Market Update by Solidecn.com

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AUDUSD

• Lower CPI data weakens the Australian dollar
• Goldman Sachs predicts a lower target rate for the RBA
• AUDUSD react to the key level at 0.679

Australian inflation slowed more than expected in the second quarter due to a decline in domestic holiday and gasoline costs, suggesting less pressure for another rate hike and causing a sharp weakening of the Australian dollar.

Annual headline inflation fell to 6.0% in June from 7.0% in March, which was weaker than the 6.2% consensus and the RBA's own 6.3% forecast. Importantly, the RBA's preferred measure - core inflation - the trimmed mean - slowed to 5.9% from 6.6%, which was slightly less than the market and RBA's expectation of 6.0%.



On a quarterly basis, the Australian consumer price index rose 0.8% in Q2, which is the weakest quarterly pace since September 2021. Economists believe this signals a peak in the interest rate cycle, despite a shift in inflation from goods to services. This shift might push the Reserve Bank of Australia (RBA) to raise rates by 0.25 percentage points in August and September. As a result, Goldman Sachs lowered its peak cash rate prediction to 4.6% from 4.85%, and National Australia Bank expects the RBA to leave rates unchanged in August. Current OCR rate is 4.10%.

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Chart of the Day: USDCNH

The theme of the morning session that generated the most market volatility was reports of further stimulus solutions to the Chinese economy. During a meeting of China's Politburo (i.e. an important part of the Chinese Communist Party's Politburo focused on the State's current political affairs), announcements were made that indicated a willingness to introduce solutions to improve the troubled property and debt markets. In the face of this news, China's real estate-focused corporate benchmark climbed 11%, posting its biggest one-day gain in eight months and bolstering sentiment around APAC markets and the yuan itself.

Moreover, the Chinese currency itself was boosted today by another factor, namely the PBoC's decisions to set the official reference rate for the USDCNH pair at 7.1406 (versus the expected 7.2044), which encouraged local banks to resell USD in the FX market and thus repurchase CNH.




As added by Morgan Stanley analysts, the euphoria around today's statements is mainly due to the words that came out of the Politurbo meetings. At the time, the establishment communicated that "real estate is for living, not for speculation", thus assuring the upcoming policy optimizations.

The USDCNH pair is trading close to 0.61% down today and is testing the support zone set by the 23.6% Fibo measure of the upward wave initiated in early 2022.

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EURUSD - Chart of the Day


The current week is crucial for the EURUSD pair, considering today's preliminary readings of PMI indices in the US and the eurozone for July. Generally speaking, the estimated PMI data in the eurozone is expected to be weaker than in the US for both industry and services. In addition, investors' attention will also be focused this week on decisions by the ECB and the Fed, which will take place on Wednesday and Thursday, respectively. Currently, the market assumes the following decisions:

• Fed - the market does not foresee a surprise and with a 99.8% probability, it will raise rates by 25 basis points.
• ECB - at this moment, the market assumes that in the eurozone rates will be raised twice more by 25bp, however, the probability for the second hike of 25 bp is just over 50%.

However, in both cases, the Powell and Lagarde's comments after the decision will be more significant. In the US, the latest labor market data are still strong, hence despite falling inflation, the tone of the conference may be perceived as neutral/hawkish. While in the EU, weakening data, including PMI, may weigh in favor of a more dovish message.





From a technical point of view, on the daily chart, EURUSD broke out of the consolidation area between 1.053 and 1.106 two weeks ago, and the rate went around 1.126. The breakout, however, was not long-lasting, and last week the price returned to the area of the upper limit at 1.112. The appreciation of the dollar occurred after stronger macro data, including from the labor market in the US. The dollar behaved stronger against most currencies. Key to maintaining the uptrend on EURUSD is defending the support area at 1.106. Otherwise, if the price returns to the consolidation area, EURUSD may retest the level of 1.10 or further 1.08.

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US100

CFD contracts on the Nasdaq 100 (US100) reacted with a significant correction after yesterday's initial attempt to break above 16,000. The Nasdaq 100 index lost 2.3% at the close of trading on Thursday, marking the worst performance since the start of the year. This sharp decline is due to several factors. ⚡

Firstly, it's currently the quarterly earnings season, and not all reported results are satisfying investors. Tesla and Netflix published their earnings two days ago after the session, and the results were worse than expected, leading to nearly 10% drops in both companies during yesterday's session. These are companies valued at approximately $820 billion and $200 billion, respectively. Given these poor results, investors are also starting to worry about upcoming releases. Yesterday's session saw losses for Nvidia (-3.3%), Microsoft (-2.3%), Meta (-4.3%), and Alphabet (-2.3%).

Another factor could be the recently announced upcoming rebalancing of the Nasdaq index. The new weights are set to be implemented on July 24, which is next Monday. The new weights significantly reduce the share of the largest companies such as Apple, Meta, Alphabet, and Tesla. Therefore, all passive funds will also have to revise their equity portfolios, which carries significant short-term selling pressure on large companies and, conversely, on smaller ones buying pressure, making an opportunity for saavy investors. Currently, the six largest companies account for 50% of the Nasdaq 100's assets. Rebalancing the index will reduce these shares to 40% of the index portfolio.



Looking at the chart from a technical perspective, all the news coincided perfectly with the US100 approaching the upper limit of the upward channel. This strong reaction may indicate a short-term correction and a decline in indicators. It's possible that we may approach the lower limit in the short term.

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USDJPY

Next Friday (July 28), we await the BoJ's interest rate decision. However, this event does not seem to surprise the market, as earlier this week, BoJ Governor Kazuo Ueda communicated that the Bank would maintain its ultra-tight monetary policy

As Reuters reported, the BoJ was due to deliberate this month on changes to the operation of the YCC (yield curve control programme). When asked about this, Ueada said that as long as everything pointed to a return to the 2% inflation target, the BoJ would not change its monetary policy.

A weak yen may boost profits for Japanese exporters, but it raises the price of energy and other yen imports for businesses and consumers. Despite rising inflationary pressures, Japan is trying to stimulate the economy in the face of broad market uncertainty, Ueda added.

In the long term, however, this situation may change. The Japanese government today lowered its economic growth forecast for the current fiscal year and raised its inflation outlook. The proximity of these updates to the BoJ's next meeting raises heightened curiosity, but nevertheless the chances of actual monetary changes (if any) do not appear to be warranted anytime soon. In this regard, tomorrow's CPI data for June (00:30 am BST) may tell us a little more.

1. GDP growth forecast for 2023/24 at 1.3% (previously 1.5% in January)
2. Growth forecast for 2024/25 financial year at 1.2%
3. Inflation forecast for 2023/24 at 2.6% (previously 1.7%)
4. Inflation forecast for 2024/25 at 1.9%

The USDJPY pair is currently testing the psychological 140 zone. In the short term, the most important support and resistance zones to watch will be the previously mentioned 140 zone and the 50-day EMA (blue curve) and the zone of recent local minima (green zone).

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GBPUSD

The GBPUSD pair goes below the psychological barrier of 1.3 and paves the way to the next important support levels set by the 200-week EMA (golden curve) and the abolition of the 61.8% Fibo of the February 2021 downtrend wave. It is worth bearing in mind, however, that the market does not seem to be unduly changing expectations for further rises, so the risk of a continuation of the ongoing upward wave is still there.

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Dollar Slides ahead of Retail Sales Data

The EURUSD continues to rise, mainly due to the weakness of the US dollar following the release of inflation data last week. EURUSD has reached the highest levels since before the Ukraine war and is testing very important resistance levels. Today, the market's attention will be focused on the publication of retail sales and industrial production from the US. Expectations point to a pretty solid report:

Moreover, the retail sales report will be the last important indication before next week's FOMC meeting (we will no longer hear comments from Fed bankers due to the closed period). At the moment, the money market is pricing that the FED will raise rates by 25 basis points on Wednesday 26 July with a 95% probability.



EURUSD is testing the vicinity of an important resistance at the 61.8 Fibo retracement of the entire large downward wave started in 2021. A break of this level will mean a negation of the entire upward impulse of the dollar from almost the last 2 years. If retail sales surprise even more strongly than the consensus indicates, a correction to the range 1.1180-1.1200, where the upper limit of the upward trend channel is located, will be possible.

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Bitcoin

• Bitcoin struggles to maintain the $30,000 level
• Extreme emotions in cryptocurrencies

Last week, we wrote about the euphoria surrounding BTC, XRP, and other cryptocurrencies after XRP won the case against the SEC in court. Riding the positive sentiment, BTC briefly surged to the $31,800 level, ETH surpassed $2,000, and XRP gained over 80% to reach $0.90.


However, the upper boundary of the consolidation channel for BTC is incredibly strong. The $31,200-$31,400 level served as significant support during the bull market in 2021 and the bear market in 2022. This time, BTC failed to break above it and experienced a sharp decline to around $30,000 on Friday evening. Speculations arose regarding the reason for the drop, but it was most likely a combination of several factors:

• Still ongoing regulatory and macroeconomic uncertainty
• XRP's win against the SEC, which after emotions cooled down, still leaves room for the SEC to appeal and continue the dispute
• Speculations about Binance's weak condition following information concerning layoffs of 1,500-3,000 employees compared to the total employment of around 8,000

The failure to break above the channel despite such significant news may suggest weakness in the bulls and an upcoming short-term downward trend. A key level to watch is the lower boundary of the channel around $29,700-$30,000. A daily close below this level could pave the way towards $27,500.