Pound down on strong USD, weak PMI

The City of London kicked off the week full of hope on news that a delegation is on its way to Brussels to discuss a ‘secret plan’ which would give the UK financial services a free-trade access to the European market after the Brexit.

PM Theresa May and Chancellor Phillip Hammond seem to soften their tone, in an effort to show the UK business owners that they care about the Brexit worries after the dramatic results dampened the mood at the heart of the Tories posterior to June 8 election.

FTSE financials surged by 1.10% in London.

Mining (+1.03%) and energy stocks (+0.84%) reinforced gains.

The FTSE is well supported by the lack of appetite in pound and firmer oil, commodity prices.

Pound softens post-PMI

The GBP/USD eased to 1.2970 amid the UK's manufacturing PMI printed an unexpected slower expansion in June (54.3 versus 56.3 expected). Last month’s figure has been revised lower to 56.3 from 56.7.

We note that Cable closed above $1.30 level for the first time in six weeks and the Bank of England (BoE) hawks are gradually conquering the market. The price pullbacks could be interesting opportunities for dip-buyers. Against the US dollar; the 1.3045 mid-term resistance (major 38.2% retracement on post-Brexit decline) is the next natural target for the GBP-bulls.

WTI longs prevail as traders ignore Libyan production news

WTI crude (+0.74%) and Brent crude (+0.62%) gained on news that US shale producers reduced the number of active rigs after twenty-four weeks of record expansion.

On the flip side, top sellers are waiting to sell this rally, encouraged by news that production in Libya exceeded 1 million barrels per day, as a result of the rebound in oil prices after the US shale producers paused their record drilling expansion.

Higher oil prices are naturally attractive for more production; the global oil supply is hard to drain.

Resistance is eyed at $46.65 (major 38.2% retrace on April – June decline) and $48.05 (50% retrace).

Euro softer despite strong PMI data

The June PMI data showed that the Eurozone’s manufacturing sector expanded at the highest pace in six years. The German manufacturing PMI pointed at a better-than-expected performance in June. French manufacturers expanded slower than expected.

The EURUSD eased to 1.1380 in Frankfurt. The European Central Bank (ECB) hawks will unlikely step down before the ECB’s monetary policy meeting accounts due on Thursday.

The 1.15 remains on the radar. Light support is eyed at 1.1370 (100-hour moving average). More support is presumed 1.1290 (post-Draghi low).

Carry currencies, gold hit by improved US yields

The US dollar started the week on a positive note as the US 10-year yields climbed past 2.30%. The surge in the US yields are put on the European Central Bank’s (ECB) account rather than the Federal Reserve’s (Fed). Although the ECB President Mario Draghi’s speech had given no hint regarding an eventual tapering in the ECB's Quantitative Easing (QE) program, the Eurozone yields spiked in the course of last week and the sudden surge in the Eurozone yields squeezed the US sovereign market.

Carry currencies lead losses at the start of the week; the Aussie (-0.28%) and the Kiwi (-0.39%) retreated the most against the greenback.

The AUDUSD traded below the 0.77 mark in Sydney. The downside correction could extend to 0.7620 (minor 23.6% retracement on May – June rise) before 0.7565 (major 38.2% retrace).

Likewise, the broad-based strength in the US dollar prevented the NZDUSD from clearing the 0.7345-offers for the third time since last Monday and could encourage a temporary setback to 0.7221 (minor 23.6% retracement on April – June rise) in the coming sessions.

Gold extended losses to $1’237. The yellow metal is poised for a further slide to $1'235 (200-day moving average). Offers are touted at $1251 / 1’249 (minor 23.6% retrace on June - July decline / 100-day moving average) and $1'260 (major 38.2% retrace).

Yet, it is noteworthy to remind that the USD appetite could remain short-lived, if the Fed meeting minutes jog the Fed-hawks memory on Wednesday and remind them how disappointed they were following the Fed's June meeting.

Japan’s Abe hit hard at Tokyo elections

Japanese PM Shinzo Abe’s LDP failed big in Tokyo elections. The party secured the fewest seats ever in the city assembly and the popularity of Mr. Abe is questioned before next year’s national election.

The disheartening outcome of Tokyo elections could encourage Abe to reshuffle his cabinet and boost the fiscal stimulus. The latter move is negative for the yen, at least in the short-term. Combined to the improvement in the US yields, the USDJPY could be catapulted toward the 115.00 level. The support to the June positive trend stands at 111.96 (minor 23.6% retrace) and 111.35 (major 38.2% retrace).

However in the long-run, the latest political developments in Japan are disquieting. If PM Abe boosts the fiscal stimulus to save his skin, he would’ve reversed the second arrow of Abenomics – fiscal consolidation.

This would mark the end of Abenomics.

In the aftermath of five years, we sadly realize that Abenomics has been nothing but a massive money printing. The monetary boost (first arrow) was needed to provide a basis for Japanese businesses to rebound. Fiscal and structural reforms – defined as the second and the third arrows of the Abenomics, would help to consolidate economic results and maintain the country's debt at sustainable levels.

Unfortunately, PM Abe failed to bring the second and the third arrows of his strategy to life. Timid attempts to raise taxes in the context of fiscal consolidation had a fatal impact on inflation and were delayed until further notice. Structural reforms never saw the daylight.

Hence, the monetary boost served to depreciate the yen meaningfully, but cheaper yen couldn’t bring the inflation back to Japan. Economic growth remained discouraging.

With no results in hand, Abe may run the risk of losing his seat at next elections.