EUR/USD: Neutral: In a 1.1020/1.1250 range.

We shifted to a neutral stance last Friday and there is no change to the view. EUR dropped to low of 1.1043 which is within the expected sideway trading range of 1.1020/1.1250. That said, on a shorter-term basis, any EUR strength from here is expected to encounter very strong resistance at 1.1190.

GBP/USD: Neutral: Bearish only if daily closing below 1.3050.

As highlighted last Friday, only a daily closing below 1.3050 would indicate the start of a sustained down-move in GBP. The low has been 1.3021 but GBP rebounded quickly to end the day higher at 1.3070. While the immediate pressure is on the downside, the current weakness does not appear to have enough momentum to extend much further below 1.2970. That said, the downward pressure is intact unless GBP can move back above and stay above 1.3180.

AUD/USD: Bullish: Immediate target at 0.7675/80.

AUD touched a high of 0.7665 last Friday, about 10 pips below the immediate target of 0.7675/80. The pull-back from the high is viewed as correction and as long as 0.7540 is intact, we continue to hold a bullish AUD view and expect an eventual break of 0.7675/80.

NZD/USD: Shift from bullish to neutral: Pull-back has room to extend lower to 0.7050.

While we highlighted the increasing risk of a short-term top last Friday, the sharp and rapid drop that took out the stoploss at 0.7120 earlier this morning was unexpected (suggested profit-taking level of 0.7290 was not met). The bullish outlook has shifted to neutral but the current pull-back appears to have scope to extend lower to 0.7050. Overall, NZD is expected to stay under pressure in the next few days unless it can move back above 0.7210.

USD/JPY: Bearish: Increasing risk of a short-term Bottom. To take partial-profit at 101.05

The strong rebound last Friday clearly suggests an increasing risk of a short-term low. However, another leg lower to the ideal target at 100.05 is not ruled out just yet but those who are short should look to book partialprofit on any dip to 101.05.

GBP/USD: Supported On Positioning Only; EUR/USD: Range-Bound Intact

FX volatility is at its lowest levels in 2016; but still well above 2014 levels, in contrast to equity volatility which is right back down there. When you look at the global economy, it hardly feels like a low-volatility, range-bound environment, but easy Fed policy is for volatility what oil is for water. The only caveat is that outlandish interest rates are a recipe for ‘risk on/risk-off’ to continue as artificially depressed volatility is replaced by risk aversion when interest rate adjustments look more imminent. But maybe that’s a topic for Autumn rather than August.

The Bank of England’s failure to persuade UK gilt owners to part with them is making asset purchases hard, which is what happened the first time they tried to buy corporate bonds, too.

Sterling has no obvious support however other than positioning. EUR/USD looks as range-bound as is possible and a steady flow of money towards yieldier currencies and assets while we watch US equities and oil prices seems set to be the sum of the market’s interest today.

EUR/USD: Neutral: Positive undertone; bullish only if above 1.1250.

While the key short-term support at 1.1100 is still intact, last Friday’s EUR strength was fleeting and the 1.1221 high did not threaten the top end of the expected sideway trading range of 1.1020/1.1250. From here, the undertone for EUR is viewed as positive but only a clear break above 1.1250 would indicate the start of a sustained up-move. 1.1100 continues to act as a strong near-term support.

GBP/USD: Bearish: To take partial profit at 1.2850. [No change in view]

The slow drift lower in GBP is in line with our bearish expectation. The target is still at 1.2850 but as highlighted yesterday, the internal momentum is not strong and this level is unlikely to yield so easily. Those who are short may likely to take partial profit at this level. In the meanwhile, the stop-loss for the bearish is view is adjusted lower to 1.3075 from 1.3130 previously.

AUD/USD: Shift from bullish to neutral: In a 0.7595/0.7725 range.

AUD/USD trades down to  0.7640 at the time of writing and this indicates that the bullish phase that started more than a week ago has ended. The current outlook is deemed as neutral within a broad 0.7595/0.7725 range even though the near-term bias is for a probe lower to 0.7595 first

USD/JPY: Neutral: In a 100.50/102.80 range.

USD has been trading mostly sideways in the past 2 weeks. Flat indicators continue to suggest a neutral outlook for this pair and only a clear break out of the expected sideway trading range of 100.50/102.80 would indicate the start of a directional move. That said, the odds for a break below 100.50 are markedly higher compared to a move above 102.80.

EUR/USD Set To Remain Resilient & Difficult To Trade

The lack of a dollar rally continues to frustrate investors… Despite a solid US labour market, positive data surprises, and widening rate differentials, the dollar has rallied little in recent months, with the trade-weighted dollar only 2% above its low from early May. This is particularly true against the euro, where investors have been persistently bearish, and viewed the UK referendum result as a strong potential catalyst for a weaker euro.

… As does the resilience of the euro The downside catalysts that investors have been expecting to spell doom for the euro - monetary policy divergence and rising Euro area political risks, in particular - have arrived in various forms, yet EUR/USD remains resilient.

We continue to expect a higher EUR/USD. We have long argued that the trade-weighted dollar has peaked against DM currencies, and we continue to forecast EUR/USD to grind higher to 1.16 by year end.

EUR/USD’s range during the past year has been among the narrowest since 2000, and EUR/USD is likely to remain difficult to trade as central banks continue to lean against currency strength. Favourable valuation, and growth re-synchronization between the US and Euro area should continue to support the euro, pushing it higher. In addition to expecting a higher EUR/USD, we remain bullish EUR/CHF and EUR/SEK.

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Fading 'Fiscal Drug': Long USD, JPY, NOK; Short EUR, GBP, NZD

We have been concerned about market addiction to unconventional monetary policies. Unprecedented volatility spikes and what appear to be diminishing returns from more policy easing in the Eurozone and Japan have justified such concerns even more this year. The Fed’s challenges normalizing policies provide further evidence. Unconventional monetary policies were necessary after the global crisis, but are not cost-free and, in some cases, might have gone too far, leading to market distortions. More recently, hopes for global fiscal expansion have satisfied the markets’ hunger for policy stimulus and addressed concerns that monetary policy is running out of steam. The policy baton is passing from monetary to fiscal stimulus.

However, our analysis suggests caution. In some cases, fiscal policy can certainly complement monetary policy to avoid deflation and support the recovery. However, we see limits for the extent to which advanced economies have room for substantial fiscal expansion. Markets may get disappointed if they expect too much. Moreover, fiscal expansion may lead to less monetary policy stimulus, leading to stronger currencies.

FX implications: long USD, JPY, NOK; short EUR, GBP, NZD.

We have argued that substantial fiscal expansion in the major G10 economies is unlikely and that any fiscal stimulus will actually suggest less monetary policy stimulus than otherwise in most cases. Markets may get disappointed by expecting too much from fiscal policy. We see the following FX implications, keeping everything else constant:

• Sell market rallies from over-excitement about fiscal policy stimulus. USD/JPY is an example, if markets get too excited again about helicopter money in Japan.

• Fiscal stimulus in the US after the elections will be positive for the USD, as markets will start expecting faster Fed tightening than otherwise.

• Stay bearish EUR/USD in the medium term, as fiscal stimulus is unlikely to relieve the ECB burden.

• Stay bearish GBP/USD, as the BoE will not use the excuse of fiscal stimulus to loosen its policies less than otherwise—the BoE is the exception in this respect.

•  As Norway already has the loosest macro policies and New Zealand the tightest in G10, buy NOK dips and sell NZD rallies.

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Risk/Reward Favors Bullish USD Positions Vs EUR, GBP And JPY

The minutes from the July FOMC meeting were less hawkish than the market feared as the Committee was divided on the need for another interest rate hike. It’s important to remember that the decision to act will ultimately rest with Yellen and that there will be no rate hike until she believes a rate hike is warranted. As our economic desk strategists not some participants stressed that the Committee needed to consider the constraints on the conduct of monetary policy associated with proximity to the effective lower bound on short-term interest rates. In their view, the "some" participants noted above almost certainly includes Yellen. She seems to be sticking to her risk management policy approach and feels little urgency to raise rates. However, the minutes pre-date the strong July US employment report. Dudley appeared to want to stress this in his comments this week.

So could Yellen reinforce Dudley’s comments at Jackson-Hole on Friday? We think not. It’s an academic conference that concentrates on long-term themes and has in recent years moved away from short-term policy signals. The tone may therefore reflect recent comments from Powell/Williams about low productivity growth and low neutral rates. But Yellen talking about lower long-term rates isn’t the same as dampening expectations of a near-term rate increase.

We therefore still believe risk/reward favours USD upside against the EUR, GBP and JPY. Discussions about lower terminal rates should ensure that EM FX out-performs the G4 currencies.

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Kansas City Fed Manufacturing Index Holds in Negative Territory

The Kansas City Fed composite manufacturing index increased slightly to -4 for August from -6 previously. Although only one 2016 reading has been in positive territory, companies remain optimistic surrounding the six-month outlook with price pressures also expected to increase.

The production index improved to -7 from -15 previously with shipments index at -4 from -17 in July. The new orders and order backlog indices remained in negative territory at -7and -4 respectively.

The prices paid index held firm over the month 7 from 10 previously, but the prices received index remained in negative territory for the month, extending the recent pattern with no increases reported over the past 12 months.

While the number of employees again declined slightly, there was an increase in the average workweek and supplier delivery times also increased slightly, the same pattern as seen in the previous two releases.

Looking at the expected six-month trends, the composite index edged lower to 11 from 14 previously, although this was the second highest reading of 2016. There were positive readings for all the components except inventories with production and new order expectations notably buoyant for the month. There was also strength in the prices components with expectations surrounding prices received at the strongest level for over 12 months.

The regional manufacturing releases this month have been relatively mixed with no clear trend for current conditions. There has, however, been a significant and consistent net improvement in expectations surrounding the six-month outlook, which will underpin overall confidence in the outlook.

Kansas City Fed President George voted for an increase in the Fed Funds rate at July’s Federal Reserve policy meeting and again called for an immediate increase in rates in comments made today.