The highly anticipated events of last week were somewhat disappointing. US delivered a solid non-farm payroll report but markets seemed to be unconvinced that was enough to secure a rate hike from Fed in September. Dollar index initially rose to 98.33 and looked like it's resuming recent rise. But the greenback then pared back much of the gains before the weekly close. And, the dollar index dipped to close at 97.56, just slightly above prior week's 97.19. The BoE super Thursday was also a bit disappointing as the overall results were less hawkish than anticipated. Sterling was sold off quite deeply in crosses since than. The developments now opened up the cases for near term reversal in dollar and sterling, which was both strong back in July.
To recap, non-farm payroll grew 215k in July versus expectation of 225k. Prior month's figure was revised up from 223k to 231k. Unemployment was unchanged at seven year low of 5.3% with participation rate held at 62.6%. Average hourly earnings rose 0.2% mom in July, inline with consensus. The set of job data was solid and should provide enough evidence of "some further improvements" for Fed to lift interest rate in September. But the data wasn't strong enough to make it a certainty. Also released, ISM non-manufacturing composite improved notably to 60.3 in July, up from 56.0. That's the highest reading since August 2005. ISM manufacturing index dropped to 52.7 in July versus expectation of 53.5.
BOE voted 8-1 to leave the Bank rate unchanged at 0.5% and unanimously to leave the asset purchase program at 375B pound in August. Unlike previously, the central bank today released a 3-page policy statement, the meeting minutes and the quarterly inflation at the same time. Ian McCafferty was the only dissenter as he opted for a 25 bps increase in the policy rate. This is surprising as we, as well as the market in general, had anticipated at least 2 members voting for a rate hike. The minutes suggested that the near-term outlook for inflation is "muted" while the decline in energy prices would weigh on inflation at least until mid-2016. The information sent was overall more dovish than previously expected. More in BOE's Super Thursday Shows Divergence in Monetary Stance.
The RBA let the cash rate unchanged at 2% for a third consecutive month. Whist this decision had been widely anticipated, the adjustment in language in the accompanying statement has lifted Aussie. We note from the statement that the central bank was content with the current monetary policy has turned more positive on the labor market. The biggest change in the statement was comments on the exchange rate, on which the central bank acknowledged that 'the Australian dollar is adjusting to the significant declines in key commodity prices'. This was compared with previous months' repeating comments that further depreciation was both 'likely and necessary'. Overall, the tone appeared to have change from dovish to neutral, signaling that the cash rate might stay unchanged in the foreseeable future. More in RBA Suggests Australian Dollar Adjusting To Commodity Selloff.
Technically, let's look at the overall outlook of dollar first. EUR/USD held well above 1.0807 near term support and recovered. We maintained that recent price actions from 1.1466 are forming a consolidation pattern with fall from 1.1436 as the third leg. 1.0807 looks holding firm and EUR/USD could have a stronger rebound from the current level. AUD/USD is also possible forming a short term bottom at 0.7233, ahead of long term retracement level at 0.7182. The support from 4 hours 55 EMA argues that it's building momentum for 0.7748 resistance to confirm near term reversal. USD/JPY lost steam ahead of 125.85 resistance with bearish divergence condition in 4 hours MACD and is possibly completing the rising leg from 120.40. USD/CAD also faced some resistance ahead of projection level at 1.3287 and lost momentum on bearish divergence condition in 4 hours MACD. Thus, overall, while there is no confirmation of reversal in dollar, the upside potential in near term is likely quite limited.
For Sterling, GBP/JPY's outlook is relatively clearly as rebound from 184.95 should have finished at 195.24, ahead of 195.86. Deeper fall would likely be seen through 190.99 towards 184.95 support. EUR/GBP refused to take out near term support of 0.6935 and is possibly heading back towards 0.7223 near term resistance. More importantly, EUR/GBP is sitting in a key support zone of 0.6535/7250 and strong buying could emerge any time. GBP/AUD and GBP/CAD also showed sign of topping at 2.1529 and 2.0630 respectively. Comparing with dollar, sterling could be a bit weaker as GBP/USD's break of 1.5465 might now pave the way back to 1.5329 support and below.
Regarding trading strategies, we closed our AUD/USD short as the start of the week as indicated in prior weekly report. That proved to be a decent act so far as AUD/USD is building momentum for a stronger rebound. With no position on hand, we'll looking for sterling and dollar short opportunities this week. Swiss Franc will be avoided as it stayed generally weak. Canadian dollar will also be avoided as crude oil's down trend might extend further. Comparing Euro, yen and Aussie, the outlook in Euro is relatively less clear. Also EUR/USD and EUR/GBP are relatively farther away from key near term resistance level and there might still be some more jitters before confirming a reversal. We thought about buying AUD/USD but the upside potential is relatively limited considering that it's trading at 0.74 and there might be strong resistance around 55 days EMA at 0.7520.
Hence, to conclude, for a short term trade, we'll sell GBP/JPY at market when market opens, with a tight stop at 193.80. Firm break of 190.99 support will affirm our view and we'll then target 184.95 support or close when the fall loses momentum. Meanwhile, we'll close out the position if GBP/JPY has a strong bounce from 190.99.