24.2k in July. Overall, we don’t expect these numbers to prove game changers with regard to expectations around the BoC’s future policy plans. At their last gathering, on Wednesday, officials maintained their neutral stance with regards to interest rates, reiterating that the current degree of monetary stimulus remains appropriate. Thus, we believe that a big disappointment is needed for market participants to start speculating that policymakers could abandon that view and turn dovish when they meet next.

GBP/CAD – Technical Outlook

After a sharp reversal to the upside on Tuesday, GBP/CAD continues to climb higher, while trading above a steep short-term tentative upside support line taken from that day. Yesterday, the pair tried to make its way closer to the 1.6356 zone, but eventually failed to do so and is now seen correcting lower. That said, if the rate remains above the above-mentioned upside line, we will stay positive, at least in the short run.

If the pair moves lower, but fails to drop below either the 1.6260 zone, or the aforementioned upside line, this could invite the bulls back into the game and we may see the rate accelerating higher again, possibly rising to the 1.6356 hurdle. That hurdle is the highest point of August, which initially may provide some resistance for the pair. But if that area eventually surrenders to the bulls, a break of it could allow GBP/CAD to travel further north, potentially aiming for the 1.6405 level, which is the high of July 26th.

On the other hand, if the aforementioned upside line breaks and the rate falls below the 1.6210 zone, this could open the door to the 1.6135 area, which is the low of September 5th. The pair might stall there for a bit, or even correct back up slightly. But if it struggles to push back above the 1.6210 barrier, the bears might take it as a good sign and step in again, in order to drive GBP/CAD back south. Another test and a break of the 1.6135 hurdle could clear the path to the next possible support area, at 1.6091. That area acted as both, an intraday swing high and low on September 3rd.

GBP/CAD 4-hour chart technical analysis

As for the Rest of Today’s Events

Apart from the US and Canadian jobs reports, we also have Eurozone’s final GDP for Q2 on the agenda, which is expected to confirm that the Euro-area economy slowed to +0.2% qoq from +0.4% in Q1.

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