Equities are a bit softer this morning and so is the dollar. The current paradigm remains in force (equities higher è dollar higher); when or if this changes it will be something to watch for and perhaps try to understand. I’ve noticed some journals are creating narratives for the bounce in EUR/USD, but as we’ve noticed in recent days, the bear trend has matured and is due a counter-trend move, if only to give sellers some time to regain their strength. Monday being a public holiday in the U.S and Canada might also explain, at least in part, any pullbacks that occur as the week nears it’s close – quite simply short term traders may just be taking some skin out of the game for now. Not surprisingly the low, in EUR/USD was within an established support zone. I’m uncertain how large a bounce we will get from there, but the 1.3330 zone represents the most obvious and recently established of resistance zones.

Some Eurozone country data this morning: Spanish GDP has come in roughly in line; as has German unemployment; but Italian retail sales is showing an accelerating downward trend, it’s worth noting, though, that this is the non-seasonally adjusted number, the seasonally adjustment is published later in the morning. In aggregate for the Eurozone, money supply growth has increased slightly, although private loans have somewhat declined, perhaps a bit more than expected. What does this all mean? Yet again the evidence is right in front of us, tough tough times for the Eurozone economic area. Business and consumer sentiment data later on this morning is likely to reinforce this message. But if and when data disappoints later on this morning and the euro continues to strengthen, it will support the theory that we’re in the midst of a pullback in the EUR/USD bear trend (or should I just say a pullback in dollar strength? Perhaps that’s as appropriate).

This all means that sterling is likely due a recovery of some sort as well. It’s been interesting observing the UK earnings season in recent weeks. A number of high profile corporates with a global footprint have identified recent sterling strength as a serious impediment to profit growth. This may or may not be true, but the cynic in me wonders if this has been an opportune time for corporate leaders to appeal to the Bank of England about maintaining the status quo in rate policy. Perhaps they’ll be able to convince Carney to hold off on raising interest rates.

Preliminary GDP and Core PCE price numbers are the big data points to come out of the US later in the afternoon.

Yet another record high for the S&P 500 yesterday risk sentiment remains positive. Durable goods numbers came out for the US as well and ignoring the flashy headline numbers (22.6% up vs 7.5% expected) the less volatile adjustment which excludes defence spending and aircraft orders was actually a  mild disappointment (0.5% down vs 0.5% up expected). There was also a slight disappointment with the annual number for the Case-Shiller house price index. Consumer confidence numbers posted an improvement, but I’m always sceptical about how much to read into this as the level of the equity markets certainly influences consumers. But the key point is that money kept coming into the equity markets.

As I said yesterday, there are definite signs that dollar momentum is waning. That said, the euro has made a new low versus the dollar again today, but this has the feel of an endgame in the short term, as traders pile on to position for the ECB’s version of QE, which seemed to be the implication of Draghi’s Jackson Hole contribution. We’ve seen sentiment numbers come out for Germany, France and Italy today with slight declines for all of them (not a huge surprise there!), although it’s worth noting that both the German and Italian numbers were a bit worse than expected, but the French Business Climate number was in line with expectations. All in all, just another confirmation.. if it was needed that all is not well with the Eurozone recovery. While I do anticipate some sort of pullback in the dollar in the next few weeks, I wouldn’t be surprised if the euro underperforms its peers in a bounce. For that reason the odds are that the EUR/GBP bounce has run its course and we’re set for new lows.

While the carry trade has not participated in the risk rally to date, I think the probability of some catch up trading will increase the longer the equity market rally continues. USD/MXN, USD/BRL, USD/INR and USD/KRW are just some of the charts I’ve looked at recently that looked primed to go lower. As the bigger investors come back from their holidays, whether in Lake Como or the Hamptons, the odds are increasing that we see a re-coupling of a trade that has worked so well over the last decade. It’s a decidedly riskier trade than in the past, with pronouncements from central banks likely to have an even bigger impact (if that’s possible), but while the music is still playing why not continue to play the game? Just make sure you get to one of those chairs before the other guy when the music stops. For that reason perhaps the real bet is  emerging market currency volatility? Much easier to define your losses!

For the rest of today the data is scarce unless you’re a commodities guy with a specific interest in US energy resource consumption.

So… Jackson Hole has been concluded. Yellen didn’t really say that much, but the tone of the conference (she was only one of a number of academic/ central banker speakers) was mildly hawkish. A number of speakers argued that the current unemployment is as a result of labour market rigidities, the implication being that monetary policy isn’t the cure – hawkish! However there was one speaker who argued the effectiveness of monetary policy. But this was neither here nor there in my view… possibly the biggest moment in the conference was the intervention of Mario Draghi the ECB president: his speech acknowledged the downward path of inflation over the past year, and indicated that the ECB is likely to take action. Some key market watchers are now speculating that said action could occur as early as next month!

Even though I’ve implied the conference was mildly hawkish in terms of the Federal Reserve, risk sentiment remained bullish into the end of the week, with the S&P 500 making a new record high, indeed we’ve now seen the index attain the 2,000 level for the first time ever. A huge psychological level no doubt. The bigger picture implications for currency markets (which as I noted last week have broken with the pattern of the last decade (with equities rallying in conjunction with dollar strength the name of the game right now) would appear to be a persistence in the ongoing bearish EUR/USD trend. Despite this, I have serious reservations about how much further the euro weakness can go in the short term, particularly against the dollar. There are increasing signs of weakening momentum in the technicals and if I were running a short EUR/USD position I would be tightening my stops and keeping a close eye on the price action. It seems to me that a correction of some sort is a high probability in the very near future. And given the fact the trend has been so strong for the past few months, it’s possible that when it happens it could be a vicious bounce. Prepare accordingly!

Some useful macro data out later today. In the US we have durable goods orders, Case-Shiller house price data and consumer confidence. Tomorrow we get some sentiment data from some Eurozone economies. For now I’m keeping an eye on USD price action.

For all my talk of lazy summer months, the S&P500 made record highs yesterday, in conjunction with that Nasdaq 100 (the more tech/ growth biased index) has been at year to date highs, and the Hang Seng is at the highest levels since 2011. Trying to fight the rise of asset valuations is clearly a fools game. Markets have shrugged off geopolitical risk, the threat of policy normalisation from at least 2 major central banks (BoE, Fed) and powered upwards. Where else can people put their money right now?

In the currency space we’re seeing something slightly different. The experience, certainly of the post 2008 world has been of the equity rises dollar falling variety, but this is not happening right now. EUR/USD is lower than at any period since early November 2013, and while there are signs of weakening momentum with some positive divergence on the daily RSI charts, it’s tough to find definitive support levels that could halt its slide before about 1.3150. Other major currency pairs appear to have the capacity to tolerate further dollar strength, not least GBP/USD and USD/JPY before we approach territory where the dollars march might be halted. Emerging market currencies reinforce the thesis that the carry trade is not a real participant in this risk rally. USD/ZAR, USD/MXN, USD/BRL, all look like they could go higher in the short term (USD up). I think this is noteworthy, and one could argue that it makes sense. Normalisation would jeopardise the carry trade, but under the right circumstances why wouldn’t equities continue to rally if major economies are confident enough with their underpinnings to move interest rates into a post crisis era?

Yellen speaks today, the theme will be labour markets. As I mentioned at the start of the week, both the Bank of England and Federal Reserve have made comments about wage growth being weak despite improvements in overall people at work. The feeling is that normalisation might not have to occur until employers are forced to bid up wages to attract workers. It’s entirely possible that Yellen says something to this effect, and risk markets will love it. It’s dovish, while acknowledging that the macro situation is correcting. But it also means that we aren’t able to earn decent interest on our cash, so… equities anyone?

Not much on the data front today. In fact it’s all about Canada, with retail sales and inflation number to come.

The rally in risk markets continues this morning, but the expression is primarily through the equity markets. The dollar appears to be bid vs most developed market currencies, and treasuries have halted their slide. It feels like correlations are just easing off a bit, but it’s difficult to read too much into the price action, for example the chart for EUR/USD looks like nothing more than a period of consolidation. This surely makes sense given the moves we’ve seen since the beginning of July.

Some interesting data today: this morning we see inflation numbers come out of the UK, with expectations of a slight reduction, and in the afternoon we see inflation numbers also published in the US. As with the UK, the numbers are expected to show a slight deceleration in price growth. If the data comes out in line with expectations, it would certainly reinforce the narrative from the Bank of England’s Inflation report last week which implies that inflation is far from a threat at the present moment with tepid wage growth. But the way I would look at this data event is… what if the inflation number actually exceeds expectations? That would certainly be sterling positive if it’s the UK number, but probably injurious to risk markets if the US market has the positive surprise. Something to think about.

As EUR/GBP continues its somewhat choppy recovery, there is simply nothing impulsive about this bounce, which leads me to believe that once the market has had time to digest the moves over the last few months, the bear trend will re-assert itself. As I’ve mentioned before the immediate target if the reversal pattern from last week remains in force is the 0.8100 area. It’s just tough to get a sense of how quickly we get there with this meandering price action, but a bear trend that has persisted for a few months, probably needs a while to catch its breath.

The inflation data could potentially excite markets for a while today, but as I’ve said before the big stuff will be later at Jackson Hole. I expect the choppy price action to persist further into the week.

So… Jackson Hole this week. I’m wondering if we’re due another seminal one. Remember some of the key speeches from years ago where Greenspan and Bernanke identified topics that became a focus for the market in the succeeding years. There are obviously major issues that central bankers can highlight which will set the tone for the next 12 to 18 months: soft labour markets; wage growth; how to normalise economies after years of zero interest policy (ZIRP). Any of these topics could give a boost to volatility in front of key macro data events in the next year. Lord knows we could all do with a bit of volatility. I know it might seem a strange thing to say, but what we have in global capital markets at the moment is not normal. It’s so abnormal that in many ways it terrifies me! Primarily because of what might happen before we can get back to normality. Anyone expecting volatility to trend higher in a gentle way is probably being far too optimistic, markets don’t generally work that way.

Anyway, the focus at Jackson Hole this time around appears to be labour market dynamics. We should expect to get an insight into how Federal Reserve guidance on labour market data will prepare normalisation of short term interest rates. I’m not sure there’s anything more important that this in the macro-scope right now. The speed at which rates go up will dramatically impact the value of the US dollar, risk sentiment, the appropriate discounting mechanisms for stock valuations. The price of tins of baked beans, and guns… you name it. It is a very big deal! Just hints about Fed thinking regarding normalisation have dramatically impacted risk sentiment in the last 12 months, now we’re that much closer to such events actually happening. I get goose bumps just thinking about it!

For now, I suspect the recent Bank of England Quarterly Inflation Report encapsulates the reality the Federal Reserve is facing. Solid looking employment growth with tepid wage growth. Central banks will pay more attention to the weakness of wage growth for now despite the obvious rationality of the current phenomenon. We should all feel better that as employment growth continues to improve, there’ll be a lesser burden on social security outlays, which will improve the fiscal position, which will lower long term rates etc etc. My point is… despite central banker concerns we’re probably a lot closer to things getting even better.

Let’s see where the markets are right now… the dollar is backing off from recent strength today and equities are looking a bit firmer, with the NASDAQ posting year to date highs this morning. Yet again I believe key levels in the dollar index have held, which doesn’t bode well for uber dollar bulls. As you’ve probably guessed, I’m doubtful that Yellen’s speech on Friday will be what dollar bulls need. In any case most of its victims – EUR, GBP – look due for a bounce. The case for a cable bounce looks far more obvious than for EUR/USD, so I’m inclined to see EUR/GBP weakness ahead, but only in the very short term. It does look like the head & shoulders bottom reversal is in play, which means our target should be close to 0.8100, but there’s nothing stopping a dip back over the day.

The new high in the NASDAQ has seriously dented my belief that we’re likely to see a deeper correction. This fits in with a narrative that anticipates a more dovish speech from Yellen than perhaps the market would have expected. Tech outperforming broader markets tends to be a bullish signal, and new highs just reinforce that suspicion.

It seems tough to find a narrative that’s supportive of the euro at present, and the threat of an escalation in sanctions is not helping growth prospects in the Eurozone’s powerhouse – Germany. As one would expect other European currencies have followed the euro’s lead, and sterling, in which positioning was most certainly long vs the euro, has been a major victim. The rush to exit longs over the last few weeks has compromised the bearish EUR/GBP trend, and indeed late last week it looked like a bullish head & shoulder bottom had formed with the possibility of a bounce to 0.81 in prospect. The bullish reversal has not been in evidence, at least yet, making me question its likelihood – after all head & shoulders patterns tend to work as reversal patterns roughly two thirds of the time, the other third it’s a continuation pattern. I’m starting to question if we’ve already seen the high for the next few weeks in the cross. In the first instance, I’m happy to maintain a bearish view, but it will be jettisoned if we exceed last Friday’s 0.7997 high. My energies will be focussed on identifying appropriate levels for the bear trend will re-assert itself.

In Europe, this week, the big news will be the BoE August Inflation report and employment report which is published on Wednesday. While we continue to expect downward pressure on the unemployment rate, weaker wage growth may add some uncertainty to the central banks thinking, although it’s hard to see anything but a hike at some point nearer the end of the year.

Risk markets generally have made fairly strong bounces from the troughs we saw last week. However, Japanese equities look a bit uninspired today, but one suspects that a renewal of Japanese yen weakness will solve all problems there. The correction we have seen over the last week in USD/JPY looks to be just that… a correction. That said, I’m not sure that we’ve seen the end to the recent excitement, it’s hard to say how much war risk has impacted sentiment in the markets, but as we’re not out of the woods, where the Ukraine or Gaza is concerned, some caution is warranted. Besides I continue to look ahead to Jackson Hole at the end of the month, to put prospects for risk markets into the end of the year in their rightful context.

I’m not expecting much excitement from US data this week, although we do have Empire and Michigan confidence numbers to look forward to. I just find it hard to see what could come of that to stir the pot. For now I remain distrustful of risk markets generally, with a preference to wait on the side-lines.

This week we switch from Fed watching to four other major markets: Australia (RBA), Eurozone (ECB), Britain (BoE) and Japan (BoJ). By far the most interesting will be the ECB, but I’m not sure it’s time for Draghi to take further steps yet, particularly considering that the euro move is exactly what they’ve wanted. So… was the dollar the driver of last week’s move, or the equity markets? It seems to me the dollar was the leader, as we’ve been seeing signs of dollar strength for the last few weeks. Initially we saw emerging market currencies stall, then both the euro and the Japanese yen started to fall, taking out key technical levels. On that basis, it’s difficult to read much into the equity market declines of last week, and this is reinforced by how relatively uninterested some Asian equity markets have looked during this unwind. At the end of the day.. the employment news was counter to exit strategy fears, so why should we persist with a bearish equity view? Personally I have a hard time seeing the S&P achieving new highs, but I’ve been having difficulties with the bullish trend for some time! I’m keeping a careful eye on the nature of any bounce back. If the pattern looks corrective, I would be looking for opportunities to get short at better levels, but this process may take weeks to develop.

As for today, time to sit back and observe? The dollar was so strong last week, and risk sentiment was poor. The question everyone is asking, is.. does this negative sentiment have any legs, or was it just a pull back? For me… EUR/USD looks unambiguously bearish, and USD/JPY bullish. However I could see EUR/USD re-testing former support at the 1.3480ish level before we see more weakness. EUR/GBP also looks like it could re-test the 0.8000 level before the downtrend re-asserts itself. With some emerging market currencies bouncing back from recent weakness over the last few days, the picture is a little mixed.

Yup… definitely time to sit back and observe!

Awesome growth numbers from the US yesterday fuelled the bullish dollar trend, we saw new recent highs for the dollar vs several currencies, indeed DXY, the dollar index, achieved 10 month highs. Economists had expected 3.1% growth for Q2, but in fact the numbers came it at 4%! Not surprisingly there were sharp spikes in fixed income yields following the data, and Emerging market currencies weakened accordingly. One has to wonder about whether a US leveraged currency like the Mexican peso won’t eventually be a beneficiary of a stronger US economy. But for now, with the rate outlook at a possible inflection point, the safe course is to be wary of risky currencies. We all need to get a better understanding of which economies, indeed which corporates have unwisely feasted on a low rate environment, and not taken adequate precautionary steps to cope with a normalisation process. Still, one sobering note on the GDP data… we should expect revisions in coming months, and recently those revisions have had a downward bias. Later revisions tend to have better data on sectors like housing, exports and healthcare which are initially factored into the estimates as assumptions derived from historic trends. But who cares, we view the market now and we observe the price action as it unfolds!

FOMC didn’t supply anything new really. The pace of bond purchases slowed, but that was expected, and the Fed reiterated its plan to keep rates low “for a considerable time” after the purchases end. There were tweaks in the language as we’ve come to expect.. they did acknowledge that the unemployment rate has fallen steadily but they observed that there are still unspecified weaknesses in the labour market. The Fed also noted that their concerns about deflation have receded, although they aren’t afraid of inflation as of yet.

What does this all mean? Risk markets have to adjust to a world of potentially higher yields, and so we should probably exercise caution where beneficiaries of carry are concerned – emerging market currencies and bonds spring to mind, as do corporate bonds; it’s not my wheelhouse, but I wouldn’t be surprised if corporate bonds come under some pressure, and spreads widen. Ironically this sort of environment will add a bid to treasuries. In the short term we’ve seen decent dollar moves so pullbacks wouldn’t be a surprise. I would favour the majors over emerging markets in this type of scenario though.

Jobless claims in the US this afternoon and Eurozone unemployment later this morning are amongst the data points to watch for. I’m not sure anything is bigger than non-farm payrolls on Friday though. That’s one to watch for

Big day today with the FOMC announcing in the early European evening – 7pm London. Obviously no one’s expecting rate hikes, but any new nuance in the committees views on the US economy will give us all further insight into the proximity of the exit strategy. The fireworks – if any – may not actually occur until Friday though, as we then get non-farm payrolls. I could easily see a scenario where the comments today are conditional on further strength in US data, and then, lo and behold, on Friday we get employment numbers that are far in excess of expectations. For what it’s worth, consensus for Friday is for a 6.1% unemployment rate and 233,000 for non-farm payrolls. Imagine a scenario where the unemployment rate is 5.9%, or the non-farm payrolls number is over 350,000? It doesn’t take much to get those sorts of numbers, but trust me… the reaction is likely to be big!

Asian equity markets seem to have reached over-extension territory. At the very least the bullish momentum seems to have run out for now. In all probability this is caution in front of the big data that’s coming our way. Let’s not kid ourselves, if the reaction is negative in European and US markets, Asian markets will follow. The one constant appears to be dollar strength. Cable is near the lows, EUR/USD is just pips away from attaining a 1.33 handle, the USD/JPY bullish run continues, and the pair is approaching the first target around the 102.25 level. And those are the majors I’ve mentioned…. Emerging market currencies fared even more poorly against the dollar, as traders switched to protection mode, or added to bullish dollar bets.

I don’t anticipate we’ll get much excitement during the European day as caution is likely to be the main theme. This might not be the right time, but more and more, as we see these big data events approaching, there will be more fear than greed at play. It’s musical chairs guys, and we all know the music is about to stop, everyone’s still pretending to dance but we’re all edging closer to the chairs. No one wants to be the one left standing when the music stops! No one wants to be long carry when the massive carry unwind begins…