James Smith, developed markets economist at ING, suggest that while they expect the Riksbank to retain its tightening bias, they suspect they will be forced to push back the timing of its next move again.

Key Quotes

“We see three key reasons why the planned rate hike from the Riksbank will probably be delayed further:

  1. The Riksbank continues to expect wage growth to gradually accelerate through 2020 and 2021, on the back of rising productivity growth. But this will depend on the wage negotiations that will culminate in an agreement in spring next year – and there are some signals that this could produce a more subdued result. Inflation expectations have been slipping, including among labour organisations. There also downside risks to the central bank’s productivity assumptions.
  2. The effects of the 2017 house price fall are still feeding through. The good news is that house prices have since stabilised, although we expect the effects of the earlier price decline to continue to weigh on household spending. Housing starts have slowed, although there is a clear risk of a sharper deceleration in the number of construction projects being commenced. Don’t forget too that a majority of homeowners are on floating interest rates – and while the global plunge in market rates should give consumers a helping hand – it is a consideration if the Riksbank begins to raise interest rates. A future rise in mortgage rates, combined with the ongoing ripple effects from the earlier price decline, could pose risks for the domestic economy.”
  3. Escalating trade tensions also pose a risk for Sweden’s relatively open economy. The Riksbank did acknowledge this in its latest statement, but its forecasts for the US and eurozone look too optimistic compared to ING projections. While our trade team ultimately expects that eurozone car tariffs will be avoided, it may not be until the second quarter of 2020 before a truce between the US and China emerges.”

“For now we expect rates to remain on hold for the foreseeable future.”

  • US Dollar Index starts the week with a bullish gap.
  • China's trade surplus narrows to $34.84 billion in August.
  • Trading action is likely to remain subdued in the second half of the day.

Despite the uninspiring trade data from China, the AUD/USD pair preserved its bullish momentum and is now building on last week's gains. As of writing, the pair, which touched its highest level since late July at 0.6873, was trading at 0.6870, adding 0.35% on a daily basis. However, the lack of fundamental drivers behind the AUD strength suggests that the pair's movements are largely technical.

US tariffs weigh on China's trade surplus

The General Administration of Customs of China on Sunday reported that China's exports fell 1% in August on a yearly basis while imports contracted 5.6% in the same period to reflect the negative impact of the trade dispute and dragged the trade surplus down to $34.84 billion from $45.06 billion compared to analysts' estimate of $43 billion.

Commenting on the data, “China’s August trade data was weak, with exports and imports falling, reflecting the worsening impact of tariffs and slowing growth," TD Securities analysts said. "The trade outlook is likely to deteriorate further, with the latest intensification of tariffs having yet to be felt."

Meanwhile, the US Dollar Index started the day with a bullish gap after suffering losses last week and is making it difficult for the pair to continue to push higher for the time being. There won't be any macroeconomic data releases from the US in the remainder of the day and the pair is likely to trade in its daily range. During the Asian session, the National Bank of Australia's Business Confidence Index and Consumer Price Index (CPI) and Producer Price Index (PPI) from China will be looked upon for fresh catalysts.

Technical levels to watch for

British Prime Minister Boris Johnson's spokesman crossed the wires in the last minutes saying that the PM's government will not seek an extension to Brexit and reiterated that they will be leaving the European Union on October 31.

"The PM has made his unhappiness about the Brexit delay bill known," the spokesman said. "There is a simple way for lawmakers to resolve this and that is to vote for an election today to let the people decide on Brexit."

These comments didn't have an impact on the British pound. As of writing, the GBP/USD pair was up 0.7% on the day at 1.2365. Below are some additional quotes as reported by Reuters.

"The PM will not sanction any more pointless delays."

"Lawmakers should face consequences of their actions and take part in an election."

"The PM wants to work with EU leaders to achieve a deal to leave on October 31."

"The PM has set out that we are working on a variety of ideas for Brexit talks."

"There are more people working on Brexit negotiations than before."

"The moment of decision will come at the EU summit on October 17-18."

  • EUR/USD is now attempting a sideline theme in the 1.1030/40 region. Further consolidation is therefore expected ahead of the key ECB event on Thursday.
  • An attempt to break higher should meet initial resistance at the 1.1075/84 band, where coincides the 21-day SMA and last week’s top.
  • Looking at the broader picture, as long as the 55-day SMA at 1.1165 caps the upside, the negative view is expected to prevail. This area is also reinforced by later August tops (August 26 at 1.1163).

EUR/USD daily chart

  • The recent Brexit optimism continues to underpin the GBP.
  • Upbeat UK data provides an additional boost on Monday.
  • Seems poised to extend the recent bounce from multi-year lows.

The British Pound strengthened across the board in reaction to upbeat UK macro data and lifted the GBP/JPY cross back beyond the 132.00 handle to fresh one-month tops. The intraday positive momentum further assisted the cross to make it through a confluence barrier, comprising of 50-day SMA and over one-month-old ascending trend-line.
Meanwhile, technical indicators on the daily chart have just started gaining positive traction and support prospects for an extension of the recent rally from multi-year lows. However, slightly overbought conditions on the 4-hourly chart might keep a lid on any subsequent up-move and thus, warrant some caution before placing aggressive bullish bets.
From current levels, immediate resistance is pegged near the 132.90-133.00 region, above which the cross is likely to accelerate the up-move towards reclaiming the 134.00 handle. On the flip side, any meaningful pullback below the mentioned confluence resistance breakpoint might now attract some dip-buying interest and help limit the further downside near the 131.00 mark.

GBP/JPY daily chart

fxsoriginal

  • The pair already seems to have found acceptance below 50-DMA support.
  • A sustained break below mid-1.3100s eyed for a fresh bearish confirmation.

The USD/CAD pair now seems to have entered a bearish consolidation phase and was seen oscillating in a narrow trading band just above mid-1.3100s, or over one-month lows. Given Friday's breakthrough 50-day SMA support and a subsequent slide below August monthly swing lows, the set-up already seems to have turned in favour of bearish traders.
Moreover, technical indicators on the daily chart maintained their bearish bias and add credence to the near-term negative outlook. However, slightly oversold conditions on the 4-hourly seemed to be the only factor that held investors from placing aggressive bearish bets and limit any further downside, at least for the time being.
Hence, it will be prudent to wait for a strong follow-through selling below an immediate support near mid-1.3100s before traders start positioning for a further near-term depreciating move. The pair then could slide back towards late July swing lows support near the 1.3100 handle en-route the next major support near the 1.3055-45 region.
On the flip side, the 50-day SMA – currently near the 1.3190 region – now seems to act as an immediate strong resistance, above which a bout of short-covering could lift the pair further towards the 1.3230 resistance zone. Any subsequent recovery now seems more likely to meet with some fresh supply and remain capped near mid-1.3200s.

USD/CAD daily chart

fxsoriginal

  • The index has managed to regain attention and retake the 98.40 area after bottoming out in the 98.00 neighbourhood last Friday.
  • While above the support line, today at 98.02, the near term bullish bias should remain in place, leaving the door open for a potential visit to YTD highs near 99.40 (September 3).
  • If the selling bias resumes, initial contention emerges in the 98.00 area ahead of the Fibo retracement at 97.87. Further south aligns the 55-day and 100-day SMAs at 97.62 and 97.55, respectively.

DXY daily chart

According to Rabobank analysts, while the main focus this week will be on the ECB, Turkey is likely to steal the spotlight in the EM space.

Key Quotes

“Ahead of the upcoming CBRT meeting scheduled on September 12, President Erdogan reiterated his expectation for significantly lower interest rates saying that the policy rate will be cut to single digits “in the shortest period.”

“With inflation falling faster than anticipated, the lira staying relatively stable (for now) and President Erdogan expecting significantly lower rates, we predict that the policy rate will be slashed by 300bps to 16.75% on Thursday.”

“However, we are not comfortable with such a rapid pace of monetary policy easing.”

The ongoing rebound in USD/JPY has scope to reach the 107.90 area in the near term, suggested FX Strategists at UOB Group.

Key Quotes

24-hour view: “We expected “further USD strength” last Friday but it staged a sharp and rapid drop that touched 106.61. Despite the subsequent strong rebound from the low, momentum indicators are patchy at best. The current price action is viewed as part of consolidation phase. In other words, USD is expected to trade sideways, likely between 106.70 and 107.20”.

Next 1-3 weeks: “After trading in an ‘undecided’ manner for several days, USD surged above the top of our expected 105.00/107.00 sideway trading range (high of 107.22). Despite the relatively strong advance, upward momentum has not improved by that much. For now, we view the current movement as a ‘rebound’ that has scope to extend to 107.90. At this stage, the prospect for a sustained rise above 107.90 is not high. On the downside, a break of the strong 106.30 support would indicate the current upward pressure has eased”.