The US Dollar has been on a strong uptrend recently, but yesterday it turned bearish after the US ISM manufacturing report. This report came in below 50 points, which means that the US manufacturing sector fell into contraction in August. Manufacturing has been contracting in most of the developed nations for months, but it was holding above stagnation in the US. Now that it fell into contraction, fears of a national recession increased, since in other countries the weakness in manufacturing is leading the way for other sectors to follow. The USD turned dovish after that report was released and the weakness has spilled into today, with the USD slipping lower against all major currencies.

On the other hand, the GBP has been on a steep decline in recent days, as the UK prepared to head out of the EU with no Brexit deal. Prime Minister Boris Johnson is going to prorogue the British Parliament next week, so it seemed that the time for any solution was running out. But the parliament voted to take things on their hands yesterday, hoping for another Brexit extension until January 31. That helped the GBP come back from the dead, and GBP/USD returned above 1.20 and climbed to 1.2220 today in the European session. Now there are three options left: 1) No deal Brexit in October 31, 2) An extension to January 31 or 3) New elections.

The European Session

• Eurozone Services PMI – The manufacturing sector has been contracting for many months in Europe and it has been dragging down the rest of the economy with it. The service sector has weakened in recent months, but today there was some hope. Services PMI indicator for August showed an improvement in all major Eurozone countries, apart from Italy which weakened again, falling close to stagnation. The Eurozone number ticked higher to 53.5 points.
• UK Services PMI – In UK, the service sector has been weakening considerably this year. We saw this sector fall briefly into contraction in March but it resurfaced again in April. But, it has been weakening since then and today the PMI indicator was expected to weaken further from 51.4 points to 51.0. But it missed expectations, falling to 50.6
• Lagarde Making Her Last Comments Before Becoming the Head of the ECB – The head of the IMF Christine Lagarde will take the place of Mario Draghi as the head of the European Central bank. She made some comments today, fitting that role. Lagarde said that the ECB needs to listen to and understand markets, but need not be guided by markets. A review of monetary framework is warranted. She ended the speech saying that I hope I never have to say “whatever it takes”, which was the most important phrase for Draghi, sending the Euro diving whenever he repeated it.
• Brexit Talk – The opposition in the UK took Johnson’s prorogation of the Parliament to the Scottish courts. But a Scottish judge ruled this morning that Boris Johnson’s prorogation of parliament does not contravene law. Lord Doherty said that the separation of powers means the courts will not interfere in the matter. Reuters reported, citing a German government document dated 30 August, that Germans see increased risk of no-deal Brexit due to lack of proposals for alternative backstop arrangement. The European Commission also chipped in saying that nothing has changed after UK parliamentary vote. Brexit deal must be on the basis of the withdrawal agreement. Boris Johnson remains the contact person in the UK. UK PM Johnson commented that if election motion passes, we should have an election on 15 October. The “rebel bill” is the only thing that stands in the way of UK leaving the EU. We will get the backstop out and get an agreement with the EU. But, the opposition leader Corbyn responded that Labour will not support an election until the threat of no-deal Brexit has been removed.
• China not Keeping its Words on Currency Manipulation – Chinese officials promised Trump not to mess with currency manipulation to fight the trade war. But today, the Chinese cabinet made some comment via state media, suggesting that they will implement broad RRR cut and targeted RRR cut in due time. China will maintain prudent monetary policy, will fine tune policy in a preemptive way and at the appropriate time and will keep consumer prices stable overall.

The US Session

• Canadian Trade Balance and Labour Productivity – The trade balance for June released last month came at +$0.1 billion, but was revised lower to -$0.1 billion today. For July, the trade balance report was expected to show a 0.2% increase but it missed expectations today showing a -$1.1 billion decline. Labour productivity came higher at 0.2% against 0.1% expected and last month’s number was revised a tick higher as well. These figures sent the CAD down initially.
• BOE’s Carney Speaking on Brexit – The Bank of England Chairman Mark Carney was testifying at the Treasury Select Committee. He said that the worst-case Brexit scenario is now less severe. The worst-case scenario now stands at a 5.5% drop in GDP against 8.0% previously. Core financial system resilient to Brexit.
• BOC Overnight Rate and Statement – The Bank of Canada left interest rates unchanged at 1.75% just a while ago, as expected. The comments from the BOC statement are as follows: trade conflicts and related uncertainty are taking a toll on the global and Canadian economies. Wages have increased but consumer spending has softened. Inflation is on target. Governing Council will pay particular attention to global developments and their impact on the outlook for Canadian growth and inflation. All in all, the statement is not as dovish as expected and the CAD has rallied higher.

Trades in Sight

Bearish USD/JPY again

• The main trend is still bearish
• The pullback higher is complete
• The 200 SMA provided resistance again today
• The previous candlestick closed as an upside-down hammer

USD/JPY again after failing to break above the 200 SMA

USD/JPY was climbing higher during the Asian and European session today. But, the climb ended right at the 200 SMA (purple) on the hourly chart once again. Buyers pierced the 200 SMA but they couldn’t close the candlestick above it,which formed an upside-down hammer. That’s a reversing signal and the reverse is already taking place now and the current candlestick shows. The stochastic indicator was overbought, but has now reversed and headed down. We went short on this pair earlier, so the setup looks good.

In Conclusion

The Bank of Canada sounded less dovish than markets were anticipating. The economic data has shown improvement in Canada during the last two months, so that is not that big a surprise and no one was expecting a rate cut from them. The weakness in the USD continues today, so we will let you know when it is over.