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Key Highlights

• USD/JPY is eyeing an upside break above the 156.40 resistance.
• A major bearish trend line is forming with resistance at 156.60 on the 4-hour chart.
• EUR/USD is gaining pace above the 1.0880 resistance.
• Gold prices recovered above the $2,350 resistance zone.

USD/JPY Technical Analysis

The US Dollar remained well- supported above the 154.50 level against the Japanese Yen. USD/JPY formed a base and started a fresh increase above 155.00.

Looking at the 4-hour chart, the pair was able to clear the 155.80 and 156.00 resistance levels. However, the bears are currently active near the 100 simple moving average (red, 4-hour). The pair is now consolidating near the 200 simple moving average (green, 4-hour).

Immediate support is near the 155.20 level. The next major support is near the 155.00 zone. A downside break and close below the 155.00 support zone could open the doors for a larger decline. In the stated case, the pair could decline toward the 154.20 level.

On the upside, immediate resistance is near the 155.20 zone. The first major resistance is near the 155.40 level. There is also a major bearish trend line forming with resistance at 156.60 on the same chart.

A clear move above the 155.60 resistance might send it toward the 157.20 level. Any more gains might call for a move toward the 158.00 level in the near term.

Looking at EUR/USD, the pair is showing bullish signs, and the bulls might soon aim for a move toward the 1.0950 level in the near term.

Economic Releases

• US nonfarm payrolls for May 2024 – Forecast 185K, versus 175K previous.
• US Unemployment Rate for May 2024 - Forecast 3.9%, versus 3.9% previous.

As the week draws to a close, market attention is squarely on the upcoming US non-farm payroll employment report. The sluggish Dollar is in need of a catalyst from the jobs report to spark a meaningful and sustainable breakout from its recent range against major currencies.

Market expectations are set for NFP to show 180k growth o May, with the unemployment rate steady at 3.9%. Average hourly earnings are expected to increase by 0.3% mom.

Recent related economic data offers mixed signals. ISM Services employment index rose from 45.9 to 47.1, but still indicating contraction. Conversely, ISM Manufacturing employment index turned to expansion, rising from 48.6 to 51.1. ADP private employment showed a growth of only 152k. Additionally, the four-week moving average of initial jobless claims rose from 210k to 222k, suggesting some softening in the labor market.

While there may be some upside surprises in headline job growth, it is unlikely to significantly exceed expectations. The critical variable remains wage growth, which is essential for gauging underlying domestic inflation pressures, and an important factor influencing the timing of Fed's first rate cut.

Dollar index dipped to 103.99 this week but struggled to find decisive selling momentum. Further decline is still in favor as long as 105.18 resistance holds. Fall from 106.51 is seen as developing into the third leg of the pattern from 107.34. Any downside acceleration could push DXY through 102.35 support towards 100.61.

However, strong bounce from current level followed by break of 105.18 will revive near term bullishness. Rise from 100.61 would then be ready to resume through 106.51 before reversing.

Analysts are predicting a softer May Non-Farm Payroll (NFP) report, with expectations set at 151,000 new jobs, down from 175,000 in the previous month. This conservative forecast follows a recent trend of underestimating the US job market's strength, with the previous miss restoring analysts' confidence in issuing more cautious projections. If the actual NFP figures surpass this modest expectation, it could positively impact the markets. Generally, an NFP above 180,000 is seen as bullish, so meeting the forecast would indicate a slowing but still growing labor market. While the pace of job creation may be decelerating, the expected figures are not indicative of a significant downturn.

AUDUSD – H2 Timeframe

AUDUSD on the 2-hour timeframe is gradually sliding towards an area of demand that aligns with the demand zone from a previous low that raided liquidity. The previous swing high has also been broken and exceeded, creating a break of structure. The trendline support is expected to complement the bullish pressure, and serving as a confluence to the bullish sentiment.

Analyst’s Expectations:

• Direction: Bullish
• Target: 0.66840
• Invalidation: 0.65848

EURUSD – H2 Timeframe

On the 2-hour timeframe chart of EURUSD, we can see a clear sweep of the previous low, followed by the bullish break of structure (which I believe you should be familiar with now as a QMR pattern). The 88% of the Fibonacci retracement tool, the drop-base-rally demand zone, and the trendline support are my confluences in favour of a bullish sentiment.

Analyst’s Expectations:

• Direction: Bullish
• Target: 1.09158
• Invalidation: 1.08162

GBPUSD – H2 Timeframe

Quite similar to what we had on EURUSD, we can see GBPUSD on the 2-hour timeframe also printing a clear QMR pattern, however, this time with an added confirmation from the demand zone that birthed the reaction. Following the break above the previous swing high, I expect to see price retrace into the 88% of the Fibonacci, and thereafter pump higher. The trendline support can be considered the final piece of the puzzle that puts the bullish sentiment altogether.

Analyst’s Expectations:

• Direction: Bullish
• Target: 1.28093
• Invalidation: 1.26786

CONCLUSION

The trading of CFDs comes at a risk. Thus, to succeed, you have to manage risks properly. To avoid costly mistakes while you look to trade these opportunities, be sure to do your due diligence and manage your risk appropriately.

• USDCAD reversed from resistance level 1.3740
• Likely to fall to support level 1.3600

USDCAD currency pair recently reversed down from the key resistance level 1.3740 (upper boundary of the narrow sideways price range inside which the pair has been moving from the start of May).

The resistance level 1.3740 was strengthened by the upper daily Bollinger Band – which created the daily Shooting Star.

Given the strength of the resistance level 1.3740, USDCAD currency pair be expected to fall further to the next support level 1.3600, lower boundary of this sideways price range.

• Brent Crude oil reversed from support level 76.95
• Likely to rise to resistance level 80.55

Brent Crude oil recently reversed up from the key support level 76.95 (which has been repeatedly reversing the price from the start of this year).

The support level 76.95 was strengthened by the lower daily Bollinger Band and by the support trendline of the daily down channel from April.

Given the strength of the support level 76.95 and the oversold daily Stochastic, Brent Crude oil be expected to rise further to the next resistance level 80.55, former low of wave a from the end of May.

• US dollar index pauses downleg near important support trendline
• Technical signals are uncertain; sellers wait below 104

The US dollar index is trading at an attractive level around the protective trendline that joins the lows from December 2023 and March 2024 near 104.00. The index could enter a new bullish phase, though the technical outlook cannot guarantee an immediate rebound.

Although the stochastic oscillator is near its 20 oversold level, the RSI keeps fluctuating below its 50 neutral mark and the MACD remains negatively charged below its red signal line. The price itself has yet to climb above its simple moving averages (SMAs,) adding to the negative risks.

A step below the 104.00 round level is expected to trigger the next bearish action, squeezing the price towards the 103.60 constraining territory. A continuation lower could stabilize around May’s support line at 103.18, while the 23.6% Fibonacci retracement of the September 2022-July 2023 downtrend could tackle steeper declines along with the long-term descending line drawn from September 2022 at 102.70.

Alternatively, the bulls might attempt to climb above the restrictive 20-day SMA at 104.54. The tentative descending trendline from May’s peak could limit bullish actions ahead of the 38.2% Fibonacci mark of 105.12. If the rally continues, the spotlight will fall on the 105.50 area.

Overall, despite the discouraging technical signals, the US dollar index might have another opportunity to rotate higher if the 104.00 floor holds.

Today, the ECB decided to cut its three main policy rates by 25bp, which leaves the key policy rate at 3.75%. This cut follows a 9-month period with unchanged policy rates on the back of the rapid hiking cycle since mid-2022. The rate cut was widely expected and thus focus was on the communication.

The updated staff projections showed inflation to hit 2% one quarter later (Q4 25) than at the time of the March meeting.

With the rate cut fully anticipated, some initial volatility was quickly replaced with markets trading in a tight range, with no commitment on the timing of the next policy rate cut, although the meeting with staff projections (September, December, March, and June) seems preferable with a lot more information provided.

We continue to look for the next policy rate cut in December in our baseline scenario, although we do not rule out a potential rate cut in September.

Acknowledging the progress – not confirming the dialling back phase

The ECB’s decision to cut rates was widely expected by market participants and did not come as a surprise. The decision itself was agreed by most GC members, except one member (Reuters sources reported this to be Holzmann). The staff projections showed an upward revision of growth and inflation this year with a direct reference to inflation still above 2% next year. Coupled with guidance of “keeping” the policy rates restrictive to bring inflation to the target, we maintain our call for the next policy rate cut to occur in December, contrary to market pricing and consensus among analysts who expect a September rate cut.

As discussed in COTW: staying restrictive - not yet entering the dialling back phase, we did not expect Lagarde to confirm that they have entered the dialling back phase, which in our reading would be a commitment to a string of policy rate cuts. When asked about it, she did ‘volunteer’ that we have entered the dialling back phase, although she pointed to a “strong likelihood” of this being the dialling back phase, but she would not confirm this. To us this means that the ECB does not want to pre-commit to a specific meeting or policy rate path. The ECB kept its meeting-by-meeting and data-dependent approach for its threetiered reaction function (inflation outlook, underlying inflation, and strength of the monetary policy). Markets are now pricing an additional 36bp of rate cuts by year-end (on top of today’s rate cut, which takes effect on Wednesday next week).

Staff projections show higher inflation and growth

The ECB expects the economy to continue its recovery as the manufacturing sector stabilises, exports pick up, and monetary policy will exert less of a drag on activity. The updated staff projections show higher inflation both this year and next year due to the persistent pressure from domestic inflation and elevated wage growth. HICP is now expected to average 2.5% in 2024 and 2.2% in 2025, which is 0.2pp. higher than the March projections in both years. Likewise, expectations for core inflation were revised up to 2.8% in 2024 and 2.2% next year from 2.6% and 2.1%, respectively. Lagarde noted that inflation will fluctuate around the current levels for the rest of the year before settling towards the 2% target next year.

The sticky expected inflation outlook is largely driven by the elevated wage growth. The ECB staff expect wage growth of 4.8% this year (previously 4.5%), 3.5% in 2025 (previously 3.6%), and 3.2% in 2026 (previously 3.0%). Lagarde noted that wages will remain elevated, but this is largely due to catching up with previous inflation, while the forward-looking wage tracker shows declining wage pressures. Rising economic activity also adds to inflationary pressures. The GDP growth expectation for 2024 was increased to 0.9% y/y from 0.6%, reflecting stronger-than-expected growth in Q1, as well as marginally higher future growth expectations. The ECB now sees balanced risks to the growth outlook in the short-term, which are changed from downside in March, while all expectations for 2026 were unchanged (see chart).

Summary

• The European Central Bank (ECB) today joined the growing group of advanced economy central banks that have begun their monetary easing cycles, lowering its Deposit Rate by 25 bps to 3.75%.
• ECB policymakers cited the past drop of inflation and the improving inflation outlook as key factors behind their decision to lower interest rates. There were some elements of caution, however, as the ECB said domestic price pressures remain strong as wage growth is elevated, and revised up its near-term inflation forecasts.
• We view the ECB's statement as consistent with further rate cuts, albeit at a measured pace. The ECB said it will continue to follow a “data-dependent and meeting-by-meeting approach” in determining its interest rate decisions.
• Over the rest of 2024, our base case is for the ECB to pause in July before cutting rates again in September, October and December. However, we suspect ECB policymakers would prefer to see a return to an overall downward trend in wage growth and domestic inflation to be fully comfortable in lowering interest rates further, and thus view the risks as tilted toward lesser easing.

European Central Bank Kicks Off Its Rate Cut Cycle

The European Central Bank (ECB) today joined the growing group of advanced economy central banks (including the Swiss National Bank, Riksbank and Bank of Canada) that have begun their respective monetary policy easing cycles. The ECB lowered its benchmark interest rates by 25 bps, bringing its Deposit Rate to 3.75%, and offered several perspectives in support of its decision to ease monetary policy, saying:

• Inflation has fallen more than 2.5 percentage points since September 2023 (when the policy rate reached its peak), and the inflation outlook has improved markedly.
• Underlying inflation has also eased, and inflation expectations have declined at all horizons.
• Monetary policy has kept financing conditions restrictive. By dampening demand and keeping inflation expectations well anchored, this has made a major contribution to bringing inflation back down.

While clearly acknowledging the improving inflation situation, the ECB's announcement was balanced by some cautious and hawkish elements, saying domestic price pressures remain strong as wage growth is elevated, and that inflation is likely to stay above target well into next year. Indeed, near-term core inflation projections (CPI excluding food and energy) have been revised higher to 2.8% for 2024 (previously 2.6%) and to 2.2% for 2025 (previously 2.1%). The core inflation forecast for 2026 was unchanged at 2.0%. The ECB also raised its GDP growth forecast for 2024 to 0.9%, from 0.6% previously.

In terms of policy guidance, we view the ECB's statement as consistent with further rate cuts, albeit at a measured pace. The ECB said it will “keep policy rates sufficiently restrictive for as long as necessary to achieve” a timely return to the 2% inflation target. Use of “sufficiently” restrictive does, in our view, allow for some further reduction in interest rates given their currently elevated levels. The ECB added however that it “will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction.” Finally, the ECB said it is not committing to a particular rate path.

Today's interest rate reduction was clearly signaled ahead of time by ECB policymakers and widely forecast, including by ourselves. Going forward, we have also forecast the ECB will hold rates steady in July before delivering another 25 bps rate cut in September. By the fourth quarter we expect Eurozone wage growth and underlying inflation may have slowed sufficiently for the ECB to deliver rate cuts at its October and December meetings, especially if the Federal Reserve begins lowering interest rates as well. If realized, that would see the Deposit rate lowered by a cumulative 100 bps this year to end 2024 at 3.00%.

We view today's announcement as very much consistent with the ECB keeping interest rates unchanged at its July meeting, while the optionality embodied in today's statement would allow for a resumption of rate cuts in September. That said, we view the risks around our ECB easing outlook for this year as tilted toward a lesser 75 bps of rate cuts, compared to our base case for a cumulative 100 bps of rate reduction. ECB policymakers are likely wary of the modest uptick in Eurozone wage growth reported for Q1, and the uptick of core inflation and particularly services inflation in May. Over the next few months ahead of the ECB's 12 September monetary policy announcement we will get CPI inflation data for June, July and August, and both the Q2 Indicator of Negotiated Wages along with Q2 compensation per employee (the most comprehensive wage measure) will be available in time for the September meeting. We suspect ECB policymakers would prefer to see a return to an overall downward trend in wage growth and domestic inflation to be fully comfortable in lowering interest rates further. Against that backdrop, a further interruption to the disinflation progress could put one of our expected September or October rate cuts at risk.

Markets

After the Swiss National Bank (March), the Swedish Riksbank (May) and the Bank of Canada (yesterday), the ECB today is the next in line among central banks from developed economies to reduce policy restriction. It cut its policy rates by 25bps, bringing the deposit rate from 4.0% to 3.75%. ECB assesses that the dynamics of underlying inflation and the strength of monetary policy transmission after nine months of holding rates steady, justifies to moderate the degree of monetary policy restriction. However, despite the progress inflation, the ECB admits that domestic price pressures remain strong as wage growth is elevated with inflation likely holding above target well into next year. Staff projections even were upwardly revised both headline (2024 2.5% from 2.3%; 2025 2.2% from 2.0%) and core (2024 2.8% from 2.6%, 2025 2.2% from 2.1%) inflation. Forecasts were left unchanged for 2026 (1.9 % headline; 2.0% core). Growth is expected to pick up to 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026. Looking forward, the ECB commits to keep rates sufficiently restrictive as necessary to bring inflation to 2.0% in a timely manner. In a data-dependent approach, the bank doesn’t commit to any particular rate path. The ECB continues to run-off of its APP portfolio and from H2 2024 will also reduce the PEPP portfolio by € 7.5 bln p/month as earlier announced. From a communication point of view, it wasn’t that easy to explain less policy restriction as inflation is expected to stay longer above target than initially expected and as wage growth remains elevated. This complicates the pace/timing of further steps. EMU/German yields rebounded up to 5 bps after the release of the policy statement and this rise was maintained during Lagarde’s press conference as the ECB Chair indicated that further easing needs the backing of data and that the ECB is not in in a phase of (automatically) dialing back. German yields currently rise between 6.0 bps (5-y) and 4.0 bps (30-y). Markets still see a 90% change of next step in September and about 70% of two additional cuts by the end of the year. US Treasuries outperform Bunts with yields adding about 1-2 bps across the curve. Jobless claims printed higher than expected at 229k and Q1 unit labour costs was substantially downwardly (4.0% from 4.7%) wiht markets looking forward to tomorrow’s US payrolls. The ECB decision had little impact on EMU equities. EuroStoxx 50 still holds a 0.65% again. EUR/USD dropped to the 1.0865 area going into the ECB decision, but again trades near 1.088 as the timing of further cuts stays (highly) conditional. The rebound of the euro also helped EUR/GBP to create some breathing space from the key 0.8490/8500 support area (currently 0.8520).

News & Views

British CFO’s in the Bank of England’s Decision Maker Panel (DMP) for May expect output prices to rise 3.9% (three-month smoothed average) in the year ahead. That’s slightly down from the 4% in the DMP’s previous edition. Consumer price inflation for the upcoming year is seen rising 3% in the three months to May, easing further from the 3.1% in April. The gauge for three-year ahead CPI dropped further from 2.7% to 2.6% and should be welcomed by the Bank of England as it suggests the risk of unanchored inflation expectations so far does not materialize. Firms reported 1.5% employment growth in May, slower than the 1.7% in April as well as the slowest pace since November 2021. Employment growth for the year ahead is anticipated at 1.3%, the same as in April. Expected year-ahead wage growth fell by 0.3 ppts to 4.5% on a three-month moving-average basis in May.

Sticking to the UK, the central bank said it allotted more than £19bn in its weekly repo operation on Thursday. That’s up from £17.2bn in the week before and the seventh straight week of record demand. The uptick is at least partially the result of the BoE’s quantitative tightening programme through which it reduces excess liquidity in the market. Contrasting with the ECB and the Fed, the BoE sets an annual QT target in September for the year ahead and effectively sells gilts if bond expiries alone are not enough to hit that mark. The Bank of England is moving the fastest of all three, currently holding £700bn of bonds compared to a peak of <£900bn in early 2022. While the huge uptake could be viewed as signs of emerging liquidity scarcity, other metrics (e.g. minimal market repo rate premium over the Bank Rate) offer no reason to worry just yet. Moreover, the shift is exactly what the central bank wants. Its governor Bailey end May revealed the aim to provide liquidity the traditional way through repo’s instead of (unconventional) QE in order to avoid interest rate risk.

Graphs

German 10-y yield holding above 2024 uptrend line as any further ECB cuts remain conditional on additional data confirmation.

EUR/USD holding near recent top, but no real test of 1.0916 resistance.

EuroStoxx 50 again nearing cycle top as markets ponder chances of (global) policy easing.

Brent oil ($ p/b) struggles even as OPEC+ sees reaction to its June 02 decision as not justified.