Fed set to remain on hold

The FOMC meeting is clearly the key FX event of the day. The market is not pricing a rate hike, the likelihood of which is estimated at below 15%. Markets already feel more confident for a rate hike at the next meeting in June and today’s meeting is unlikely to change anything. The Fed should likely show its optimism in its statements. The inflation target of 2% was beaten in February before falling again below this level.

We expect a clearer assessment of the US economic situation after the recent lacklustre data (GDP and personal consumption in particular). The non-farm payroll employment for March disappointed (98k new jobs) after strong data in February (220k). In March, industrial production also saw its biggest decline for the last two years. We remain suspicious on Fed rate tightening as we believe that the state of the US economy is overestimated. For example, the number of bankruptcies in the US in 2017 is already higher than all bankruptcies in 2016.

On top of that, the second-hand car market is collapsing as the losses on auto credit subprime have reached their highest level. Last but not least, 60% of Americans - according to a CNN poll - do not have a $500 emergency fund. This is why we maintain our bullish position on the EURUSD, despite political uncertainties in Europe.

NZD holds ground amid strong job report

The USD extended gains against most of its peers ahead of today’s FOMC meeting and ADP job report. The New Zealand dollar was among the few that was able to resist against the increasing demand for the greenback. NZD/USD rose to 0.6969 this morning amid a solid job report. The unemployment rate fell to 4.9% in the March quarter, widely beating market expectation of 5.1% and previous reading of 5.2%. The surprise increase in the participation (70.6% versus 70.5%), together with a solid growth in employment (+5.7%y/y versus 5.3% expected).

However, the tightening of the job market failed translate into wage growth. Indeed, average hourly earnings rose only 0.3%q/q, while market participants were expecting a reading of 0.7%. This weak reading should keep the RBNZ on the back foot at its next meeting on May 11th as it gives Governor Wheeler an excuse to stay on the dovish side for another round. The Aussie was heavily sold against the Kiwi this morning with AUD/NZD sliding 0.50% to 1.0795. The closest support can be found at 1.0755 (Fibonacci 38.2% on January-March rally). If broken, the door is wide open towards 1.07, then 1.06.

US oil price bounced from fresh five-week low at 47.35 posted on Tuesday and returned above $48.00 handle. The rally was triggered by release of API report that showed stronger than expected drawdown in Crude oil stocks that by 4.2 million barrels in the week ended Apr 28 compared to 2.3 million barrels draw forecasted.

Focus turns on today's EIA crude inventories report which shows forecast for 2.3 million barrels draw in the week ended Apr 28, compared to the previous week's draw of 3.6 million barrels.

Oil prices remain under pressure on global supply that remains near record high and offsets impact of OPEC production cut that aims to support oil price.

US oil remains in step descend from $53.74 (12 Apr high) and approaches key med-term supports at $47.07 (higher base / 2017 lows) and $46.44 (top of thick weekly cloud).

Technical studies are firmly bearish (10/200 SMA Death cross is forming at $49.12) that signals additional pressure.

However, hesitation ahead of key $47.07 support could be anticipated and upticks may extend on better- than-expected crude stocks release today.

Thick daily cloud (spanned between $49.70 and $51.03) weighs heavily and cloud base is expected to limit extended upticks.

Alternative scenario requires firm break above psychological $50.00 barrier to ease existing downside pressure.

Res: 48.21, 48.53, 49.26, 49.70
Sup: 47.80, 47.35, 47.07, 46.44

The Aussie was sharply lower on Wednesday and eased below 0.7500 handle after recovery rally from 0.7438 failed to clear key 200SMA barrier.

Fresh weakness through hourly cloud (0.7520/00) so far probed below 0.7482 (Fibo 61.8% of 0.7438/0.7554 upleg), signaling further weakness.

Close below daily Tenkan-sen (0.7510) will be seen as bearish signal, with close below 0.7482 needed to confirm reversal.

Technical studies on lower timeframes turned into bearish mode and maintain downside risk.

Cluster of resistances that lies within 0.7500/0.7524 zone is should keep the upside limited, with converged 20/100SMA's at 0.7524 (attempting to form bear-cross) expected to cap upticks.

Res: 0.7500, 0.7510, 0.7524, 0.7549
Sup: 0.7480, 0.7465, 0.7438, 0.7400

'While traders see little chance of a Fed interest rate hike this week, an increase is seen as much more likely in June.' – Alexandria Arnold and Dennis Pettit, Bloomberg

Pair's Outlook

On Wednesday morning the common European currency had slightly retreated against the US Dollar, as the currency exchange rate continued to trade above the 1.09 mark. The reason for the almost flat trading was the fact that the markets are expecting fundamental data in the form of the EU GDP and the US Federal Funds Rate later in the day. Meanwhile, from a technical perspective the currency pair remains below a strong resistance cluster, which surrounds the upper trend line of a long term ascending channel.

Traders' Sentiment

SWFX traders continue to short the Euro, as 61% of open positions are bearish. Meanwhile, 52% of trader set up orders are to sell.

EUR/JPY - 122.48

Recent wave: wave v of (C) ended at 94.12 and major correction in wave A has ended at 149.79

Trend: Near term up

Original strategy:

Buy at 120.65, Target: 122.85, Stop: 120.05

Position: -
Target: -
Stop: -

New strategy :

Buy at 120.65, Target: 122.85, Stop: 120.05

Position: -
Target:  -
Stop:-

Although the single currency has maintained a firm undertone after recent rally above previous resistance at 122.01 and near term upside bias remains for further gain to 122.55-60, loss of upward momentum should prevent sharp move beyond previous resistance at 122.89 (b leg top) and price should falter below 123.50-60, risk from there has increased for a retreat to take place later this week.

In view of this, would not chase this rise here and would be prudent to buy euro on subsequent pullback as 120.60-65 should limit downside. Below 120.25-30 would defer and suggest top is possibly formed, risk weakness to 120.00, then 119.45-50 but reckon support at 118.92 would contain downside and euro may stage another rally from there. 

Our latest preferred count is that wave (ii) is ABC-X-ABC which ended at 123.33 and wave (iii) is unfolding with wave iii ended at 100.77, followed by wave iv at 111.57 and wave v as well as the wave (iii) has ended at 97.04, followed by wave (iv) at 111.43 and wave (v) has ended at 94.12 which is also the end of the larger degree v, this also implied the major wave (C) has also ended there, hence major correction has commenced from there with (A) leg unfolding in its lower degree wave c which has possibly ended at 145.69. Under this count, A-B-C wave (B) has commenced with A leg ended at 136.23, wave B at 143.79 and wave C has possibly ended at 149.79.

Our larger degree count is that the decline from 139.26 is wave (C) and is sub-divided into a diagonal triangle i-ii-iii-iv-v with wave i - 105.44, wave ii- 123.33, wave iii - 97.03, wave iv - 111.43, followed by the final wave v as well as the end of wave (C) at 94.12, this also mark the bottom of larger degree wave B. Under this count, major rise in wave C has commenced as an impulsive wave with minor wave III ended at 145.69, wave V is still in progress for further gain to 150.00. Having said that, this so-called wave V could well be the first leg of larger degree 5-waver wave C and this wave C should bring at least a retest of wave A top at 169.97 (July 2008).

AUD/USD – 0.7486

Recent wave: Wave 5 ended at 1.1081 and major correction has commenced for fall to 0.7000 and then towards 0.6500-10

Trend: Near term down

New strategy :

Stand aside

Position: -
Target:  -
Stop:-

Although aussie rebounded to 0.7556 yesterday, lack of follow through buying and current retreat suggest further consolidation would be seen, however, reckon downside would be limited to 0.7468 and last week’s low at 0.7440 should remain intact, bring another rebound later. Only a break of this support would shift risk back to downside and signal recent decline has resumed and extend weakness to 0.7390-00 first.

On the upside, whilst recovery to 0.7520-25 cannot be ruled out, break of said resistance at 0.7556 is needed to revive bullishness and add credence to our view that low has possibly been formed at 0.7440, then further gain to resistance at 0.7592, a sustained breach above this level would provide confirmation, bring further subsequent rise to 0.7611.

On the 4-hour chart, the move from 0.8066 is the wave 5 with i: 0.8860, ii: 0.8315, wave iii is an extended move ended at 1.0183, iv: 0.9706 and wave v has ended at 1.1081 (also the top of entire wave 5). The subsequent selloff is the major correction which is unfolding as ABC-X-ABC and 2nd A leg has ended at 0.8848, followed by a-b-c wave B which ended at 0.9758, hence, 2nd C wave is now in progress and indicated downside target at 0.7000 and 0.6950 had been met, so further fall to 0.6710-20 cannot be ruled out.

'We expect GBPUSD to drop to 1.23 in 3M on a combination of 1) general USD strength and 2) a rocky start to the UK/EU negotiations for an exit agreement.' – BMO Capital Markets (based on PoundSterlingLive)

Pair's Outlook

The British Pound surprised with its performance on Tuesday, being that it outperformed the US Dollar and reclaimed the 1.29 level. Technical indicators today keep giving positive signals, suggesting the Sterling is to edge higher against the Buck for another day. Such an outcome is possible, but in this case gains are likely to be capped around 1.3020, with the broadening rising wedge's upper border and the weekly R1 representing resistance there. On the other hand, upbeat US fundamentals could boost the Greenback, which would cause the Cable to fall even under the second support, namely the weekly S1.

Traders' Sentiment

There are 52% of traders holding short positions today (previously 51%), whereas 67% of all pending orders are to acquire the Pound.

'Concerns about geopolitical risks such as North Korea had weighed on the dollar against the yen recently... But the focus is shifting to whether the (strength) of US economic fundamentals is for real. There is more data coming up including the jobs data, so those need to be watched closely.' – Sumitomo Mitsui Banking Corporation (based on The Business Times)

Pair's Outlook

Despite having appreciated against the Japanese Yen yesterday, the US Dollar still retreated from its intraday high, as it lacked momentum to pierce the second resistance level. Nevertheless, the USD/JPY pair has the opportunity to pierce this supply level today, with the 112.95 level expected to be the intraday high, as it marks the descending channel's upper border. The given trend-line is also reinforced by the upper Bollinger band and the monthly R1, while technical indicators are now giving bullish signals in the daily timeframe. The base case scenario, however, is a close around 112.60.

Traders' Sentiment

Market sentiment is relatively neutral, as 53% of all open positions are short and the remaining 47% are long. At the same time, the number of orders to buy the Buck plunged from 69 to 49%.

'The Fed meeting is the next likely catalyst for gold.' – Jordan Eliseo, ABC Bullion (based on Reuters)

Pair's Outlook

The yellow metal's price is fluctuating, as forecasted. The metal hit the support cluster below it near the 1,252 level and made a slight rebound. On Wednesday morning the metal traded above the support cluster, which is made up of the 55 and 200-day SMAs, the weekly S2, the lower trend line of a medium scale descending channel and the 50.00% Fibonacci retracement level. All of these levels of significance make the 1,250 mark a strong foundation for the bullion. Due to that it is even unlikely that the will pass this support soon.

Traders' Sentiment

SWFX market sentiment remains unchanged, as 52% of open positions are short, and 67% of trader set up orders are to buy.

'This is better news for the UK economy, after a very gloomy end to last week. However, we hesitate to get too excited. (Even) if the manufacturing and export upswing seen in H2 2016 does have further to run, these are not the key drivers for the UK economy more widely.' - Elizabeth Martins, HSBC

British manufacturing activity hit its best since 2014 last month, supported by a solid global economic recovery and the weak Pound. Markit/CIPS reported on Tuesday that its Purchasing Managers' Index for the British manufacturing sector came in at 57.3 in April, following the preceding month's 54.2 and surpassing analysts' expectations for a decline to 54.0. Tuesday's data is set to provide an additional support to the current British Prime Minister Theresa May ahead of the June 8 National Election. According to the data, British manufacturers enjoyed the recent positive performance of the global economy and the cheaper Sterling, which boosted export growth. However, back in March, the Bank of England Deputy Governor Ben Broadbent said that a rebound in the performance of the UK manufacturing sector might vanish soon and the future performance of the sector would solely depend on the outcome of Brexit negotiations. Moreover, some analysts claim that manufacturers will stop benefiting from the weak currency soon. Nevertheless, Tuesday's data is set to please the Central bank, which is due to meet next week. After the release, the British Pound hit its seven-month high against the US Dollar but failed to sustain its gains.