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• RBA unexpectedly raises rates by 25 bp
• AUD/USD jumps 1%
• Federal Reserve widely expected to follow with 25 bp hike

The Australian dollar has racked up sharp gains today. In the European session, AUD/USD is trading at 0.6691, up 0.93%.

RBA surprises with 25 bp hike, Aussie surges

The Reserve Bank of Australia has a knack for surprising the markets, and today’s rate hike certainly qualified. The markets had widely expected that the RBA would pause rates for a second straight month, but the central bank defied expectations and delivered a 25-basis point hike. This brought the benchmark cash rate to 3.85%. The Australian dollar surged by 0.95% in response to the move.

RBA Governor Lowe defended the hike in his rate statement, saying that inflation “at 7% is still too high” and that a rate increase is needed in order to bring inflation back down to the target of 2%. The decision to raise rates was made despite last week’s inflation release, which showed inflation fell from 7.8% to 7.0% in the first quarter. The robust labour market and the sharp increase in immigration were factors in favor of a hike that the RBA took into account.

The rate hike is not only adding to the misery of households who have mortgage payments but is also raising concerns that the RBA may end up over-tightening and the economy could have a hard landing. The RBA was heavily criticised for allowing inflation to climb out of control and policy makers may be gun shy about ending the current rate cycle while inflation is so high.

The Federal Reserve holds its meeting on Wednesday and market pricing of a 25-basis point hike has jumped to 96%, up from 75% just a week ago. Unlike the RBA decision, I don’t expect the Fed to defy expectations and take a pause at tomorrow’s meeting. The RBA hike raised concerns about a hard landing, and we are hearing similar concerns that another Fed hike will raise the likelihood of the US economy tipping into recession.

AUD/USD Technical

• AUD/USD has pushed past resistance at 0.6632 and tested resistance at 0.6690 earlier. Above, there is resistance at 0.6896
• 0.6558 and 0.6500 are providing support

Australian dollar rose over 1% on Tuesday, lifted by unexpected 25 basis points rate hike by the Reserve Bank of Australia and hawkish stance which signals that more hikes could be expected, in efforts to curb persistently high inflation.

Aussie dollar jumped to the highest since Apr 21, retracing 61.8% of 0.6805/0.6573 bear-leg and sidelining risk of retesting key support at 0.6563 (2023 low posted on Mar 10).

Daily technical studies improved on the latest rally as 14-d momentum is breaking into positive territory and RSI/Stochastic are in steep ascend, however bulls face headwinds from the base of very thick daily cloud (spanned between 0.6708 and 0.6860), as the action cracked cloud base but quickly returned, with daily Tenkan-sen/Kijun-sen still in bearish setup and adding to warning signals.

Firm break of cloud base and nearby Fibo 61.8% of .6805/0.6573 (0.6716) is needed to keep bulls intact for further advance.

Failure under cloud base will signal consolidation, with bullish bias expected while the price stays above 0.6662 (10DMA/broken Fibo 38.2%).

Loss of 0.6662 pivot would initial signal recovery stall and make the downside more vulnerable.

Res: 0.6708; 0.6716; 0.6750; 0.6805.
Sup: 0.6672; 0.6662; 0.6628; 0.6591.

Eurozone CPI accelerated from 6.9% yoy to 7.0% yoy in April, above expectation of 6.9% yoy. CPI core (all item excluding energy, food, alcohol & tobacco) slowed from 5.7% yoy to 5.6% yoy, below expectation of 5.7% yoy.

Looking at the main components, food, alcohol & tobacco is expected to have the highest annual rate in April (13.6%, compared with 15.5% in March), followed by non-energy industrial goods (6.2%, compared with 6.6% in March), services (5.2%, compared with 5.1% in March) and energy (2.5%, compared with -0.9% in March).

Full Eurozone CPI release here.

According to Reuters, market participants were waiting for a pause in a series of interest rate hikes, as the data showed a slowdown in inflation. However, the Reserve Bank of Australia on Tuesday raised the rate by 25 basis points.

"Inflation in Australia has passed its peak, but at 7 percent is still too high and it will be some time yet before it is back in the target range," said governor Philip Lowe.

As a result, the Australian dollar jumped by about 1% against major currencies. It's a tumultuous start to the week after May 1, which was a public holiday for the financial industry in many countries. Note that news from the Reserve Bank of New Zealand, as well as from the Fed, is expected tomorrow.

Meanwhile, the daily chart of AUDUSD shows a promising bullish pattern — a false bearish breakdown (1) of the lower border of the rising channel. In the most favorable scenario for the bulls, the rate may continue to rise towards a (3) year high, however (2) resistance at 0.678 is on the way — it will help to reveal how strong the demand in the AUDUSD market is really strong.

Gold experienced a remarkable surge since early March, forming a series of higher highs to peak at the 13-month high of 2,048. However, bullion quickly retraced lower, falling below the 2,000 mark and trading without a clear direction in the past few daily sessions.

The momentum indicators currently suggest that bullish forces are subsiding but have not surrendered yet. Specifically, the stochastic oscillator is declining after posting a bearish cross, while the MACD histogram fell below its red signal line but remains positive. Nevertheless, the price is currently way beyond the Ichimoku cloud, hinting that the short-term picture has not turned bearish yet.

If bullish pressures fade completely and the price moves to the downside, the February resistance region of 1,959 could serve as initial support. Dipping beneath that zone, gold could descend to challenge 1,933 before the 1,885 hurdle comes under examination. Should that barricade fail, the 2023 low of 1,804 could prove a tough obstacle for the price to overcome.

Alternatively, should buyers regain the upper hand, the 2,000 psychological mark might provide immediate resistance. A violation of that crucial level could pave the way for the 13-month high of 2,048. Failing to stop there, further advances may cease at the March 2022 high of 2,070 registered after Russia’s invasion of Ukraine.

Overall, gold has been trading sideways for the past two weeks, appearing unable to adopt a clear directional impetus. Therefore, a fresh higher high or lower low is needed for this neutral technical picture to alter.

EURCHF is edging higher today, bouncing off a support area defined by the 200-day simple moving average (SMA) and the 38.2% Fibonacci retracement of the June 9, 2022 – September 26, 2022 downtrend respectively. The recent upleg could be the product of the recent bullish divergence that formed between the EURCHF lows and the stochastic oscillator, which has the potential to further impact price action.

A smile has most likely appeared on the bulls’ faces, especially if one adds the stochastic’s recent move. It has broken above its moving average and its oversold area, and it is moving higher in a vertical fashion. However, the Average Directional Movement Index (ADX) is just a tad above its 25-threshold, pointing to a weakening trend. Nevertheless, it is worth noting that the SMAs' convergence and the relative tightening of the Bollinger bands remain in play at this juncture.

Should the bulls decide to push the market higher, the next key resistance area will come at the 50- and 100-day SMAs at the 0.9881-0.9898 area. The 61.8% Fibonacci retracement and the January 13, 2023 high at the 1.0089-1.0096 range could then prove tougher to crack.

On the other hand, the bears would have to deal with the 0.9824-27 range first, populated by the 38.2% Fibonacci retracement and 200-day SMA. The lower boundary of the current rectangle at 0.9741 comes next, very close to the November 14, 2022 low at 0.9706 that appears to be a stronger support area, as seen at the mid-March breakout.

To sum up, EURCHF bulls might feel a bit more confident on the back of the current stochastic oscillator move. But the overall technical picture remains mixed, especially as the price action continues to be confined by the recent rectangle.

UK PMI Manufacturing was finalized at 47.8 in April, slightly down from March's 47.9. Output, new orders, employment and stocks of purchases all contracted and vendor lead times improved (a sign of weaker demand for inputs hurting suppliers).

Rob Dobson, Director at S&P Global Market Intelligence, said: "The UK manufacturing sector remained in the doldrums at the start of the second quarter. Output and new orders contracted, as manufacturers felt the impacts of client uncertainty, destocking and tightening cost controls. There was no escape from the subdued mood of the market, with both domestic and export customers remaining reticent to commit to new contracts."

Full UK PMI Manufacturing release here.

Eurozone PMI Manufacturing was finalized at 45.8 in April, a 35-month low. The index was also below the 50 no-change mark for a tenth straight month. PMI Manufacturing Output was finalized at 48.5, a 4-month low.

PMI Manufacturing of all major states declined in the month, and recorded contractionary reading except Greece (52.4). Ireland (48.6), France (45.6), the Netherlands (44.9), Germany (44.5) and Austria (42.0) were all at 35-month low. Spain was at 3-month low of 49.0 while Italy was at 6-month low at 46.8.

Full Eurozone PMI Manufacturing release here.

GBPUSD is retreating after the climb towards a new eleven-month high of 1.2585 in the previous week and is finding significant support near the 20-day simple moving average (SMA). Currently, the market remains well above the long-term uptrend line, indicating more gains. The MACD oscillator is moving sideways in the positive territory, while the RSI is ticking marginally higher above the neutral threshold of 50.

More upside pressures could open the way for a retest of the previous high of 1.2585 ahead of the 1.2665 resistance, registered in May 2022. Above this hurdle, the 200-weekly SMA, which hovers near the next resistance of 1.2855, may halt the bullish moves.

Alternatively, any downside movements could re-challenge the 20-day SMA at 1.2450 before slipping towards the 1.2270-1.2350 support region, which encapsulates the 50-day SMA too. Beneath these levels, the ascending trend line around 1.2170 could act as a turning point for traders ahead of resting near the 23.6% Fibonacci retracement level of the up leg from 1.0325 to 1.2585 at 1.2050.

All in all, GBPUSD is continuing to maintain an upside structure and only a plunge below the uptrend line and the 200-day SMA at 1.1940 could switch the outlook to bearish. 

JP Morgan swallowed the First Republic Bank (FRC) on Monday and will assume all its deposits.

Capital flew out of US treasuries yesterday as bank stress waned, the S&P500 closed slightly lower yesterday, but it made a positive attempt to the 4186 mark, the highest since February this year. Nasdaq 100 advanced to the highest level this year despite the rising US yields yesterday.

The Federal Reserve (Fed) begins its two-day policy meeting in relatively calmer conditions.

Many think that this week’s 25bp hike will mark the Fed’s tightening cycle, but the surprise hike from the Reserve Bank of Australia (RBA) this morning hints that it may not be the case.

Elsewhere, the eurozone will reveal its quarterly survey of bank lending which will show how the recent bank stress impacted credit growth in Europe, and the flash CPI figures for April. Both data are extremely important for shaping the expectations regarding what the European Central Bank (ECB) will do this Thursday.

https://www.youtube.com/watch?v=6B_eO5xsr9Q