Oil Tumbles, China Chip News Hits Tech, Fed Hike Odds Climb to 33%

Oil prices kept sliding as hopes for a Middle East ceasefire mounted, while a Chinese chipmaking breakthrough pummeled tech stocks in Asia and the Nasdaq futures pointed to a lower open. The Fed funds futures now price in about a 33% chance of a rate hike at tomorrow's FOMC meeting, up from roughly 10% on July 16. The dollar traded with a clear firm bias, making new monthly highs against the euro, sterling and the Australian dollar.

The euro touched a session high just below $1.1420 early in European turnover yesterday, then slipped steadily, falling below $1.1370 before European markets closed. It settled on its lows and edged to a little below $1.1355 today, a marginal new low for the month. Little stands in the way of the year's low set June 24 near $1.1325.

Lower oil prices and lower US yields dragged the greenback slightly below JPY 163.35 yesterday. The dollar recovered and approached the session high shy of JPY 163.80. It firmed to JPY 163.95 today, approaching the 40-year high from last week near JPY 164. That level does not appear to hold much in the way of stops or optionality. The next inflection point might be nearer JPY 165.

Sterling snapped a six-day fall before the weekend but recorded an ostensibly bearish outside down day yesterday. It traded on both sides of last Friday's range and settled below its low, below $1.33 for the first time since July 1. That was the 61.8% retracement of sterling's rally from the June 24 low near $1.3140. Follow-through selling today pushed sterling to about $1.3275. Options for GBP 375 mln at $1.3280 expire today. The next area of chart support may be in the $1.3240-50 area.

The dollar edged higher against the Canadian dollar yesterday, reaching CAD 1.4120, its best level in nearly two weeks. The CAD 1.4125 area marks the halfway point of the greenback's decline this month. The 20-day moving average is near there as well. The dollar reached a high near CAD 1.4130 in Asia today. Above there, the CAD 1.4155 area holds the next retracement objective. The two-year US premium widened a little yesterday and reached near the highest level in 14 months recorded last week around 144 bp. It is a couple of basis points softer today.

For the eighth consecutive session, the Australian dollar traded on both sides of $0.7000 and failed to close above it once. The Aussie tested last week's low and the 20-day moving average, slightly below $0.6965 today. That area also corresponds to the 38.2% retracement of this month's rally. The next retracement level is near $0.6945.

The peso rose about 0.2% yesterday. The dollar tested yesterday's high in the European morning. Resistance is seen in the MXN 17.54–MXN 17.56 area. The Chilean peso led the regional advance with a 0.85% gain, followed by the Colombian peso's 0.65% gain. The Brazilian real was the weakest in the region, falling almost 0.5% as the greenback settled above BRL 5.10 for the first time in a week.

The dollar was sold to session lows against the offshore yuan a little after midday in New York yesterday, near CNH 6.7630, a new low for the month. Last month's three-year low was about CNH 6.7540. The dollar is bid above CNH 6.77. Last Friday's high near CNH 6.79 offers the nearby target. The PBOC set the dollar's reference rate slightly higher today at CNY 6.7928 versus CNY 6.7911 yesterday. The first fix below CNY 6.80 in three years was on July 10. It has not been fixed above there since then, and July 23 was the new low at CNY 6.7906.

Reports of continued intervention by the Reserve Bank of India initially pushed the dollar to INR 95.6275, its lowest level since July 13. But the greenback's strength emerged late in the session, and it settled near the session high around INR 95.86, though slightly below the 20-day moving average for the first time this month.

Equities are mixed today. As was the case before the weekend, the Nasdaq was unable to sustain early gains. After gapping lower last Thursday, it posted an ostensibly bearish outside down day yesterday. Futures are trading around 0.85% lower. A break of the 24700 area could signal a test of the 23940 retracement area, which also holds the 200-day moving average. The S&P is off marginally. Most of the large bourses in Asia fell today, led by a precipitous 10.8% plunge in South Korea and a 7.7% drop in Taiwan. Hong Kong, India, Australia and New Zealand posted small gains. Europe's Stoxx 600 is up about 0.4%, its third consecutive gain if sustained.

The sharp drop in oil prices saw a modest 3–6 bp decline in US and European benchmark 10-year yields yesterday. Yields continue to pull back today, 2–4 bp lower in Europe. The 10-year US Treasury yield is off three basis points to about 4.62%. The two-year yield is off around the same, dipping slightly below 4.30%.

Gold gapped higher yesterday, reached a little above $4116, then reversed lower and filled the opening gap that extended to the pre-weekend high near $4082. It settled below there and remains uninspiring. It has pulled back to around $4020 today. Silver tells a similar story. It popped above $60 briefly but has not settled above it in three weeks. It was sold below $57 today but has steadied late in the European morning.

September WTI surged roughly 30% in the past three weeks and gapped lower yesterday amid new hopes for an end to the Middle East war, which the IEA has said was the most disruptive in history. Momentum traders and trend followers got caught leaning the wrong way. The session low was recorded late in the North American session a cent below $82.00. Follow-through selling today took the contract to $79.80, a little beyond the halfway point of this month's range near $80.30. The next retracement at 61.8% is found around $77.20, and the 20-day moving average is near $77.80.

A flurry of US economic data will be reported today in a two-hour window from 8:30 to 10:30 AM ET, but outside of headline risk, the reports will be overshadowed by tomorrow's FOMC meeting and the first estimate of Q2 GDP on Thursday. The merchandise goods deficit may be the most politically sensitive. The goods deficit widened in May by the most in more than a year. Exports pulled back 5.4% from record levels, and imports rose 3.6%. Consumer goods imports increased to their highest level in six months. The trade and inventory data will help drive last-minute adjustments to Q2 GDP forecasts. The median forecast in Bloomberg's survey is for 2.1% annualized growth in Q2, the same as in Q1. The Atlanta Fed's GDP tracker has it at 1.7%.

Spain reported a decline in Q2 unemployment, but at 9.87% in Q2, down from 10.83% in Q1, it remains elevated despite solid growth. Q2 GDP is due Thursday and is expected to have grown 0.6%, the same as Q1, making it among the strongest EMU members. June retail sales rose 2.4% year-over-year in constant prices, after a revised 0.3% decline in May. The wildfires in Spain and France will likely spur an emergency fiscal response.

India reported June industrial output rose 7.3% year-over-year after a revised 5.0% pace in May. It matches the largest rise since March 2024. The gain was broad-based. Capital goods output jumped a little more than 14%, followed by electricity and gas production at 10.6%, and manufacturing rose 7.8%.