AUD/USD sinks ahead of GDPThe Australian dollar is sharply lower on Tuesday. AUD/USD is trading at 0.6732 in the European session, down 0.88% today at the time of writing.
Australia’s economy has been sputtering and the markets aren’t expecting much change from second-quarter GDP on Wednesday. GDP is expected to trickle lower to 1% y/y, down from 1.1% in Q1, which was the weakest pace of growth since Q4 2020. Quarterly, the market estimate for GDP stands at 0.3%, compared to 0.1% in Q1.
GDP-per-capita is expected to be negative, another indication that economic activity remains subdued. Australia has been hit by a drop in iron ore and core prices and exports fell by 4.4% in the second quarter, which doesn’t bode well for the Australian dollar.
The GDP is unlikely to change the Reserve Bank of Australia’s plans when it meets on Sept. 24. The central bank is closely watching inflation, which remains stubbornly high, as well as the labor market. Governor Bullock has said she has no plans to lower the cash rate from its current 4.35% for the next six months. The RBA has stuck to its “higher for longer” stance and has maintained rates since November.
The Federal Reserve is widely expected to lower rates on September 18, with a 70% likelihood of a quarter-point cut and a 31% likelihood of a half-point cut. Ahead of the meeting is a crucial employment report on Friday. The previous jobs report was much weaker than expected and triggered a meltdown in the financial markets. Another weak jobs report would raise the likelihood of a half-point cut, while a solid release will cement a quarter-point cut.
AUD/USD has pushed below support at 0.6780 and is testing support at 0.6737. Below, there is support at 0.6708
0.6809 and 0.6852 are the next resistance lines
Manufacturingpmis
Euro falls sharply on soft Manufacturing PMIsThe euro is sharply lower on Monday. In the North American session, EUR/USD is trading at 1.0495, down 0.75%. The euro continues to struggle and has reeled off 10 straight losing weeks, with EUR/USD sliding some 700 basis points during that time.
Germany's manufacturing sector continues to struggle. In September, the Manufacturing PMI was revised lower to 39.6 from a preliminary of 39.8, marking a fifteenth straight month of contraction. Demand was weaker across the sector, output declined and manufacturers' expectations fell.
Eurozone manufacturing is also stuck in a deep decline. Manufacturing PMI confirmed at 43.4 in September, which also was the fifteenth consecutive month of contraction. A reading below the 50 line marks a decline in activity. This all paints a grim picture and I don't see any relief in the near future for German or eurozone manufacturing.
The weak manufacturing numbers are further evidence that the eurozone economy is cooling down and inflation has been easing as well. Friday's eurozone CPI data was encouraging, with a reading of 4.3% y/y in September, compared to 5.2% in August and below market expectations. Lower energy costs helped fuel the downtrend, but core inflation, which excludes food and energy, also declined, from 5.3% y/y to 4.5% y/y, its lowest level since October 2022.
In the US, manufacturing is also experiencing deep contraction but showed some improvement. The ISM Manufacturing PMI rose to 49.0 in September from 47.6 in August, above the consensus estimate of 47.8. Manufacturing has posted declines for eleven consecutive months. Demand remains weak and the Fed's tightening has further squeezed manufacturers.
In the US, a host of Fed members will be making public statements and investors will be listening closely for any hints regarding future rate decisions. The Fed rate odds of a quarter-point increase for the November meeting have increased to 31%, up from 18% on Friday, according to the Fed Watch Tool, which means the markets consider a rate hike to be on the table.
EUR/USD tested support at 1.0489 earlier. Below, there is support at 1.0404.
There is resistance at 1.0572 and 1.0648
Euro rebounds after sharp losses, NFP nextThe euro is in positive territory today after taking a nasty spill on Thursday. In the European session, EUR/USD is trading at 0.9984, up 0.40%.
Thursday was a day to file away and move on for the euro, as EUR/USD tumbled 1.07%. The euro is under pressure from a high-flying US dollar and is having trouble staying above the symbolic parity line. A combination of solid US numbers, weak eurozone data and lower risk sentiment sent the euro sharply lower.
German Manufacturing PMI dipped to 49.1, down from 49.3 in July. This marked a second straight contraction, and was the lowest level since May 2020, at the start of the Covid pandemic. It was a similar story for the eurozone Manufacturing PMI, which dropped from 49.8 to 49.6, a 26-month low. The manufacturing sector continues to struggle with supply chain disruptions and a shortage of workers, and high inflation and an uncertain economic outlook are only exacerbating matters.
In the US, the ISM Manufacturing PMI held steady at 52.8, showing modest expansion. The labour market remains strong, with initial jobless claims dropping to 232 thousand, down from 237 thousand a week earlier and much better than the consensus of 248 thousand.
Adding to the euro's woes is the uncertainty over European energy supplies from Russia. Russia has shut down Nord Stream 1 pipeline for three days for maintenance, but Germany has charged that the shutdown is politically motivated and that the pipeline is "fully operational". Nord Stream is supposed to come back online on Saturday. Even if Moscow does restore service, this episode is a reminder of Europe's energy dependence on an unreliable Russia. Germany has greatly reduced its dependence on Russian gas, from 55% in February to just 26%, but a cutoff from Moscow would result in a shortage this winter.
The week wraps up with the August nonfarm payrolls report. The consensus is for a strong gain of 300 thousand, after the unexpected massive gain of 528 thousand in July. The report could well be a market-mover for the US dollar. The markets are finally listening to the Fed's hawkish message, and a strong reading will raise expectations of a 0.75% hike in September and likely push the dollar higher. Conversely, a weak report would complicate the Fed's plans and raise the likelihood of a 0.50% hike, which could result in the dollar losing ground after the NFP release.
EUR/USD is testing resistance at 0.9985. Above, there is resistance at 1.0068
There is support at 0.9880 and 0.9797