Daily Market Outlook, August 26, 2022

Overnight Headlines

An announcement has just been made on Ofgem’s energy price cap which is set to rise to £3,549 from £1,971 on 1st October. With wholesale gas prices still rising further increases are being forecast for early 2023 with some predicting the price cap could move above £5,000 by April. Reports suggest that the Conservative Party leadership candidates are discussing possible support measures for both households and businesses. Some reports say that a package could be announced in the second week of September soon after the new UK PM is confirmed. Meanwhile, the latest German consumer confidence measure fell to a record low on the back of higher energy prices.

Today’s US Federal Reserve policy symposium has been eagerly awaited by markets. The event is primarily an opportunity for central bank policymakers to meet with economists and discuss a key topic of the day. This week’s theme is “Reassessing constraints on the economy & policy”. Typically, of most immediate wider interest are the comments of Fed Chair Powell who is scheduled to speak at 3pm BST. Last year, Fed Chair Powell said that inflationary pressures were temporary - a comment that he later had cause to regret. This time markets will be looking for signals on the size of the probable US rate hike in September, indications of whether he thinks inflation has now peaked and what evidence he and his colleagues will want to see before ending monetary tightening. The likelihood is that his message will be hawkish, highlighting that not only do they want to see a fall in headline inflation but are equally focused on whether domestic inflationary pressures - such as the tight labour market – have settled.

Today’s data calendar outside the US is light with nothing of note in the UK. In the Eurozone, July M3 money supply data will be watched for any signs of the effects of the recent pivot in monetary policy. In the US, the Fed’s preferred inflation measure (the personal consumption expenditure deflator) is expected to confirm the message from the CPI data that inflation fell modestly in July but is still well above target. Consumer spending is expected to have risen modestly in July, while the trade deficit in goods is forecast to be little different from June.

Citi month-end FX model points to EUR buying and JPY selling
Fixed income indices have seen renewed losses in August while equities have shown mixed performance, the bank says, where the MSCI US equity index is broadly unchanged in the month, but European equities are down and Japanese equities up.
"The signals to buy EUR and sell JPY are driven by respective under and outperformance of local assets," Citi said, adding that "fixed income hedge rebalancing needs explain about 80% of the signal, which is unusual by historic standards."
Citi says that its real money clients have been modest net buyers of JPY in recent days, suggesting no early rebalancing on the JPY sell signal.
Flows into EUR have been positive, on the margin, in line with the model's signal - Source: CT News

EUR/USD: 0.9850 (536M), 1.0000-10 (2.0BLN), 1.0050-55 (1.08BLN), 1.0150 (1.75BLN)
USD/JPY: 135.00 (360M), 137.00-10 (1.3BLN)
USD/CHF: 0.9755 (250M)
USD/CAD: 1.2870 (226M), 1.2875-85 (524M), 1.2900 (210M), 1.3000 (350M)

EURUSD Bias: Bearish below 1.0250

GBPUSD Bias: Bearish below 1.2050

USDJPY Bias: Bullish above 133.40

USDJPY bid and set to retest projected range resistance 137.50
Retail traders squaring books ahead of Jackson Hole event risk
Japanese importers and retail will be looking to buy the dips, likely close to 135.60
Dealers expect more chop ahead of more US data, Fed Jackson Hold meet
20 Day VWAP is bullish, 5 Day bullish

AUDUSD Bias: Bearish below .71

BTCUSD Bias: Bearish below 25.3K