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FXStreet reports that economist at UOB Group Lee Sue Ann provides her thoughts on the latest BoE monetary policy meeting.

“In the latest statement, the BOE noted that the ‘modest tightening’ in policy foreseen over their horizon in August, ‘some developments during the intervening period appear to have strengthened that case, although considerable uncertainties remain’.”

“We have moved forward our rate hike forecast timing to end-2022 from mid-2023 to reflect a key change in the minutes, that all MPC members ‘agreed that any future initial tightening of monetary policy should be implemented by an increase in Bank Rate, even if that tightening became appropriate before the end of the existing UK government bond asset purchase programme’.”

FXStreet reports that economists at TD Securities note that USD/JPY has rocketed higher in line with the move of the EDZ2-EDZ3 calendar spread and suggest that could keep the pair elevated near its 2021 highs.

“One needs to look no further than the repricing euro/dollar curve where Z2Z3 has widened rather appreciably. While one could argue that policy tightening may be a bit premature, there isn't much in the way of a catalyst to material derail it.”

"The market seems to have gotten over its Evergrande craze. What's more, one could also argue that the lack of a terminal rate adjustment suggests that the risk is towards more hawkish repricing further out the curve that could further weaken the JPY. Taken in conjunction with our short US 10y real rates position (targeting -60bp), the yen seems like it will do nothing but struggle."

“The cyclical highs near 112 beckon in USD/JPY.”

FXStreet reports that analysts at Credit Suisse expect GBP/USD to retest of key range support at 1.3601/1.3567.

“Support is seen at 1.3694/90 initially, ahead of 1.3633 and then a retest of key support from the lower end of converging range from late June, seen starting at 1.3601 and stretching down to 1.3571/67.”

“An eventual move below 1.3571/67 should resolve the range lower for the completion of a bearish “triangle” continuation pattern. We would then look for a more meaningful decline with support seen initially at 1.3520/15, the December 2019 high, then the ‘neckline’ to the 2019/2020 base at 1.3451/36.”

“Big picture, we would see scope for an eventual fall to a cluster of supports including the 38.2% retracement of the entire 2020/2021 bull trend at 1.3189/35.”

• Baseline scenario remains that inflation stays below 2%-target over medium-term
• There are some factors that could lead to stronger price pressures than anticipated
• But there are limited signs of such a risk so far
• Inflation could prove weaker than foreseen if economic activity were to be affected by renewed tightening of restrictions
• Growth outlook continues to be uncertain, dependent on pandemic evolution
• We remain committed to preserving these favourable financing conditions; this is necessary for a robust recovery that will restore inflation to its pre-pandemic level

U.S. stock-index futures fell on Friday, as big tech names came under pressure amid rising U.S. Treasury yields.

Global Stocks:

(company / ticker / price / change ($/%) / volume)

The U.S. Commerce Department reported on Monday that the durable goods orders surged 1.8 percent m-o-m in August, following a revised 0.5 percent m-o-m gain in July (originally a 0.1 percent m-o-m decrease). 

Economists had forecast a 0.7 percent m-o-m advance.

Meanwhile, orders for durable goods excluding transportation rose 0.2 percent m-o-m in August, following a revised 0.8 percent m-o-m increase in July (originally a 0.7 percent m-o-m gain), being below economists’ forecast for a 0.5 percent m-o-m climb.

Elsewhere, orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, went up 0.5 m-o-m in August after a revised 0.3 percent increase m-o-m in July (originally a 0.1 percent m-o-m uptick). Economists had called for a 0.4 percent m-o-m rise in core capital goods orders in August.

Shipments of these core capital goods rose 0.7 percent m-o-m in August after a revised 0.9 percent m-o-m growth in the prior month.

USD strengthened against most of its major rivals in the European session on Monday, as U.S. Treasuries yields rose across the board, with the benchmark 10-year note hitting the highest level since late June.

The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, increased 0.14% to 93.45.

The 10-year Treasury yields were trading at 1.492%, compared with 1.454% at the end of last week. This represented the highest rate since June 25. 

The U.S. Treasury yields extended their last week’s gains, as the markets continued to price in the looming end of the period of the super-cheap money. The latest policy update from the Federal Reserve signaled that the U.S. central bank could begin scaling back its bond purchases in November and end the process by mid-2022. In addition, the Fed officials’ projections of interest rates, known as the "dot plot", pointed to a sooner-than-expected rate hike for 2022.

Market participants also continued to monitor developments in Washington. The U.S. House Speaker Nancy Pelosi set Thursday vote on a $1 trillion infrastructure bill, which, according to her claims, will only happen if she has the numbers to pass it. Meanwhile, the U.S. Senate will grapple with legislation aimed at both preventing a government shut-down and raising the country’s debt ceiling.

• U.S. economy "close" to meeting substantial progress bar to start taper
• Low unemployment rate should not dictate a change in policy rate if inflation rate has not become undesirable
• Inflation does not yet satisfy Fed's overshooting criterion
• Long-run inflation expectations are still likely somewhat below target
• Fed should focus on producing sustainable inflation that aligns with 2% goal
• Most supply issues to be "largely resolved" next year

FXStreet reports that FX Strategists at UOB Group believe that the upside momentum in USD/JPY could push the pair to the 111.00 area in the next weeks.

24-hour view: “We highlighted last Friday that ‘the USD rally has scope to extend to 110.55 but is unlikely to threaten the next resistance at 110.80’. Our view for USD to strengthen was not wrong even though the advance came close to taking out 110.80 (high of 110.79). In view of the strong momentum, further USD strength is not ruled but overbought conditions indicate that a break of 111.00 is unlikely. On the downside, a break of 110.35 (minor support is at 110.50) would indicate that the current upward pressure has eased.”

Next 1-3 weeks: “We did not anticipate the rapid manner by which USD approaches 110.80 as it rose to 110.79 during NY session. While overbought, the current USD strength could extend to 111.00, with lower odds for extension 111.20.”

FXStreet reports that FX Strategists at UOB Group suggest that AUD/USD is now expected to navigate within the 0.7220-0.7330 range for the next weeks.

24-hour view: “Our expectations for AUD to ‘strengthen further’ was incorrect as it dropped to 0.7237 before closing on a soft note at 0.7257 (-0.54%). The rapid drop appears to be running ahead of itself and AUD is unlikely to weaken further. For today, AUD is more likely to trade sideways between 0.7245 and 0.7295.”

Next 1-3 weeks: “...AUD dropped and cracked our ‘strong support’ level at 0.7245 (low of 0.7237). The price actions suggest that AUD is in a broad consolidation range and is likely to trade between 0.7220 and 0.7330 for now.”

FXStreet reports that strategists at MUFG Bank suggest that complicated talks to form German government are set to last for several months but the euro is expected to stay unnerved.

“The wafer-thin margin of victory for the SPD creates even more uncertainty over the likely formation of the next government and leaves an array of potential coalition options still on the table. Coalitions talks are expected to take weeks and possibly months. The continued uncertainty is one reason why there has been limited euro reaction to the initial election results.” 

“The close results further reinforce the need for political parties to compromise to form the next government. It most likely favours only a modest shift in policy direction in Germany and thereby more limited impact on the performance of the euro.”

• Inflation between 4% and 5% is possible on a temporary basis

FXStreet reports that FX Strategists at UOB Group note that USD/CNH now looks to extend the consolidative mood within the 6.4350-6.4880 range in the next weeks.

24-hour view: “USD traded between 6.4593 and 6.4730 last Friday, narrower than our expected consolidation range of 6.4500/6.4730. The quiet price actions offer no fresh clues and further consolidation appears likely. Expected range for today, 6.4520/6.4700.”

Next 1-3 weeks: “...USD is still in a consolidation phase and could trade between 6.4350 and 6.4880 for a period of time.”

• Progress in vaccinations and decline in new infections prompt this move

• China's economic recovery not solid, unbalanced
• We will keep liquidity reasonably ample
• We will make prudent monetary policy flexible, targeted and appropriate
• We will safeguard legitimate rights and interests of housing consumers
• We will push real lending rates to further fall
• We will ensure "healthy" property market development

FXStreet reports that economists at MUFG Bank discuss GBP/USD prospects.

“The recent underperformance of the pound can be partly explained by less favourable market conditions that have turned more risk averse over the last couple of weeks reflecting heightened concerns over downside risks to growth in China and globally.”

“The pound’s failure recently to track higher UK yields could reflect concern that tightening policy so soon into the COVID-19 recovery is an unfavourable development for the UK economy. The BoE is clearly starting to put more weight on dampening upside inflation risks than continuing to support the recovery.”

“We expect cable to fall further especially once support at the 1.3600-level is broken.”  

CNBC reports that Nomura’s Chief China Economist Ting Lu cut his forecast for Chinese GDP growth this year as factories shut down to comply with carbon emissions reduction targets.

As a result, he expects China’s GDP to grow by 7.7% this year, down from 8.2% previously forecast.

Chinese President Xi Jinping announced in September 2020 that China would reach peak carbon emissions by 2030 and become carbon neutral by 2060. That’s kicked off national and local plans to reduce production of coal and other carbon-heavy processes.

Fitch on Thursday lowered its China growth forecast to 8.1% from 8.4% on expectations a slowdown in the property market puts pressure on domestic demand.

Other economists haven’t cut their 2021 China GDP forecasts yet, but are watching a rising number of drags on growth.

Macquarie’s Chief China Economist Larry Hu said in an email Monday his 8.5% GDP estimate, set a year ago, is “facing downside risk now, given property slowdown and production cut.”

China Renaissance’s Bruce Pang, head of macro and strategy research, said Monday the firm hasn’t yet changed its GDP forecast of 8.4% either. But he said there could be a downward revision to 8.25% or 8.3% if the electricity shortage is prolonged, hitting not just energy-intensive industrial manufacturing but local livelihood and even services.

Reuters reports that the opposition Labour Party said that Britain needs to be more "clear-eyed" about the risks of Chinese investment in key industries like nuclear energy.

Labour foreign policy chief Lisa Nandy said Chinese involvement in the British economy could not be stopped entirely, but that key industries needed to be better protected in the interest of national security.

Johnson's government has itself expressed nation security concerns about Chinese investment, excluding telecoms firm Huawei from its next generation mobile network.

But China remains involved in the construction of new nuclear power plant in southern England, working with French firm EDF.

That, coming alongside government criticism of both China's role in the former British colony of Hong Kong and its treatment of Uyghur Muslims in its western Xinjiang region, amounted to a muddled foreign policy dictated by conflicting government departments, Nandy said.

Earlier this year, Johnson's government voted down parliamentary proposals seeking to ban the government striking trade deals with countries that commit genocide, after a row that focused on China.

A Labour government, which is not in prospect until 2024 if Johnson seeks a full term as prime minister, would echo U.S. legislation and ban the import of goods produced using modern slavery, Nandy said, citing cotton from Xinjiang as an example.

FXStreet reports that analysts at Natixis said that if, in late 2021 and in 2022, there is a slowdown in growth and significant disinflation then it will be difficult for the Fed and the ECB to justify tapering.

“The first obstacle to tapering concerns the US in particular: the rising number of COVID-19 cases due to a wave of the Delta variant, which is weakening the economy.”

“Growth at the end of 2021 and in 2022 may be slowed by the likely reduction in fiscal deficits between 2021 and 2022, the fall in real wages in 2021 and commodity supply bottlenecks, which are holding back growth in several sectors.”

“The central banks are forecasting significant disinflation between 2021 and 2022, but it could even be more pronounced, given the absence of a rise in unit labour costs and a change of the sign of the base effect of commodity prices, which, after having risen significantly between 2020 and 2021, will fall (even if only slightly) between 2021 and 2022.”

Reuters reports that oil producers and traders said that global fuel demand is expected to reach pre-pandemic levels by early next year as the economy shrugs off pandemic woes.

While a persistent rise in COVID-19 infections in several markets has hurt recovery in demand for some refined products such as jet fuel, consumption trends of petrol and diesel indicate higher growth, the industry leaders said.

"We saw refining margins rebound as demand rebounded ... But overall for the world, there's still a lot of unutilised capacity and a lot of capacity has been taken off stream," said Eugene Leong, president of BP Singapore.

"The spare (refining) capacity is probably going to act as a little bit of a cap on margins," he said.

"This year alone we've seen some mega refining (and) petrochemical complexes start up, so I think that's going to be challenging for refining."

The International Energy Agency (IEA) has also forecast a robust rebound from the fourth quarter, citing "strong pent-up demand and continued progress in vaccination programmes".

It expects global oil demand to average 96.1 million bpd in 2021 and 99.4 million bpd in 2022, versus 90.9 million bpd in 2020. The OPEC expects demand to average 99.70 million bpd in the fourth quarter of 2021.

According to the report from European Central Bank, the annual growth rate of the broad monetary aggregate M3 increased to 7.9% in August 2021 from 7.6% in July, averaging 7.9% in the three months up to August. Economists had expected a 7.8% increase. The components of M3 showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, stood at 11.1% in August, compared with 11.0% in July. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) was -1.5% in August, compared with -1.8% in July. The annual growth rate of marketable instruments (M3-M2) increased to 9.9% in August from 7.9% in July.

Looking at the components' contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 7.8 percentage points (up from 7.7 percentage points in July), short-term deposits other than overnight deposits (M2-M1) contributed -0.4 percentage point (up from -0.5 percentage point) and marketable instruments (M3-M2) contributed 0.5 percentage point (up from 0.4 percentage point).

Annual growth rate of adjusted loans to households stood at 4.2% in August, unchanged from previous month

Annual growth rate of adjusted loans to non-financial corporations decreased to 1.5% in August from 1.7% in July

FXStreet reports that analysts at ING discuss EUR/CHF prospects.

“Suffice to say, the SNB slightly cut growth and raised inflation forecasts, but core policy remains unchanged. It will be one of the last central banks in the world to raise rates. This week sees the SNB release details on its FX intervention in 2Q21. These had dropped to just CHF296 M in 1Q. EUR/CHF was naturally bid through most of 2Q meaning that FX intervention will probably be as low – but 3Q will be another matter.”

“We have noticed recently that EUR/CHF turned bid when the ECB hawks piped up. Another high Eurozone CPI figure this week could send EUR/CHF back to 1.09.”

CNBC reports that analysts said that China will likely fail in its bid to join the Comprehensive and Progressive Trans-Pacific Partnership — but its move to submit an application highlighted the lack of U.S. economic policy in Asia-Pacific.

President Barack Obama had negotiated the TPP to deepen U.S. economic engagement in Asia-Pacific and counter China’s growing influence in the region.

All 11 signatories of the CPTPP must agree to China’s request to join before it can be admitted as a member. 

Beijing’s strained diplomatic relations with some member countries would hurt its chances, said analysts. China will also likely face difficulties in meeting the trade pact’s demands for a level-playing field in many aspects of the economy, they added.

China is not the only one that’s applied to join the CPTPP; the U.K. and Taiwan have done the same.

U.S. allies in the CPTPP such as Australia, Canada and Japan increasingly view China as a “strategic threat,” and they could block China’s application, said analysts from risk consultancy Eurasia Group.

Meanwhile, Canada and Mexico could stand in China’s way through the United States-Mexico-Canada Agreement or USMCA. The trade deal contains a “poison pill” provision requiring any of the three members to consult the others if it wishes to pursue a trade deal with a “non-market country.”

Many analysts said the clause could have been aimed at China. USMCA was negotiated by the Trump administration and replaces the North American Free Trade Agreement or NAFTA.

In addition to political hurdles, China may have difficulties meeting CPTPP provisions that promote cross-border data flows, labor and environmental protection, as well as restrictions on state-owned companies, said analysts.

During today's Asian trading, the dollar was almost unchanged against the euro, pound and yen, but fell against the Australian dollar.

The ICE index, which tracks the dynamics of the dollar against six currencies (euro, swiss franc, yen, canadian dollar, pound sterling and swedish krona), fell by 0.04%. The dollar index is near the lowest value for the week, as traders continue to evaluate the statement of the US Federal Reserve System following the results of the September meeting.

Federal Reserve Chairman Jerome Powell said after the Fed meeting that the regulator could begin reducing the asset repurchase program as early as November and finish this process by mid-2022.

The head of the Federal Reserve Bank of Cleveland, Loretta Mester, made it clear on Friday that she shares this position. "In my opinion, the US economy meets the necessary conditions, and I support reducing the volume of asset repurchases since November, as well as completing this program in the first half of next year," Mester said. In addition, she expects that by the end of next year, the economy will have created the "necessary conditions" for a rate increase.

Meanwhile, concerns about the consequences of the financial problems of the Chinese developer China Evergrande have eased after the People's Bank of China poured another 100 billion yuan into the financial system as part of reverse repo operations to ensure sufficient liquidity in the banking system. The interest rate on 14-day operations was 2.35% per annum, the Chinese Central Bank said.

FXStreet reports that the Fitch Ratings assessed the impact of potential default by China Evergrande on rated Chinese construction issuers.

“The impact from a China Evergrande Group (CC) credit event on rated Chinese construction issuers will be manageable because they have limited exposure to Evergrande.”

“The scale advantage of Fitch-rated engineering and construction (E&C) companies mitigates their risk of a single customer default or project failure incident.”

“That said, E&C companies with material exposure to housing projects and property development business may be affected in the unlikely event that a default disrupts the broader property market.”

“We expect the potential effect of a slowdown in property market to be partially offset by a revival in the infrastructure business.”

Reuters reports that the Bank of Japan Governor Haruhiko Kuroda said the central bank would continue to focus on cushioning the economic blow from the coronavirus pandemic given lingering uncertainty over the outlook.

But he said the economy's recovery would become clearer as the impact of the pandemic subsides, and pent-up demand props up consumption.

"It's true Japan's economy has been held back by the successive waves of COVID-19. But the mechanism for an economic rebound remains in place," Kuroda said. 

"Exports, output continue to increase. Consumption likely to rebound ahead with support from pent-up demand. But timing of consumption recovery will depend largely on developments regarding pandemic", Kuroda said, and added that exports, output are likely to slow near-term as factory shutdowns in southeast Asia affect Japan manufacturers.

CNBC reports that the German election is heading for tough coalition talks and a possible three-way power-sharing agreement in Berlin, after one of the country’s most significant votes in recent years.

Preliminary results showed the center-left Social Democratic Party gaining the largest share of the vote with 25.9%, but falling well short of achieving a majority to govern alone.

Angela Merkel’s right-leaning bloc of the Christian Democratic Union and Christian Social Union got 24.1% of the vote, according to the early results.

The Green Party is expected to get 14.8% of the vote. The liberal Free Democratic Party was seen with 11.5%, while the right-wing Alternative for Germany party was seen with 10.3%. The left-wing Die Linke party was expected to gain 4.9% of the vote.

After exit polls on Sunday evening, both main candidates for chancellor, the SPD’s Olaf Scholz and the CDU-CSU’s Armin Laschet, immediately claimed a mandate to govern. But coalition negotiations, which could begin on Monday, are likely to take weeks or even months.

Commenting after the exit polls, Laschet conceded the result was disappointing and said it posed a “big challenge” for Germany.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1818 (835)

$1.1785 (555)

$1.1762 (567)

Price at time of writing this review: $1.1723

Support levels (open interest**, contracts):

$1.1671 (3747)

$1.1635 (1148)

$1.1593 (6557)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date October, 8 is 71298 contracts (according to data from September, 24) with the maximum number of contracts with strike price $1,2200 (8607);

GBP/USD

$1.3859 (432)

$1.3816 (522)

$1.3778 (171)

Price at time of writing this review: $1.3676

Support levels (open interest**, contracts):

$1.3615 (1190)

$1.3560 (957)

$1.3484 (1372)

Comments:

- Overall open interest on the CALL options with the expiration date October, 8 is 11973 contracts, with the maximum number of contracts with strike price $1,4150 (2071);

- Overall open interest on the PUT options with the expiration date October, 8 is 17193 contracts, with the maximum number of contracts with strike price $1,3800 (1778);

- The ratio of PUT/CALL was 1.44 versus 1.27 from the previous trading day according to data from September, 24

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.