GBP/USD, EUR/USD implied vols pick up ahead of key data: European open

Asian Indices:

• Australia's ASX 200 index rose by 37.3 points (0.51%) and currently trades at 7,314.30
• Japan's Nikkei 225 index has risen by 284.81 points (0.89%) and currently trades at 32,059.91
• Hong Kong's Hang Seng index has fallen by -151 points (-0.8%) and currently trades at 18,622.55
• China's A50 Index has fallen by -13.94 points (-0.11%) and currently trades at 12,670.77

UK and Europe:

• UK's FTSE 100 futures are currently up 20.5 points (0.27%), the cash market is currently estimated to open at 7,527.65
• Euro STOXX 50 futures are currently up 20 points (0.46%), the cash market is currently estimated to open at 4,350.23
• Germany's DAX futures are currently up 53 points (0.33%), the cash market is currently estimated to open at 15,957.25

US Futures:

• DJI futures are currently up 13 points (0.04%)
• S&P 500 futures are currently up 9 points (0.2%)
• Nasdaq 100 futures are currently up 50.25 points (0.33%)

It was a lively session where economic data was concerned in Asia. Strong exports helped Japan’s Q2 GDP blow past expectations, rising at an annualised rate of 6% y/y. The Australian dollar was lower following weak wages data and the RBA minutes, which mentioned a “credible path” to get inflation back to target “with the cash rate staying at its present level”. That’s quite a big admission, as it shows the RBA think they are done with hiking rates with a relatively low base rate of 4.1%.

Yet at the same time, the PBOC cut rates for a second time in three months to try and stimulate the economy. Then just thirty minutes later, a slew of weak economic data form China hit the screens including soft retail sales, industrial production and fixed-asset investment. I think we’re fast approaching a phase where bets will be on for another round of stimulus.

Yield differentials have continued to point to a higher USD/CNH, with PBOC cuts, deflationary CPI figures and rising US bond yields suggesting that a retest or break above the 2022 highs could be in order. But headlines that China’s state banks have been supporting the yuan should serve as a reminder that Beijing will decide if or when that happens.

Economic data for GBP/USD, EUR/USD and USD/CAD traders up for grabs

We have a few data points today which could sway sentiment for major currency pairs. Wage data for the UK keeps GBP pairs in focus, as another hot print today could be a proxy for tomorrow’s inflation print (which itself could be a proxy for further BOE tightening). Wages have continued to accelerate and at a faster than expected in three of the past four reports. They’re also expected to rise to 7.3% y/y including a bonus, which certainly keeps the pressure on the BOE to keep tightening as it is a key inflationary input.

The monthly ZEW economic report is also released for Germany and the eurozone at 10:00 BST and is expected to fall further. But if there's to be any surprises here, it would need to be to the upside (as unlikely as that seems).

US retail sales are released alongside Canada’s latest inflation report, which could make UD/CAD a volatile pair at 13:30 BST if a divergent theme occurs. Trimmed mean and median CPI’s are the ones to watch for the BOC’s next move, because if they do not soften faster than they have been then bets may be on for another BOC hike in September. Estimates suggest trimmed mean to pull back to 3.7% y/y and mean down to 3.9%, so anything above that could spark from CAD strength.

1-day implied volatility levels for most forex majors are above their 20-day average, suggesting volatility could be expansive in today’s European and US sessions. GBP/USD is over twice its average due to key wage and employment data for the UK and US retail sales.

EUR/GBP fell for a second consecutive day on Monday and is trying to hold above last week’s low. The cross remain within a choppy range between 0.8500 0 0.8660, and price action suggests its ready to aim for the lower bounds of that range.

The FTSE 100 is trying to build a base above 7500. A small bullish hammer formed on Monday, and it is the fifth lower-wicked day to form over the last 8.

GBP/USD technical analysis (4-hour chart):

GBP/USD formed a bearish trend on the 4hour chart down towards the 1.2600 low, yet a double bottom which comprises of a Doji and a 2-bar bullish reversal pattern warn of a potential move higher. Whether today’s wage data for the UK is the trigger or not remains to be seen, but with the US dollar index rally hesitating beneath its July high, perhaps the path of least resistance for GBP/USD is higher over the near term. Note the lower 1-band implied volatility band sits right on the 1.2600 level, so perhaps it can provide some support if prices pull back which could potentially increase its reward to risk ratio for bulls.

EUR/USD technical analysis (4hour chart):

Traders tried without success to hold EUR/USD beneath the 1.0900 handle on Monday. Whilst the market is now holding just above the level, it clearly remains significant to traders. I feel inclined to expect at least a minor bounce from current levels, given it managed to rebound back above 1.0900, the weekly S1 and the 100-day EMA. But for any meaningful bounce we may need to see a much stronger-than-expected ZEW report and refreshingly soft US retail sales. Beyond that, the trend remains bearish on the 4-hour chart of EUR/USD, and the risk of new lows seem apparent whilst EUR/USD remains below 1.10.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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