Market Digests Earnings Reports and Economic Optimism While Australian Dollar Surges on Strong Employment Data | Daily Market Analysis

Key events:

• USA - Initial Jobless Claims
• USA - Philadelphia Fed Manufacturing Index (Jul)
• USA - Existing Home Sales (Jun)

During Wednesday's evening trading, Dow futures were showing a decline after major benchmark averages reached new 15-month highs earlier in the day. Traders were closely examining the quarterly earnings results from significant companies that were reported throughout the session. The market was in a phase of digesting this corporate financial data to gauge its impact on future trends.

Yesterday, US Treasury Secretary Janet Yellen shared a positive outlook on the current economic conditions in the United States, which was well received by the markets. The declining inflation has fostered optimism about the US economy's ability to achieve a smooth landing. Yellen's confidence in the labor market cooling down without significant distress has added to this positive sentiment.

If economic data continues to support this optimistic view, the market is likely to maintain confidence in a soft economic landing, leading to a gradual decline in the value of the US dollar. The S&P 500 index saw a 0.7% increase yesterday, nearing levels last observed in early April when inflation concerns were dominant.

Recent retail sales data from the US also aligns with the notion of a soft landing, as consumer spending continues to grow, albeit at a slower pace. However, the yen, which experienced notable gains last week, is now underperforming in an environment that favors carry trades. In Japan, the TOPIX index rose by 1.0%, and the 10-year swap rate retraced some of the surges seen earlier this month after breaching 0.70% on Friday for the first time since March.

Governor Ueda's comments at the G20 summit in India have contributed to the renewed bounce in USD/JPY and the drop in longer-term yields. His statement emphasized that the 2% inflation goal remains distant, based on the unchanged assumption reiterated in the overall narrative.

The market's reaction to Governor Ueda's comments has led to reduced speculation about an imminent yield curve control (YCC) change in the upcoming week. However, there is still a possibility that the Bank of Japan (BoJ) could make adjustments to YCC during the July meeting, depending on the updated forecasts. Although yields are currently not experiencing upward pressure and are not threatening the 0.50% band limit, the upcoming CPI data on Friday will be crucial and could reignite speculation depending on its outcome.

On Thursday, the Australian dollar experienced a significant surge following the release of better-than-expected employment data in the country. The data revealed that Australia's net employment rose by 32,600 in June, surpassing market expectations of a 15,000 increase for the second consecutive month. As a result of this positive economic news, the Australian dollar rallied more than 0.9% to reach an intra-day high of $0.6834.

In contrast, the British pound was facing significant losses due to disappointing inflation data, which fell short of market expectations. As a result, market expectations of further aggressive interest rate hikes from the Bank of England (BoE) diminished. The pound managed to recover slightly, gaining 0.15% to trade at $1.2958, after experiencing a decline of more than 0.7% on the previous day.

The euro, on the other hand, strengthened by 0.24% against the US dollar, reaching $1.1227. Investors were closely monitoring the upcoming European Central Bank (ECB) policy meeting for additional insights into the rate outlook. Recently, ECB policymakers have adopted a more dovish stance, with some indicating uncertainty about future rate increases beyond the likely 25 basis points increase expected in July.