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Key Highlights

• GBP/USD started a downside correction from the 1.2600 zone.
• It traded below a key bullish trend line with support near 1.2550 on the 4-hour chart.
• EUR/USD is still holding the 1.0710 support zone.
• The US Consumer Price Index could decline from 4.9% to 4.1% in May 2023 (YoY).

GBP/USD Technical Analysis

The British Pound gained pace for a move above 1.2500 against the US Dollar. GBP/USD even broke the 1.2550 resistance before the bears appeared.

Looking at the 4-hour chart, the pair tested the 1.2600 zone. It recently started a downside correction below the 1.2550 level. The pair traded below a key bullish trend line with support near 1.2550.

It even traded below the 38.2% Fib retracement level of the upward move from the 1.2427 swing low to the 1.2599 high. Immediate support is near the 1.2500 level and the 100 simple moving average (red, 4 hours).

The 61.8% Fib retracement level of the upward move from the 1.2427 swing low to the 1.2599 high is also near 1.2500. The next major support is near the 1.2460 level and the 200 simple moving average (green, 4 hours).

If there is a downside break below the 1.2460 support, the pair could decline toward the 1.2400 support. Any more losses might send EUR/USD toward 1.2320.

If there is a fresh increase, the pair could face resistance near 1.2550. The first major resistance is near the 1.2600 level. If there is a move above the 1.2600 resistance, the pair could drift toward 1.2740.

Looking at EUR/USD, the pair is attempting a recovery wave but the pair could face resistance near the 1.0850 zone.

Economic Releases

• UK Claimant Count Change for May 2023 – Forecast -9.6K, versus 46.7K previous.
• UK ILO Unemployment Rate for April 2023 (3M) – Forecast 4.0%, versus 3.9% previous.
• US Consumer Price Index for May 2023 (MoM) – Forecast +0.2%, versus +0.4% previous.
• US Consumer Price Index for May 2023 (YoY) – Forecast +4.1%, versus +4.9% previous.
• US Consumer Price Index Ex Food & Energy for May 2023 (YoY) – Forecast +5.3%, versus +5.5% previous.

 A truly devastating jobs report for BoE policymakers

It's not often that you would refer to a jobs report that delivers a drop in unemployment, record employment and a rise in wages as horrible, but that is exactly what the Bank of England will be feeling today.

The central bank has raised interest rates for the last 12 meetings in a row and yet the economy is showing the kind of resilience that few would have anticipated. This creates an enormous headache for the MPC as it desperately wants to avoid crashing the economy in order to weaken the labour market and get wages and inflation down to more sustainable levels but that's looking increasingly possible at these levels.

A rate hike at the next meeting is now unavoidable – assuming it wasn't already – but a 50 basis point increase could suggest the BoE is throwing in the towel in trying to deliver 2% inflation and a soft landing for the economy. And the withdrawal of any votes for a pause will be equally important as the scale of the hike – we've seen two for four consecutive meetings – ​ and would be another strong sign that the BoE is very concerned.

Is a Fed pause as locked in as markets think?

What the BoE would give to now be in the Fed's position. Inflation is falling and has been for almost a year, while core inflation is also on the decline even if it stands above 5% which is still too high. But progress is clear and there is plenty of optimism that the trend will continue, enabling the Fed to perhaps not just pause tomorrow – which markets are heavily pricing in – but maybe even bring an end to the tightening cycle altogether.

Not that they'll be ready to acknowledge that yet but a pause will certainly be a step in the right direction. The BoE will be wondering where they've gone so wrong. Having been one of the first out of the traps, they may be the last to cross the finish line.

• S&P 500 broke key resistance level 4310.00
• Likely to rise to resistance level 4450.00

S&P 500 index recently broke sharply above the key resistance level 4310.00 (former multi-month high from August).

The breakout of the resistance level 4310.00 accelerated the active minor impulse wave 3 of the intermediate impulse wave (C) from the start of March.

Given the strong multi-month uptrend, S&P 500 index can be expected to rise further toward the next resistance level 4450.00 (target for the completion of the active impulse wave 3).

• CHFJPY reversed from support level 153.45
• Likely to rise to resistance level 155.400

CHFJPY currency pair recently reversed up from the pivotal support level 153.45 (former strong resistance from the start of May).

The support level 153.45 was strengthened by the 20-day moving average and by the 38.2% Fibonacci correction of the previous sharp upward impulse wave (i).

Given the clear daily uptrend, CHFJPY can be expected to rise further toward the next resistance level 155.400 (top of the previous impulse wave (i)).

BoE Governor Andrew Bailey expressed his concern regarding the tight labour market in the UK during a hearing at the House of Lords Economics Affairs Committee today. His comments followed the release of data showing stronger than expected wages growth.

Commenting on the situation, Bailey said, "As I'm afraid this morning's numbers illustrated, we've got a very tight labour market in this country." He also added, "We've had a fall in the supply of labour, which is showing signs of recovering, but very slowly, frankly."

On a similar note, MPC member Catherine Mann voiced her concerns, noting "wage increases of 4.0% would be a challenge to returning CPI to 2.0%." She also flagged services price inflation as a potential hindrance in achieving the 2% CPI target.

Mann stated, "Drop in inflation expectations was important for me to switch my vote to a 25 bps rate hike from 50 bps."

US consumer inflation slowed to 4.0% y/y in May from 4.9% y/y. The monthly gain was 0.1%. In both cases, the data was 0.1 percentage point weaker than expected, marking a slightly faster decline in the inflation problem than expected.

By and large, inflation has returned to normal due to energy and food, which are not only no longer contributing positively to price increases but are pulling them down.

The core CPI (excluding food and energy) added 5.3% y/y against 5.5% y/y. However, there is an elevated pace of month-on-month price growth, which could soon be a stumbling block for the markets.

So far, rate rises have not caused enough of a cooling of the economy and labour market that this would reduce domestic price pressures. The current monthly rate of increase of the core index has been observed in the second half of the 1980s, bringing the overall inflation rate to around 4%, which is half the peak but twice the target.

On the other hand, given the lag effect in monetary policy, the Fed may still announce a “monetary regime change”, i.e., a signal that rates have peaked, and easing will follow a pause, the duration of which will be determined by economic data.

On the balance sheet, we have a contradictory inflation report, and it will be up to the Fed to determine the further direction of the stock indices and the dollar at tomorrow’s meeting.

Brighter outlook

Economic activity in Japan has picked up steam. Revised figures showed the economy grew by 2.7% in annualized terms in the first quarter of this year, and leading indicators such as business surveys suggest this momentum is likely to persist for some time.

On the inflation front, the situation seems even more promising. Inflation is running near its fastest pace in three decades and the spring wage negotiations resulted in serious pay rises for workers, helping to fuel optimism that inflationary forces are becoming more entrenched.

Yet, BoJ officials are not convinced. Haunted by decades of deflation and mistaken decisions to tighten policy prematurely in previous cycles, the BoJ has committed to 'play it slow' this time. The Bank's forecasts suggest inflation is going to cool off later this year and Governor Ueda has warned the recent victories on the wage front might not be sustained.

In addition, the BoJ is concerned about a global slowdown that inflicts collateral damage on Japan's export-heavy economy. As a result, the central bank has made it crystal clear that it won't tighten policy until it is convinced inflation will remain sustainably above 2%.

On hold, for now

With the likelihood of an immediate policy shift appearing low and this being a meeting without updated economic forecasts, the focus will be mostly on any changes in the language. Specifically, will the BoJ strike a more optimistic tone on inflation, setting the stage for an upgrade of its inflation forecasts at the next meeting in July?

Forecasts are extremely important for the central bank. The way that BoJ officials will ultimately determine whether inflation will remain 'sustainably' above 2% is by whether their inflation forecasts for the next 2-3 years say it will.

We are pretty close to this stage. All that remains is for the 2025 forecasts to be revised higher, which could very well happen in July. That would be the signal that further policy tightening is imminent, elevating the importance of the July meeting.

Yen outlook

In the markets, in case the BoJ does nothing once again, that would argue for a minor negative reaction in the yen as those looking for immediate tightening are left disappointed. Taking a technical look at dollar/yen, the first barrier to the upside might be the latest local high near 141.00.

On the flipside, a surprisingly hawkish tone that refuels market bets for near-term tightening could breathe some life back into the devastated currency. In this case, the focus would shift towards the 138.00 zone in dollar/yen, which roughly encompasses the 200-day moving average too, currently at 137.30.

Aside from BoJ policy, the other two elements that will influence the yen's trajectory moving forward are the actions of other major central banks and global risk sentiment. With the Fed and the ECB likely to hit the 'pause' button this summer just as the BoJ considers tighter policy, the environment seems favorable for the yen.

If such a shift in central bank policies coincides with a selloff in stock markets that fuels safe-haven demand for the Japanese currency, that could mark the beginning of a healthy recovery in the yen. Alas, this is probably a story for July or beyond.

Markets:

Trading today was supposed to be a long-drawn countdown to the US CPI release. However, Asian investors got a first surprise impulse as the PBOC unexpectedly cut its 7-day reverse repo rate by 0.1% to 1.90%. Chinese inflation remains low (CPI 0.2% Y/Y, PPI -4.6% Y/Y in May) suggesting a sluggish post-pandemic recovery. The prospect of further stimulus supported risk sentiment in the region. Spill-overs to the likes of Europe were temporary and limited. Copper and oil gained, but especially oil (Brent $73,5/b) is still holding relatively close to the YTD lows. The yuan extended its recent decline. At USD/CNY 7.16, the yuan touched the weakest level since November.

UK labour data also delivered quite a huge surprise. UK job growth in the three months to April jumped 250k (3M/3M). The unemployment rate eased from 3.9% to 3.8%. Last but not least, wage growth (ex-bonus) accelerated sharply from 6.8% 3M/Y/Y to 7.2%. There is no one-on-one link between the labour data and the UK May inflation to be published next Wednesday. Even so, they evidently more than fulfill the condition from the BoE monetary policy statement ‘The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required’. UK bond yields jumped between 20 bps (2-y) and 4 bp(30-y). The UK 2-y yield now surpasses the top during the Truss-Kwarteng fiscal/financial stability crisis in September, reaching the highest level since the GFC in 2008. Money markets now see the peak BoE policy rate well north of 5.5% in Q4. Still, a 50 bps rate hike next week is seen as unlikely (25%). Strangely, sterling hardly profits from a favourable interest rate differential. At EUR/GBP 0.8580, it stays relatively far away from the key 0.8540 area tested yesterday. FX traders apparently err to the side that at current levels enough interest rate support should be discounted for sterling and/or that a too slow BoE reaction function only clouds already weak UK growth prospects further down the road.

The PBOC interest rate cut and/or the UK labour data had limited impact on EMU/US bonds. US and German yields traded almost unchanged (< 2bps) going into the US CPI release. The US CPI was close to expectations with the headline at 0.1% M/M and 4% Y/Y (from 4.9) and core at 0.4% M/M and 5.3% Y/Y (from 5.5%). However, in an understandable asymmetric reaction, US yields declined temporary (2-y -8 bps) as some market participants apparently still feared that a stronger than expected figure could question the Fed ‘skip ‘ scenario. This option is now scrapped. Even so US yields currently again trade little changed (2-y -2.5bps, 30-y +2 bps). German bunds underperform (2-y +4 bps; 30-y 0.5 bp). (European) equities couldn’t keep PBOC-driven gains at the open, but regained some ground after the US CPI (EuroStoxx +0.6%, S&P 500 +0.6%). The combination of softer US yields and a constructive risk context triggers further USD profit taking. DXY nears the 103 area. EUR/USD regained the 1.0775 resistance area, but still struggles to move above the 1.08 barrier in a sustainable way. USD/JPY extends its short-term consolidation pattern between 139/140

News & Views:

Hungarian business newspaper Vilaggazdasag reported that PM Orban’s government may pass a decree to overwrite private contracts between SME’s and utility providers (especially fixed-price electricity contracts struck during the height of the energy crisis) to lower their costs and help slow inflation which still runs at a Y/Y-pace over 20%. The head of the Hungarian Chamber of Industry and Commerce said that the change could be approved within a week. The Hungarian forint loses ground today. In hindsight, the forint may also face selling pressure as comments by Economic Development Minister and previous central bank governor Nagy yesterday get a bigger platform. He suggested that a higher inflation goal may help lower real interest rates, making borrowing more accessible, incentivizing investment and economic expansion. Nagy is part of the wing who believes that inflation won’t return to target due to structural factors like energy, demographics and cost of capital. Acknowledging a higher inflation target implies, all else equal, faster scope to introduce policy rate cuts. The MNB last month started lowering its emergency deposit rate (17% from 18%) towards the normal policy rate (13%). EUR/HUF rises from 369 to 371. From a technical point of view, the extensive test of EUR/HUF 368 support is rejected.

• UK job numbers shine
• US inflation falls to 4%
• Fed widely expected to pause rates

The British pound has pushed higher today, courtesy of a strong employment report. In the North American session, GBP/USD is trading at 1.2592, up 0.64%.

UK job market flexes muscles

The UK labour market remains robust, and today’s employment numbers were higher than expected.  The economy created 250,000 jobs, up from 182,000 crushing the consensus of 162,000. The unemployment rate dipped to 3.8%, down from 4.0% and below the consensus of 4.0%. As well, average earnings including bonuses jumped to 6.5%, above 6.1%, which was also the consensus.

The hot numbers will be a major disappointment for the Bank of England, which was expecting the labour market to show signs of cooling off after 12 straight rate hikes. The jump in wages may pose the biggest concern for the BoE, as high wage growth is a key driver of inflation, which remains very high at 8.7%.  Governor Bailey testifies today before the House of Lords Economic Affairs Committee, and the committee members are likely to grill Bailey on the latest job data.

US inflation has been heading lower and the trend continued today. Headline CPI for May fell from 4.9% to 4.0%, just beating the consensus of 4.1%. The core rate dipped from 5.5% to 5.3%, as expected. The Fed’s tightening policy has succeeded in pushing inflation lower, but the question is whether the Fed feels that inflation is dropping fast enough.

Today’s inflation data has the markets buying all into a pause at Wednesday’s Fed meeting. The probability of a pause has soared to 99% according to CME’s FedWatch, compared to 75% prior to the inflation release. There are Fed members who favour more rate hikes and the expected non-move on Wednesday could be a “hawkish skip” in which the Fed signals that it is taking a breather but more rate hikes are coming.

GBP/USD Technical

• There is resistance at 1.2657 and 1.2734
• 1.2513 and 1.2436 are providing support