British Pound: Impact From CPI Leveraged By BOE’s Shift

The US Dollar advanced Monday for the first time in seven consecutive trading sessions. That ended the longest string of consecutive losses for the currency in 19 months. Having corrected approximately 350 points from the three-year high set last month, the Dow Jones FXCM Dollar is testing the boundaries between a mere correction and a committed trend reversal. With the opening session’s rebound, there is relatively little to suggest this is anything more than a natural bounce from a currency that is more comfortable trading within a low boundary range rather than making the more fundamentally-loaded push lower. One headline that did stick out for dollar bulls Monday was a Fed research report that suggested forward guidance offered better results than outright QE. Tuesday, watch for Fed’s Lockhart’s comments.

Japanese Yen Posts Universal Drop after 2Q GDP Release
Economic growth in the world’s third largest economy was slower than expected according to the official 2Q GDP numbers. The 0.6 percent expansion through the three-month period translated into a 2.6 percent annualized pace – slower than the 0.9 and 3.6 percent tempo expected respectively. Unlike the dollar’s connection to the expected Taper timeframe, this data’s impact on the yen crosses is relatively straightforward. When the Nikkei 225 initially slipped Monday morning, so too did the yen crosses. Local capital flows on overleveraged carry exposure promotes a clear relationship between capital markets and the currency. Yet, when the Nikkei stalled, so too did the yen’s rally.

British Pound: Impact from CPI Leveraged by BoE’s Shift
Though there are a range of noteworthy releases on the economic docket for the upcoming 24 hours, the data with the best potential for generating volatility is the UK inflation report. The sterling has enjoyed a shift in strength these past weeks tied to the expectations surrounding the Bank of England’s monetary policy path. Through the opening quarter of the year, the pound dropped between 9.1 and 5.4 percent against its major counterparts (with the exception of GBPJPY) on the combined expectations of an ongoing recession and upgraded stimulus effort. Those concerns have receded over the past few months as monthly economic readings upgraded into positive quarterly GDP figures. Realization that the BoE would not blindly follow the Fed, BoJ and ECB down the path of escalated stimulus programs is where the real momentum has been found however. The CPI reading can further expel hold out expectations for the central bank to cave to stimulus appetite. Though Governor Carney set a 7 percent threshold on the unemployment report, inflation can prove the spark for the eventual rate hike.

Euro: Does the Market Not Care About Greece’s Ongoing Recession?
Conditions are improving for the Eurozone’s most troubled members…slowly. For the first of this week’s European GDP releases, Greece reported a year-over-year slump of 4.6 percent through 2Q. Compared to the performance of ‘Core’ members, this is a pained reading; but compared to the 5.6 percent drop through the first quarter (much less the record 9.0 percent plunge in 4Q 2010), it is a material improvement. It is difficult for optimists or pessimists to claim this data for their cause. German news outfit Der Spiegel ran an article over the weekend that quoted an internal Bundesbank report that expected Greece to receive another loan later this year or early 2014 though the country’s efforts were deemed ‘barely satisfactory’. There are longer-term issues at play, but investors have grown tolerant of European troubles as long as they don’t seize up region’s financial system. Perhaps the growth updates for the Core on Wednesday can clarify.

Australian Dollar Stumbles after Pre-Election Debates on Budget, Economy
Australian Prime Minister Kevin Rudd and Liberal-National coalition leader Tony Abbott debated the economy and national budget Monday in the first discussion before the national September 7 election. At the center of concern is how to compensate the waning strength of a Chinese led boom in export demand and investment alongside a projected A$70 billion financing gap. A proposed, 1.5 percent point reduction corporate tax rate cut by the opposition has peaked the business community’s interest, but the economic implications the discussion has one way or the other is not immediately digestible for near-term FX traders. If local equity markets climb on assumed, favorable business conditions; it may still not offer enough Aussie dollar support to compensate for global ebb and flow that influences foreign investment in local investments.

US Oil Little Moved after IEA Lowers 2014 Demand Outlook, Specs Temper Longs
US-standard West Texas Intermediate (WTI) oil prices were little changed Monday – a significant change of pace from this past Friday’s 2.5 percent rally. For the past month, the commodity has oscillated between $109 and $102.50 as the fundamental drive has shifted from the ‘mispricing’ on supply-demand issues in key US ports to the more traditional courses. For risk trends, there has been limited ‘risk appetite’ to pick up the reins since the US benchmark fully closed the gap against its UK counterpart – Brent – a month ago. Given this stalled momentum, the retreat in the CFTC’s Commitment of Traders (COT) report – showing the first pullback in six weeks for record net speculative long futures interest – should concern bulls. Similarly, the International Energy Agency’s (IEA) global demand forecast for next year cools the appetite. Due to a slowing China economy and unconvincing US and European pace, the group lowered its demand forecasts to 92 million barrels per day.

Gold Wins a Critical Technical Break Above $1,320 – Will it Trend?
A tentative rebound by the US dollar this past session didn’t prevent gold from making a leap higher. The precious metal climbed 1.8 percent ($24) Monday – the second biggest advance in four weeks. What makes the move particularly impressive though is the context with which it has occurred. This opening move has cleared $1,320 and subsequently broken a level of technical resistance. Less subjective, this advance brings gold’s tally to a four day string of gains. Since the commodity entered its current bear phase (last September), we have seen 8 other instances of four-day advances (one was a 5-day climb). This seems a statistic cap for measuring out ‘corrections’ in a dominant. To keep moving higher would insinuate a more fundamental shift in bias. To generate the support needed to keep a persistent trend in place, the anti-currency appeal is gaining little traction as Taper expectations seem rooted. Alternatively, pure speculative appeal can fill a gap left by dollar impotency as it awaits the September Fed. COT figures revealed the biggest jump in net speculative futures positioning last week in 11 months.