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In focus today

In the euro area, focus turns to the initial wage growth data for Q1, specifically the ECB's indicator of negotiated wages. We anticipate a significant decline in wage growth from the 4.1% y/y recorded in Q4. This is attributed to reduced actual pressures and the base effect from substantial inflation-compensating one-offs provided to employees in Q1 2024, as indicated by the ECB's wage tracker.

In Sweden, Q1 unemployment figures from the Labour Force surveys have shown significant volatility. April data, releasing today, is expected to show an improvement from January's 9.6% to 8.9%, but an increase from March's 8.1%. Employment is expected to decline, reflecting the drop in new vacancies observed in late April.

Economic and market news

What happened overnight

In Japan, core inflation rose to 3.5% y/y, exceeding expectations and reaching its fastest pace in over two years, driven by reduced energy subsidies and rising food prices. Excluding fresh food and fuel costs, the index increased to 3.0% y/y, underscoring the BoJ's predicament of balancing price pressures from persistent food inflation against growing headwinds from Trump's tariffs.

What happened yesterday

In the euro area, PMIs came out dovish, with composite dropping below 50 to 49.5, largely due to a disappointing drop in services to 48.9 (cons: 50.3, prior: 50.1). This is concerning, given that services constitute 73% of the economy and have been the primary growth driver in recent years. Meanwhile, manufacturing showed resilience, improving to 49.4, with the output index staying above 50 due to rising domestic and international orders, indicating minimal impact from trade uncertainty.

Similar trends were observed in France and Germany, where services underperformed, recording lower-than-expected figures at 47.7 and 47.2, respectively, while manufacturing remained strong. In Germany, the IFO figures highlighted increased business expectations, with optimism driven by lower interest rates and anticipated large projects, outweighing trade war concerns.

In the US, PMI data showed robust growth, with manufacturing rising to 52.3 (prior: 50.2) and services increasing to 52.3 (prior: 50.8). The manufacturing index benefited from front-loading, while the stockpiling sub-component hit a record-high in May.

The US House, led by Republicans, narrowly passed Trump's tax bill with a 215-214 vote, advancing it to the Senate, where passage may face greater challenges and could take weeks.

In Norway, the Norges Bank Expectations survey aligns with market expectations, showing 2025 wage growth forecasts at 4.4%, matching the central wage norm and Norges Bank's forecast. Notably, wage growth expectations for 2026 remain unchanged at 3.7%, below Norges Bank's forecast of 4.0%. Short-term inflation expectations rise, but the five-year decline eases pressure on Norges Bank. Profitability expectations turn negative indicating weaker sequential growth, yet the employment diffusion index has shown a positive trend.

Equities: Equity markets ended lower yesterday, largely reflecting spillover effects from the weak US session on Wednesday. This meant that the underperformance was most notable in cash markets across Europe, Japan, and broader Asia, whereas US equities managed to hold broadly flat. Given that the US is mostly driven by cyclical sectors, we observed a marginal cyclical outperformance yesterday. Volatility edged slightly lower with the VIX ticking down again, and across asset, we had a modest bid returning to the dollar. Meanwhile, US long-end yields, which had touched 5.15% on the 30-year, eased slightly into the close. In the US yesterday, Dow 0.0%, S&P 500 -0.04%, Nasdaq +0.3%, and Russell 2000 -0.1%. Looking to this morning, Asian equities are mostly higher, with a constructive tone prevailing in both Japan and China despite Japanese inflation data coming out slightly on the high side this morning. Futures markets in Europe and the US are little changed.

FI&FX: US yields initially rose yesterday but staged a reversal from late afternoon with the 10Y UST moving from a peak of 4.62% to 4.52% and the 30Y UST from a peak of 5.15% yesterday to 5.04%, trading sideways overnight. Today is light in terms of Tier 1 data so attention will be on the US Senate where several Republican members have demanded major changes to vote in favour of the tax bill. Despite the reversal in US yields, EURUSD has again moved above the 1.13-mark overnight after touching below 1.1260 yesterday. EURSEK edged somewhat higher yesterday and current level around 10.88 is not significantly misaligned with our short-term fair value. EURNOK remained stable overnight, in the lower part of the 11.50-11.54 interval seen since yesterday.

UK retail sales volumes jumped by 1.2% mom in April, significantly above the expected 0.3% mom gain. This marks the fourth consecutive monthly increase, with volumes now at their highest level since July 2022. Food store sales led the rise with a sharp 3.9% rebound, attributed largely to favorable weather conditions, offsetting declines seen in February and March.

On a broader basis, sales volumes grew 1.8% over the three months to April compared to the prior three-month period, the strongest gain since July 2021. Year-on-year, volumes rose 2.6%, the largest increase since March 2022.

Full UK retail sales release here.

Daily Pivots: (S1) 1.3840; (P) 1.3864; (R1) 1.3883; More...

Intraday bias in USD/CAD remains mildly on the downside at this point. Deeper decline should be seen for retesting 1.3479 low, or further to 1.3727 key fibonacci level. Nevertheless, break of 1.3888 minor resistance will turn bias back to the upside, to extend the corrective pattern from 1.3749 with another rising leg.

In the bigger picture, price actions from 1.4791 medium term top could either be a correction to rise from 1.2005 (2021 low), or trend reversal. In either case, further decline is expected as long as 1.4150 resistance turned support holds. Firm break of 38.2% retracement of 1.2005 (2021 low) to 1.4791 at 1.3727 will pave the way back to 61.8% retracement at 1.3069.

Dollar is once again under pressure in a relatively calm Asian session, as broader financial markets appear to have stabilized following the earlier bout of volatility driven by US deficit and debt concerns. Wall Street closed the day nearly flat with little direction, while US 10-year Treasury yield held above the 4.5% level after recent volatility. In Asia, risk appetite is returning modestly, with regional equities trading slightly higher.

The spotlight, however, has shifted back to the slow-moving trade negotiations between the US and several of its major partners. Japan is intensifying its engagement with the US on tariff talks, with top negotiator Ryosei Akazawa said to make a fourth visit to Washington on May 30, just one week after this weekend’s third round. Akazawa is seeking a direct meeting with US Treasury Secretary Scott Bessent, who won’t attend the upcoming session. Prime Minister Shigeru Ishiba also held a 45-minute phone call with US President Donald Trump at the latter's request, though Ishiba said Trump made no concessions on Japan’s demand for complete tariff elimination.

On the European front, the Financial Times reported that US Trade Representative Jamieson Greer plans to deliver a strong message to European Trade Commissioner Maros Sefcovic. Washington views Brussels' recent “explanatory note” as insufficient and continues to push for unilateral tariff reductions on US goods. Without meaningful concessions, the US is prepared to impose additional 20% reciprocal tariffs on EU exports.

Meanwhile, US-China communication channels remain open but unclear. A call between Chinese Vice Foreign Minister Ma Zhaoxu and US Deputy Secretary of State Christopher Landau yielded “substantial progress” in Beijing’s phrasing, though neither side confirmed whether tariff issues were addressed. Earlier, Vice Premier He Lifeng emphasized China’s willingness to open its markets further to US firms, a potentially strategic signal of compromise from Beijing amid slow progress elsewhere.

Currency markets continue to reflect a defensive stance. Yen remains the top performer for the week, followed by Euro and Swiss Franc. Dollar lags as the weakest currency, alongside Aussie and Kiwi. Sterling and the Canadian Dollar are holding in mid-pack.

Technically, WTI crude oil reversed quickly after a brief spike to 64.60 earlier in the week. Overall outlook is that price actions from 55.20 low are merely a corrective pattern. Firm break of 60.54 support will suggest that the consolidation has completed with three waves to 64.60. Retest of 55.20/55.64 support zone should then be seen next.

In Asia, at the time of writing, Nikkei is up 0.58%. Hong Kong HSI is up 0.77%. China Shanghai SSE is up 0.03%. Singapore Strait Times is down -0.20%. Japan 10-year JGB yield is down -0.007 at 1.555. Overnight, DOW fell -0.00%. S&P 500 fell -0.04%. NASDAQ rose 0.28%. 10-year yield fell -0.043 to 4.553.

Looking ahead, retail sales data from the UK and Canada are the main focuses of the day.

Sticky inflation persist as Japan’s core CPI climbs to 3.5%

Japan’s inflation pressures remained elevated in April, with the core CPI (excluding fresh food) rising from 3.2% yoy to 3.5% yoy, beating expectations of 3.4% yoy and marking the highest level since January 2023. This keeps core inflation above the BoJ’s 2% target for over three years.

Core-core CPI, which excludes both food and energy, also ticked up from 2.9% yoy to 3.0% yoy, suggesting broader underlying price momentum. Headline CPI held steady at 3.6% yoy.

There were notable upward drivers in inflation. Energy prices surged 9.3% yoy, up from March’s 6.6% yoy. Food prices (excluding fresh items) jumped 7.0% yoy, up from 6.2% yoy. In particular, rice prices soared by 98.4% yoy, a seventh consecutive record high, reflecting persistent supply shortages.

However, services inflation, closely watched by BoJ as a wage-sensitive component, edged slightly lower to 1.3% from 1.4%, tempering some of the hawkish signals.

NZ retail sales rise 0.8% qoq in Q1, but ex-auto growth modest

New Zealand retail sales volumes rose a stronger-than-expected 0.8% qoq in Q1 to NZD 25B, offering a positive surprise relative to market expectations of flat growth.

According to Stats NZ, 10 of the 15 major retail industries saw increased activity, led by a 3.1% jump in motor vehicle and parts retailing and a 3.7% rise in pharmaceutical and other store-based sales. Clothing and accessories also saw a healthy 3.2% gain.

Despite the upbeat headline, underlying momentum appears less robust when excluding the volatile auto sector. Core retail sales rose just 0.4% qoq, sharply missing expectations of a 1.5% qoq rise.

Economic indicators spokesperson Michelle Feyen noted that growth was "modest" and broad-based.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.3840; (P) 1.3864; (R1) 1.3883; More...

Intraday bias in USD/CAD remains mildly on the downside at this point. Deeper decline should be seen for retesting 1.3479 low, or further to 1.3727 key fibonacci level. Nevertheless, break of 1.3888 minor resistance will turn bias back to the upside, to extend the corrective pattern from 1.3749 with another rising leg.

In the bigger picture, price actions from 1.4791 medium term top could either be a correction to rise from 1.2005 (2021 low), or trend reversal. In either case, further decline is expected as long as 1.4150 resistance turned support holds. Firm break of 38.2% retracement of 1.2005 (2021 low) to 1.4791 at 1.3727 will pave the way back to 61.8% retracement at 1.3069.

Japan’s inflation pressures remained elevated in April, with the core CPI (excluding fresh food) rising from 3.2% yoy to 3.5% yoy, beating expectations of 3.4% yoy and marking the highest level since January 2023. This keeps core inflation above the BoJ’s 2% target for over three years.

Core-core CPI, which excludes both food and energy, also ticked up from 2.9% yoy to 3.0% yoy, suggesting broader underlying price momentum. Headline CPI held steady at 3.6% yoy.

There were notable upward drivers in inflation. Energy prices surged 9.3% yoy, up from March’s 6.6% yoy. Food prices (excluding fresh items) jumped 7.0% yoy, up from 6.2% yoy. In particular, rice prices soared by 98.4% yoy, a seventh consecutive record high, reflecting persistent supply shortages.

However, services inflation, closely watched by BoJ as a wage-sensitive component, edged slightly lower to 1.3% from 1.4%, tempering some of the hawkish signals.

New Zealand retail sales volumes rose a stronger-than-expected 0.8% qoq in Q1 to NZD 25B, offering a positive surprise relative to market expectations of flat growth.

According to Stats NZ, 10 of the 15 major retail industries saw increased activity, led by a 3.1% jump in motor vehicle and parts retailing and a 3.7% rise in pharmaceutical and other store-based sales. Clothing and accessories also saw a healthy 3.2% gain.

Despite the upbeat headline, underlying momentum appears less robust when excluding the volatile auto sector. Core retail sales rose just 0.4% qoq, sharply missing expectations of a 1.5% qoq rise.

Economic indicators spokesperson Michelle Feyen noted that growth was "modest" and broad-based.

Full NZ retail sales release here

The short-term Elliott Wave analysis for Ethereum (ETHUSD) indicates that a bullish cycle, initiated from the April 9, 2025 low, is unfolding as a five-wave impulse structure. Starting from this low, wave (1) concluded at $1,687.20, followed by a corrective pullback in wave (2) that ended at $1,473. Ethereum then resumed its upward trajectory in wave (3), reaching $2,738.90, as illustrated in the one-hour chart below. The subsequent wave (4) correction formed a double-three Elliott Wave structure.

In this correction, wave W declined to $2,478.80, followed by a recovery in wave X to $2,649. The corrective wave Y then completed wave (4) at $2,405.20. From this point, Ethereum has entered wave (5), advancing with an internal five-wave subdivision. Within wave (5), wave 1 peaked at $2,615.40 as a diagonal, with wave 2 retracing to $2,454. As long as Ethereum remains above the wave (4) low of $2,405.20, the outlook favors further gains. Additionally, while the pivot low at $1,753.60 holds, any pullbacks are likely to attract buyers in a 3, 7, or 11-swing pattern, supporting Ethereum’s potential to extend higher in the near term.

Ethereum (ETHUSD) 60-Minute Elliott Wave Technical Chart

ETHUSD Elliott Wave Technical Video

https://www.youtube.com/watch?v=L7S97-Ha15U

Key Highlights

• USD/JPY started a fresh decline below the 145.50 support.
• It cleared a key bearish trend line with resistance at 144.00 on the 4-hour chart.
• EUR/USD gained pace for a move above the 1.1280 level.
• GBP/USD is eyeing a key upside break above the 1.3450 resistance.

USD/JPY Technical Analysis

The US Dollar failed to continue higher above 148.65 against the Japanese Yen. USD/JPY declined below the 146.00 and 145.50 support levels.

Looking at the 4-hour chart, the pair settled below the 145.00 level, the 100 simple moving average (red, 4-hour), and the 200 simple moving average (green, 4-hour). The bears even pushed the pair below the 144.00 level. A low was formed at 142.80 and the pair is now consolidating losses.

There was a break above a key bearish trend line with resistance at 144.00 on the same chart. However, the bears are active near the 144.20 level and the 200 simple moving average (green, 4-hour).

On the upside, the pair could face resistance near the 144.20 level. The next key resistance sits near the 145.00 level and the 100 simple moving average (red, 4-hour). The first major resistance sits at 145.50. A close above the 145.50 level could set the pace for another increase.

In the stated case, the pair could even clear the 146.85 resistance. The next major stop for the bulls could be near the 147.20 resistance.

On the downside, immediate support sits near the 143.20 level. The next key support sits near 142.80. Any more losses could send the pair toward the 142.00 pivot level in the near term. The main support could be near 140.00.

Looking at EUR/USD, the pair managed to avoid more losses and started a recovery wave above the 1.1280 level.

Upcoming Economic Events:

• US New Home Sales for April 2025 (MoM) – Forecast -0.2% versus +7.4% previous.

Key insights from the week that was.

As widely expected, the RBA delivered a 25bp rate cut on Tuesday, bringing the cash rate to 3.85%. In contrast to the relatively hawkish cut of February, the latest move was framed as a “confident cut” by Governor Bullock – recognition that inflation has since been confirmed in the target band and, on an underlying basis, is “expected to be around the midpoint” through to June 2027.

Further justifying the shift in tone in the RBA’s post-meeting communications was the change in the balance of risks since February. On the domestic front, the Board note that “the pick-up [in household consumption] will be a little slower than was expected three months ago”, a trend evident in card activity data for some time; although, lingering labour market tightness continues to limit their concern over the activity outlook. Offshore, the growth outlook is abnormally uncertain, and the RBA recognises this could contribute “to a weaker outlook for growth, employment and inflation in Australia”.

As discussed by Chief Economist Luci Ellis in a video update midweek, Governor Bullock stated that the domestic factors – lower inflation and downside risks to consumption – were enough to warrant May’s rate cut, but that the global backdrop strengthened the case further. That the Board considered a 50bp rate cut emphasises policy makers are willing to deliver further relief if/when the data and risks warrant. If the labour market remains in robust health and global risks do not crystalise, a 25bp cut in August and November seems the most probable path for policy, bringing the cash rate to a broadly neutral 3.35% by year end.

Offshore, it was a quiet week on the data front.

China’s April data round was on the soft side. Retail sales growth rose to only 4.7%ytd against the market’s expectation of a 5.0%ytd gain. Growth by sub-component was variable but broad based – only petroleum and autos went backwards over the past year, and arguably only as a result of price declines. Fixed asset investment was also sub-par (4.0% ytd) and heavily concentrated amongst state-backed firms – private investment essentially unchanged from 2024 (0.2%ytd). Industrial production meanwhile showed continued strength (6.4% ytd), led by growth in semiconductors and electric vehicles.

Continuing the steady flow of policy support, Chinese authorities this week cut the 1-year and 5-year Loan Prime Rates by 10bps to 3.0% and 3.5% respectively having already lowered the Reserve Requirement Ratio early in the month. Authorities remain committed to their 5.0% growth target for 2025, but are likely to wait and see the outcomes of trade negotiations with the US before deciding the next steps for stimulus. The 90-day truce with the US will provide additional near-term support for GDP growth, keeping the growth target within reach without aggressive stimulus.

Further afield, April CPI readings showed a re-acceleration in inflation in the UK and Canada. Annual UK headline inflation rose to 3.5%yr in April, the first reading above 3.0% since March 2024. Energy prices were the main driver as subsidies roll off. Transport (3.3%yr) and recreation & culture (3.1% yr) also contributed meaningfully. Abstracting from food and energy, core inflation rose to 3.8%yr in April from 3.4%yr in March.

In Canada meanwhile, headline inflation eased to 1.7%yr, largely due to falling gasoline prices after the removal of the consumer carbon tax on April 1. However, trimmed mean core inflation rose from 2.8%yr to 3.1%yr, surprising market participants.

For these nations’ central banks, balancing upside inflation risks and growth concerns will remain a challenge. With limited fiscal capacity and monetary policy still restrictive, the Bank of England is likely to prioritise growth over inflation in the near term. In contrast, with greater fiscal flexibility and accommodative monetary policy, the Bank of Canada is expected to remain more focused on inflation expectations and risks. In its last statement, the BoC alluded to this noting “Monetary policy cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation.”

As a final note, overnight President Trump’s tax bill passed the House in a 215-214 vote after a week of negotiations. Passage through the Senate is likely to prove much more challenging and may also see changes to the bill that are unpalatable for the House. The administration still has 7 months to pass the bill through Congress before the temporary tax cuts currently in effect lapse. However, the debt ceiling, which the current bill also looks to address, will become a binding constraint again in August or September. More broadly, every week that slips past debating these issues is one less the Administration and the House majority has to craft and debate the deregulation initiatives financial markets expect from this Administration. If such measures are not forthcoming, an additional risk to medium-term US growth prospects may be priced by markets.

In today’s session, USD/JPY trades 0.03% higher, having fallen below the key level of 144.000 courtesy of a weaker dollar, increased safe-haven demand, and a narrowing interest rate differential.

USD/JPY Key Takeaways

• Primarily due to a fall in dollar value, USD/JPY currently trades at around ~144.058, representing two-week lows for the currency pair
• Renewed tariff fears, geopolitical tensions, and general uncertainty on the US economy are allowing the Japanese yen to strengthen against the U.S. dollar

USD/JPY: Yen benefits from renewed safe-haven flows

With global equities somewhat wobbly this week, markets have made a notable shift towards yen strength, renewing demand for typical safe-haven assets.

Compounded by a credit rating downgrade on U.S. sovereign debt last week, nervousness surrounding US trade policy and the latest developments on Trump’s ‘big, beautiful’ tax bill have done little to calm market nerves, with questions rising on how the current administration will address a ballooning US deficit and rising interest costs.

At least in part, the outcome has been a weaker dollar, with USD/JPY trading around ~1.09% lower in this week’s trading.

USD/JPY: Tide turning on Japanese bond yields

Snoynmous with ultra-low interest rates for the best part of 20 years, the Bank of Japan’s change in monetary policy, bookmarked by the appointment of Kazuo Ueda, represents a profound shift in perception for the Japanese economy, and by extension, the yen.

At least one outcome has been rising Japanese bond yields, with longer-dated treasuries gaining value massively under the new monetary policy outlook. Recently, the 30-year yield hit a 25-year high of ~3.2%, while the 40-year yield reached over ~3.5%, its highest point since inception in 2007.

With the differential between US and Japanese treasuries becoming increasingly narrow, the dollar is becoming less attractive to hold, especially when considering the stark difference in current predictions on future monetary policy of the Fed and the Bank of Japan, respectively.

Worsened by a continuing unwinding of the infamous yen carry trade, any further reduction in the yield differential between US and Japanese treasuries will likely encourage further USD/JPY downside.

USD/JPY: Increased US rate cut bets weaken dollar-yen exchange rate

With markets currently pricing in two Fed rate cuts and one Bank of Japan rate hike before year-end, the attractiveness of holding the dollar over the yen, at least by some metrics, is set to be reduced.

While the latest US data shows inflation cooling faster than first predicted, Japanese inflation remains stubborn, further cementing current monetary policy predictions.

Further commitment to this narrowing interest rate differential trajectory, whether in policy decisions or general commentary, will likely lead to further USD/JPY downside.

A chart showing the recent price action of USD/JPY. OANDA,TradingView, 22/05/2024

USD/JPY technical analysis

• Breaking a 6-day losing streak in today’s session, USD/JPY remains bearish at a technical level. Decisively breaking the key level of 145.000 earlier this week, bears will likely target previous lows at ~142.384 in price breaks down further