The relative calm in the geopolitical space failed to last a full day, with the Israel-Hamas ceasefire ending yesterday after rockets were fired from the Gaza strip into Israeli territory. The re-escalation of the conflict has carried over into today, with a swift military response from Israel after pulling out of peace talks in a reaction to the breaking of the ceasefire.
Elsewhere, IS militants have released a video claiming to show the beheading of American journalist James Foley who was kidnapped back in November of 2012, in a bid to get the US to call off the airstrikes against the insurgents. Global equities have been trading flat to slightly lower throughout the Asian and European sessions as investors’ exhibit caution on geopolitical developments and await the release of the FOMC minutes later today, with the USD continuing its steady march higher, gaining further momentum against most of the majors this morning.
The Asian session saw the Nikkei end essentially flat, though the Yen gave up the 103 handle against the USD after Japan’s trade deficit came in wider than expected, increasing from a (non-adjusted) deficit of ¥822bn to ¥964bn.
While exports did manage to shake two consecutive months of declines, the value of imports came in stronger than expected rising by 2.3% when a decline of 1.5% had been forecast, signaling a continued struggle for Abe as the devaluation of the Yen on the back of monetary policy accommodation raises import prices disproportionately.
On the back of a broadly stronger USD, the Euro has also ceded a major threshold against the big dollar, collapsing through the 1.3330 handle yesterday. After failing to see the selling pressure ease, EURUSD fell through the 1.3300 level earlier this morning, unable to contend with the DXY’s rally as treasury yields on the 10-year jumped back above 2.4%.
The slide in EURUSD through the key technical levels before touching down to an area not seen since September of last year opens up room for a further run into the low 1.32s, though tomorrow’s PMI numbers out of the Eurozone, along with Mario Draghi’s speech as Jackson Hole on Friday, will be significant in dictating follow-through price action.
The Pound has been one of the few majors to ward off the strength of the USD this morning, seeing a slight bounce from yesterday’s losses after the minutes from the last MPC meeting showed that Mr. Carney lost his consensus on interest rate levels as both Weale and McCafferty dissented and advocated for raising the benchmark rate to 0.75%.
The bounce in GBPUSD was capped by the pair’s 200-day moving average in the high-1.66s, as the overall tone of the minutes makes it likely that Weale and McCafferty will stay in the minority for some time, as the rest of the MPC saw merit in “waiting to see firmer evidence in pay growth were in prospect before tightening.” While the market continues to be willing to sell Sterling on its bounces, a constructive retail sales print tomorrow could help the Pound recover and stem some of its recent bleeding.
Heading into the North American open, the big release on everyone’s radar is the publication of the FOMC minutes from the last meeting, and the range of opinions on what will happen after the taper has been completed in October. The more near-term focus will likely be the treatment of excess reserves for monetary policy purposes rather than the timing of the first rate hike, though because the minutes will represent the opinions of everyone on the board, they will likely sound more hawkish than what we’ll hear out of Yellen’s Jackson Hole speech on Friday. Ahead of the opening bell the Loonie is whipsawing around the unchanged mark against the USD, managing to rebuff its earlier losses after a stronger than expected Wholesale Sales number in June that printed at 0.6%. With the main domestic data points for the Loonie not emerging until Friday when Retail Sales and CPI figures drop, there is risk the pair oscillates higher within its upward trend channel ahead of the numbers, with potential for another probe at the 1.10 level.
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