Daily Market Outlook, July 30, 2021

Overnight Headlines

  • Biden Details New Vaccination Initiatives As Covid-19 Cases Surge
  • Schumer Claims He Has Votes For Moving $3.5T Social Package
  • House Passes Sprawling Spending Bill Ahead Of Fall Shutdown Fight
  • ECB Focusing On Medical Data When Declaring End To Emergency
  • UK Chancellor Optimistic As Pace Of Economic Recovery Picks Up
  • China Keeping An ‘Open Mind’ On G-7 Talks Aimed At Trade Abuses
  • Japan's Factory Output Rises, Job Availability At Near One-Year High
  • Japan Seeks To Expand Tokyo Emergency Amid Record Virus Wave
  • Asian Equity Markets Down, Set For Worst Month Since Mar 2020
  • Amazon Dumps 7.5% After Hours On Soft Third Quarter Guidance

The Day Ahead

  • Eurozone Q2 GDP is expected to see the first rise in three quarters as lockdown restrictions impeded output in the previous two quarters. Just released GDP data for France showed a rise in output of 0.9% in Q2. The individual outturns for Germany, Italy and Spain are also all expected to be positive. The forecast rise of 1.5% for the Eurozone might be considered a rather tepid upturn, but that is partly due to the gradual and uneven lowering of restrictions. Moreover, preliminary indications for Q3 point to a further acceleration.
  • The July Eurozone CPI is expected to show annual inflation unchanged from June at 1.9%, while the ‘core’ rate is forecast to slip to 0.5% from 0.9%. That headline number would leave inflation only marginally below the European Central Bank’s new symmetrical 2% target but the much lower ‘core’ rate points to the risk that it may fall sharply. Overall, the data is likely to reinforce expectations that ECB monetary policy is likely to remain accommodative.
  • The data from today’s US consumer spending report for June will have been included in yesterday’s GDP outturn. So today’s reading should provide few surprises. However, it will show the monthly trajectory and so how much momentum spending had moving into Q3. Unsurprisingly, it appears that spending is switching from goods to services as restrictions are eased. The report also contains the Fed’s preferred inflation measure, which is expected to show the annual rate rise above 4% in June, although the Fed continues to describe most of the rise as transitory. .
  • Also in the US, the employment cost index is expected to show a gain of 0.9% in Q2, the same as in Q1. The final reading for July consumer sentiment will be watched in particular for what it says about inflation expectations. The first estimate showed a big rise in 1-year expectations and a smaller increase in 5- to 10- year expectations.
  • Today’s speech from the Fed’s Bullard will provide one of the first comments by Fed policymakers following Wednesday’s US monetary policy update. Bullard does not have a vote on policy this year but will in 2022. His previous comments suggest he favours a relatively early date for tapering asset purchases.

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby)

  • EUR/USD: 1.1850 (1.5BLN), 1.1865-75 , 1.1900 (1.3BLN), 1.1910-20 (700M)
  • USD/CHF: 0.9225 (250M). EUR/NOK: 10.35 (520M). AUD/USD: 0.7340 (205M)
  • EUR/GBP: 0.8470-80 (810M). GBP/USD: 1.3800 (381M), 1.3900-05 (425M), 1.4000 (270M)
  • USD/CAD: 1.2400 (785M), 1.2450 (735M), 1.2500 (835M), 1.2545 (431M)
  • USD/JPY: 109.00 (537M), 109.25-35 (500M), 110.25 (315M), 110.40 (280M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.1950 Bullish above

  • EUR/USD eased back from 1.1895 EBS early high but still buoyant
  • Downside limited to 1.1878, upside seen capped ahead of 1.1900 for now
  • Option expiries today working again to contain EUR/USD moves
  • 1.1840-50 below E1.7 bln, 1.1865-85 E1.6 bln, 1.1900-25 total E2 bln
  • Stronger EZ data o/n. contrasts with US GDP miss
  • EUR/JPY not a factor, steady between 130.03-31, EUR/GBP quiet, 0.8516-19
  • EUR/USD's post Fed recovery matches 6 July 1.1895 peak Friday
  • Close above 23.6% of 1.2266-1.1752 fall at 1.1873 opens 38.2% 1.1943
  • However, huge 5-billion options between 1.1850-1.1920 expire 10-am NY
  • Related delta hedging could certainly have some influence - add resistance
  • EUR/USD implied volatility finds mild support after post Fed setback
  • 1-month risk reversals show a tiny topside vol premium emerging
  • Options focus volatility premium on Jackson hole and Sept Fed

GBPUSD Bias: Bearish below 1.40 Bullish above.

  • Cable falls to 1.3935 as risk appetite decline weighs on risk-sensitive GBP
  • 1.3935 is the lowest level since Thursday's five-week high of 1.3982
  • Risk appetite decline influenced by Amazon's Q2 revenue miss
  • 1.3935 is a pip shy of 23.6% Fibo of 1.3768 (Tuesday's low) to 1.3982
  • Tuesday's low was plumbed before big fix-related buying of GBP
  • New COVID cases in Britain rose for second day in row Thursday

USDJPY Bias: Bullish above 109 Bearish below

  • Market risk off in Asia on Amazon news, after US GDP miss
  • USD/JPY heavy, to 109.37 EBS before bounce to 109.60 before steadying
  • Support ahead of 109.29 base of daily Ichi cloud, 100-DMA 109.60 above
  • Break below Ichi cloud base could see 109.00 test, 109.07 low July 19
  • Tokyo better bid from low into Tokyo fix, Gotobi and month-end demand
  • Offers look to be in place from @109.60
  • Option expiries today 109.00 $537 mln, 109.25-35 $501 mln, supportive
  • US yields sag some in Asia, help cap upside, Treasury 10s @1.252%
  • Asia risk off on Amazon news, Nikkei -1.5% @27,353
  • Some JPY crosses buoyant, GBP/JPY 152.62-91
  • Others steady, EUR/JPY 130.03-21 EBS, AUD/JPY 80.80-81.03

AUDUSD Bias: Bearish below .76 Bullish above

  • AUD/USD -0.2% as Asia risk mood remains fragile on China regulatory concerns
  • Shanghai Composite -1%, Hang Seng-2.3% as investor sentiment remains fragile
  • Nasdaq e-mini -1.3% after Amazon earnings, likely to dent mood further
  • Dalian iron ore drops 7.5% Fri on China demand concerns, will undermine AUD
  • Upside constrained by Sydney lockdowns which cloud economic recovery outlook
  • RBA meets Tuesday, widely expected to reverse taper decision
  • Resistance 0.7415-20, 0.7445-50, support 0.7375-80, 0.7355-60, 0.7320-25