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eFXdata reports that analysts at Credit Agricole CIB Research provide their USD/JPY outlook.

"Fumio Kishida, former Chair of the LDP’s Research Council and Foreign Affairs Minister in Shinzo Abe’s cabinet, will be Japan’s new PM following the LDP Presidential election yesterday." 

"The Nikkei and the JPY did not react to the election result for several reasons... This leaves USD/JPY sensitive to UST yields and market sentiment. We maintain a year-end target for the exchange rate of 115 and stay long USD/JPY as a trade recommendation."

FXStreet notes that the U.S. Dollar Index (DXY) has firmed to 12-month highs. Economists at Westpac suggest that more near-term DXY upside is likely now.

“In the wake of the hawkish reshuffling to the Fed’s dots at the Sept meeting OIS markets are now pricing in 3 Fed hikes by end-2023. That is very close to the 2023 median dot at 1.00%. But for 2024, there’s a large disconnect between the dots and market rates. With markets still under-pricing the Fed’s intent, there’s plenty of scope for real rates to provide ongoing support for the USD.”

“DXY retracement targets for the Mar 2020 103.0 highs to the Jan 2021 89.0 lows point to 96.0 as a realistic upside target.”

FXStreet notes that EUR/USD is trading below 1.16 key support. That should be attractive for momentum players, and economists at TD Securities reckon the near-term bias is to the downside with 1.15 the next key level.

“For EUR/USD, the breach of 1.16 represents a key technical pivot.” 

“The ECB has clear calendar limitations to policy sequencing. If it wants to show fidelity to its Strategy Review, it must finish PEPP and APP first before it can even hike. Meanwhile, the Fed has already signaled it will move on taper.”

“Given the real yield outlook, we reckon that the break of 1.16 will be significant for momentum players. Next support comes in at 1.15.”

MNI Indicators’ report revealed on Thursday that business activity in Chicago expanded in September at a slightly slower pace than in August.

The MNI Chicago Business Barometer, also known as Chicago purchasing manager's index (PMI) came in at 64.7 in September, down from an unrevised 66.8 in August. This was the lowest reading since February.

Economists had forecast the index to decrease to 65.0.

A reading above 50 indicates improving conditions, while a reading below this level shows worsening of the situation.

According to the report, Order Backlogs recorded the largest decline among the main five indicators, plunging 20.5 points to a six-month low of 61.1, as supply shortages continued to weigh on production. It was followed by Supplier Deliveries, which tumbled 11.6 points to 81.2, the lowest level since April, as businesses noted worsening port congestion and ongoing problems with ocean, rail trucking, and even air cargo. In addition, New Orders dropped 3.4 points to 64.4, the lowest since March, reflecting the raw material shortages and a low supply of critical components like semiconductors. At the same time, Employment was the only major indicator that posted increase in September, advancing 4.1 points to 52.4, the highest since April. On the price front, Prices paid at the factory gate fell 3.2 points in September to a four-month low of 90.7, as companies reported fewer problems with labor that may have put downward pressure on prices.

U.S. stock-index futures rose on Thursday, supported by reports that the Senate agreed to avoid shutdown, an unexpected upward revision to the U.S. Q2 GDP data and Merk’s (MRK) acquisition of Acceleron Pharma (XLRN) valued at $11.5 billion.

Global Stocks:

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A report from the Commerce Department showed on Thursday that the U.S. economy grew slightly more than initially estimated in the second quarter of 2021, as upward revisions to personal consumption expenditures (PCE), exports, and private inventory investment were partly offset by an upward revision to imports.

According to the third estimate, the U.S. gross domestic product (GDP) increased at an annual rate of 6.7 percent in the second quarter, marginally better than a 6.6 percent advance reported in the second estimate.

Economists had expected the growth rate to be unrevised at 6.6 percent.

In the first quarter, the economy expanded by 6.3 percent q-o-q.

The increase in real GDP reflected gains in PCE, nonresidential fixed investment, exports, and state and local government spending that were partly offset by declines in private inventory investment, residential fixed investment, and federal government spending. Meanwhile, imports, which are a subtraction in the calculation of GDP, rose.

Starbucks (SBUX) downgraded to Neutral from Overweight at Atlantic Equities; target $105

The data from the Labor Department showed on Thursday the number of applications for unemployment unexpectedly rise last week.

According to the report, the initial claims for unemployment benefits increased by 11,000 to 362,000 for the week ended September 25. This was the highest reading in seven weeks.

Economists had expected 335,000 new claims last week.

Claims for the prior week were left unrevised at 351,000.

Meanwhile, the four-week moving average of jobless claims increased to 340,000 from an unrevised 335,750 in the previous week.

As for continuing claims, they decreased to 2,802,000 from a downwardly revised 2,820,000 in the previous week. 

Germany's Federal Statistical Office (Destatis) reported on Thursday the country’s consumer price index (CPI) is expected to be flat m-o-m in September after being unchanged m-o-m in the previous month.

On the y-o-y basis, Germany’s CPI is seen to climb 4.1 in September, following a 3.9 percent jump in August. This represents the largest advance since December 1993.

Economists had predicted inflation would advance 0.1 percent m-o-m and 4.2 percent y-o-y in September.

According to the report, food prices surged 4.9 percent y-o-y in September, accelerating from a 4.6 percent y-o-y in August. Energy prices jumped 14.3 percent y-o-y, accelerating from 12.6 percent y-o-y in the previous month. Services costs rose 2.5 percent y-o-y, the same pace as in August.

Meanwhile, the harmonized index of consumer prices for Germany (HICP), which is calculated for European purposes, is expected to advance 0.3 percent m-o-m and 4.1 percent y-o-y.

USD traded mixed against other major currencies in the European session on Thursday amid persistent concerns about global growth slowdown, growing inflation, and the withdrawal of the Fed's economic support.

The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, increased 0.10% to 94.44, hovering near its one-year high of 94.50, which was reached early today.

Growth concerns heightened after the latest data out from China showed an unexpected slowdown in the country’s manufacturing activity this month. According to the data, the Chinese manufacturing PMI fell to 49.6 in September from 50.1 in the previous month, slipping into contraction territory for the first time in 18 months. However, the non-manufacturing PMI rose to 53.2  from 47.5 in August, returning into expansionary territory.

Meanwhile, worries over a potential federal government shutdown in the U.S. faded as the Senate agreed to vote Thursday morning on legislation that will fund the government through to early December that is expected to be supported by lawmakers from both parties in both chambers of the U.S. Congress. The approval of the legislation will allow avoiding a government shutdown on Friday. Meanwhile, the fate of the looming debt ceiling remains uncertain.

Both Fed Chair Powell and Treasury Secretary Yellen will testify before the House Financial Services Committee later today. Speaking at the event hosted by the ECB on Wednesday, Jerome Powell stated that he was frustrated by persistent inflation, but reiterated his view the price pressures would ease eventually.

FXStreet reports that economists at CIBC Capital Markets expect sterling to outperform, as 2022 rate hike expectations are set to grow amidst expected recovery in the UK labour market,  report.

“Should the labour market prove able to absorb workers coming off the jobs support scheme, helped by the more than 1m in current job vacancies, we can expect the increasingly hawkish BoE to underline the prospect of two UK rate hikes in 2022.”

“We assume a 15bp rate hike in February, reversing the emergency cut from March 2020. Absent a labour market breakdown, we expect the bank to look to hike again in H2 2022, most likely August.” 

“BoE activism in the face of above trend growth and inflation contrasts with the central bank laggards. That suggests sterling will perform well against the EUR, JPY and CHF.”

FXStreet reports that UOB Group’s FX Strategists reiterate their view USD/CNH faces further gains once 6.4880 is cleared.

24-hour view: “We expected USD to ‘strengthen to 6.4830’ but we were of the view that ‘the major resistance at 6.4880 is unlikely to come into the picture’. Our expectations did not quite materialize as USD rose to 6.4800. Upward momentum has not improved by much and USD is unlikely to strengthen much further. For today, USD is more likely to trade between 6.4690 and 6.4830.”

Next 1-3 weeks: “As highlighted, shorter-term upward momentum is beginning to improve but USD has to close above 6.4880 before a sustained rise can be expected. At this stage, the odds for USD to close above 6.4880 are not high but it would remain intact as long as USD does not move below 6.4600 within these couple of days.”

FXStreet reports that economists at TD Securities believe that Asian and European energy supply crunch is very supportive for oil. 

“Considering that Asia and Europe are facing challenges in securing sufficient energy supplies ahead of winter, and given the fact that US supply has still not recovered very quickly and that OPEC+ may have difficulties delivering the production increases to fulfill its promise to balance the market, crude markets may well continue to catch a bid as we move into Q4.” 

“As OPEC+ struggles to deliver on the promised production increases, while US production growth continues to disappoint due to a lack of investment, and demand trends higher, a move to a higher trading range with $80+/b could be quite possible in the coming months.”

• Inflation spike is still regarded as temporary
• Euro area growth is expected to continue to grow rapidly, exceeding its pre-crisis level in Q4
• ECB has tools to respond "with agility and effectiveness"

FXStreet reports that economists at CIBC Capital Markets discuss USD/CAD prospects. 

“A growing consensus for a sharper Fed QE tapering and subsequent rate hikes have provided an offset to the commodity price enthusiasm for the CAD. Both of those forces should persist in the coming months, seeing USD/CAD end the year at today's level even as the Fed announces its tapering plan, likely in November.”

“While the BoC is likely to further taper its QE program in October, it will use that same meeting to push back its forecast for achieving a zero output gap into Q4 of 2022, and markets will begin to price in a lighter path for its policy rate as a result. Shortly thereafter, the start of a quick Fed tapering path will have investors upping medium-term projections for the fed funds rate, suggesting a weaker CAD in 2022.”

“Look for USD/CAD to end 2022 at 1.30, with a continued depreciation likely in 2023.”

According to the report from the Society of Motor Manufacturers and Traders Limited (SMMT), UK car production fell -27.0% in August, the second consecutive month of decline, with 37,246 cars manufactured. Output was affected by the continuing global shortage of semiconductors leading to production stoppages, as well as the timing and length of some manufacturers’ summer factory shutdowns.

Despite the challenges, production of the latest battery electric (BEV), plug-in hybrid (PHEV) and hybrid (HEV) cars surged to a new high, representing more than a quarter (27.6%) of all cars made, equivalent to 10,274 units. It means UK car factories have turned out 137,031 alternatively fuelled cars since January, 51,679 more than the same period in 2020.

While manufacturing for the UK market increased 3.3% in the month, the rise was equivalent to just 255 additional units and exports fell dramatically, down -32.5%. 29,200 cars were shipped overseas, with the decline driven by falling exports to faraway markets including Australia, the US and China down -74.9%, -65.7% and -58.7% respectively. Exports to the EU held up better, down -4.9%, accounting for almost seven in every 10 cars exported in August.

Production in the year-to-date remains up, by 13.8%, to 589,607 cars, driven by exports with 83.2% of everything made heading for markets abroad. The performance, however, must be set in context against a Covid-hit 2020 as it remains significantly lower, by -32.0%, than in 2019. The total is -42.8% down, equivalent to 440,920 fewer units, when compared against the five-year average for the first eight months of the year.

Data published by Eurostat showed that in August 2021, the euro area seasonally-adjusted unemployment rate was 7.5%, down from 7.6% in July 2021 and from 8.6% in August 2020. The EU unemployment rate was 6.8% in August 2021, down from 6.9% in July 2021 and from 7.7% in August 2020.

Eurostat estimates that 14.469 million men and women in the EU, of whom 12.162 million in the euro area, were unemployed in August 2021. Compared with July 2021, the number of persons unemployed decreased by 224 000 in the EU and by 261 000 in the euro area. Compared with August 2020, unemployment decreased by 1.965 million in the EU and by 1.861 million in the euro area.

In August 2021, 2.833 million young persons (under 25) were unemployed in the EU, of whom 2.317 million were in the euro area. In August 2021, the youth unemployment rate was 16.2% in the EU and 16.4% in the euro area, down from 16.4% and 16.7% respectively in the previous month. Compared with July 2021, youth unemployment decreased by 66 000 in the EU and by 63 000 in the euro area. Compared with August 2020, youth unemployment decreased by 508 000 in the EU and by 471 000 in the euro area.

FXStreet reports that economists at MUFG expect the DXY to hit the 96.000 level.

“The next important resistance level is provided by the high from 25th September 2020 at 94.742. On that occasion that proved to be a bearish turning point for the greenback. However, on this occasion fundamentals are aligning in favour of an extension of USD strength heading into year-end.”

“With the Fed shifting in a more hawkish policy direction, there still appears scope for the US rate market to price in more tightening into the coming years and helping to support a stronger US dollar.”

“The relative appeal of the US dollar is continuing to be boosted in the near-term by building concerns over the outlook for global growth.”

“We expect the US Dollar Index to head towards the 96.000-level.” 

Reuters reports that data from the Federal Employment Agency showed that German unemployment fell in September, suggesting that supply chain bottlenecks hitting industrial firms have not yet taken toll on recovery in Europe's biggest economy.

The number of people out of work fell by 30,000 in seasonally adjusted terms to 2.508 million. Economists had expected a fall of 33,000. The seasonally-adjusted jobless rate remained unchanged at 5.5%.

"The labour market continues with its positive development," said Daniel Terzenbach of the Federal Labour Agency. "Unemployment and underemployment are both falling significantly."

The KOF Economic Research Agency said that the Economic Barometer declines for the fourth time in a row in September. However, the Barometer remains above its long-​term average. The recovery of the Swiss economy in the wake of the pandemic is thus slowing somewhat but is likely to continue in the upcoming months.

The KOF Economic Barometer stands at 110.6 points in September, 2.9 points lower than in August. Economists had expected a decrease to 110.0. The recurring decline is primarily attributable to bundles of indicators concerning foreign demand. Indicators of the manufacturing sector send an additional negative signal, followed by indicators of the economic sector and other services. By contrast, indicators from the finance and insurance sector are providing slightly positive impulses.

The negative developments within the manufacturing sector stem largely from indicators concerning the metal industry, the paper and printing sectors, the mechanical engineering and vehicle manufacturing sector, followed by indicators for the textile industry.

In the goods producing sector (manufacturing and construction), indicators for assessing the order backlog point in a positive direction. By contrast, sub-​indicators assessing employment prospects, the competitive situation and production developments point in a negative direction, resulting in a negative balance for the indicators in the goods producing sector.

During today's Asian trading, the US dollar traded steadily against the euro and the yen, but fell against the pound and the Australian dollar.

"The dollar has been strengthening recently against the background of fundamental changes in politics and the economy, which showed traders that they were on the wrong side," notes IGM currency market analyst Bruce Clark.

Dollar sales "were popular at the beginning of 2021," when everyone expected major stimulus measures from the new US President Joe Biden, as well as keeping the base rate by the Federal Reserve System at close to zero for another couple of years, the expert says. "However, the prerequisites for the sale of the dollar began to crumble this summer, when it became clear that the implementation of the Biden agenda was in jeopardy, and it is becoming increasingly obvious that the Fed was somewhat mistaken with inflation forecasts," Clark said.

Fed Chairman Jerome Powell said on Wednesday that high inflation in the US could persist into early next year - longer than expected due to a shortage of components and commodities. At the same time, he expressed confidence that the increase in inflation in the United States is due precisely to the recovery of economic activity after the COVID-19 pandemic, and such an inflationary regime will not continue in the future. Powell, however, repeated the words that the Fed will raise the base interest rate if "a significant increase in inflation will cause serious concerns."

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 0.05%, but remained near the highest level for the year.

According to the provisional estimate from INSEE, over a year, the Consumer Price Index (CPI) should rise by 2.1% in September 2021, after +1.9% in the previous month. This increase in inflation should result from the acceleration in service and energy prices. The prices of manufactured goods, and to a lesser extent food and tobacco should slow down.

Over one month, consumer prices should fall back by 0.2%, after +0.6% in August. Service prices should contract sharply, due to the seasonal downturn in the prices of certain tourism-related services. The prices of food should drop in the wake of those of fresh food. The prices of tobacco should decrease slightly and those of manufactured goods should slow down. In contrast, the prices of energy should accelerate.

Year on year, the Harmonised Index of Consumer Prices should rise by 2.7% after +2.4% in August. Over one month, it should decrease by 0.2% after +0.7% in the previous month.

According to the report from Nationwide Building Society, UK annual house price growth eased back to 10.0%, from 11.0% in August. Economists had expected a 10.7% increase.

Prices little changed month-on-month (+0.1%), after taking account of seasonal factors. Economists had expected a 0.6% increase.

Nationwide said that Wales and Northern Ireland the strongest performing regions in Q3, London the weakest.

Commenting on the figures, Robert Gardner, Nationwide's Chief Economist, said: “Annual house price growth remained in double digits for the fifth month in a row in September, though there was a modest slowdown to 10.0%. House prices rose by 0.1% month-on-month, after taking account of seasonal effects. As a result, house prices remain c13% higher than before the pandemic began in early 2020.

“House prices have continued to rise more quickly than earnings in recent quarters, which means affordability is becoming more stretched. Raising a deposit remains the main barrier for most prospective first-time buyers. A 20% deposit on a typical first-time buyer home is now around 113% of gross income – a record high.

“As we look towards the end of the year, the outlook remains uncertain. Activity is likely to soften for a period after the stamp duty holiday expires at the end of September, given the incentive for people to bring forward their purchases to avoid the additional tax. Moreover, underlying demand is likely to soften around the turn of the year if unemployment rises as government support winds down, as seems likely. But this is far from assured. The labour market has remained remarkably resilient to date and, even if it does weaken, there is scope for shifts in housing preferences as a result of the pandemic – such as wanting more space or to relocate – to continue to support activity for some time yet.”

EUR/USD

Resistance levels (open interest**, contracts)

$1.1755 (604)

$1.1713 (1258)

$1.1677 (513)

Price at time of writing this review: $1.1599

Support levels (open interest**, contracts):

$1.1566 (6398)

$1.1532 (1608)

$1.1491 (5773)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date October, 8 is 74166 contracts (according to data from September, 29) with the maximum number of contracts with strike price $1,2200 (8606);

GBP/USD

$1.3802 (703)

$1.3753 (183)

$1.3705 (293)

Price at time of writing this review: $1.3445

Support levels (open interest**, contracts):

$1.3393 (1297)

$1.3344 (458)

$1.3273 (565)

Comments:

- Overall open interest on the CALL options with the expiration date October, 8 is 12652 contracts, with the maximum number of contracts with strike price $1,4150 (2064);

- Overall open interest on the PUT options with the expiration date October, 8 is 21620 contracts, with the maximum number of contracts with strike price $1,3250 (1887);

- The ratio of PUT/CALL was 1.71 versus 1.48 from the previous trading day according to data from September, 29

* - 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.

According to the report from Office for National Statistics, UK gross domestic product (GDP) is estimated to have increased by 5.5% in Quarter 2 (Apr to June) 2021, revised from the first estimate of a 4.8% increase. Economists had expected a 4.8% increase.

The level of GDP is now 3.3% below where it was pre-pandemic at Quarter 4 (Oct to Dec) 2019, revised from the previous estimate of 4.4% below.

In output terms, the largest contributors to this increase were from wholesale and retail trade, accommodation and food service activities, education and human health, and social work activities.

In Quarter 2 2021, there were increases in all main components of expenditure, with the largest contribution from household consumption, which contributed 4.0 percentage points to the 5.5% increase following the easing of coronavirus restrictions in Quarter 2 2021 when compared with those in place in Quarter 1 (Jan to Mar) 2021.

The UK’s net borrowing position with the rest of the world reduced to 1.5% of GDP in Quarter 2 (Apr to Jun) of 2021 compared with 1.7% of GDP in Quarter 1 (Jan to Mar) of 2021.

A rise in household spending of 7.9% saw the household saving ratio decrease to 11.7% in Quarter 2, compared with 18.4% in Quarter 1, which was the second highest on record.

General government decreased its net borrowing position in the non-financial account to £51.3 billion in Quarter 2 2021 (8.9% of GDP) from £73.2 billion in Quarter 1 2021 (13.1% of GDP); lower borrowing was driven by a rise in income from taxes on products and production of 9.1%, a fall in subsidies of 19.7% and a fall in government final consumption expenditure of 3.0%.