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With only second tier data on the agenda, yesterday brought a session of order-driven, technical trade. ECB and Fed speakers mainly held to recent narratives. In the end, the US yield curve inverted slightly further with the 2-y gaining marginally while the 10 and 30-y ceded slightly less than 2.5 bps. US housing data printed mixed with housing starts marginally better than expected (1420k) but permits declining more than hoped for (1413k). Fed’s Bostic defended the March dots advocating one additional rate hike in May and holding the policy rate above 5% for some time. Fed’s Bullard in an interview with Reuters kept a more hawkish tone, as he favours a scenario of the policy rate being raised to 5.5%/5.75%. He also pushed back against the idea that the US economy is heading for a recession, with the labour market holding strong and pandemic savings still being used to support spending. The German curve showed a similar, modest move with the 2y yield adding 2.7 bps. The 30-y ceded 1.8 bps. ECB’s chief economist Lane indicated that a further rate hike in May is appropriate, with data to decide on the size of the move. He doesn’t exclude a 50 bps step. On equity markets, Europe (Eurostoxx 50 + 0.60%) still outperforms the US (major indices hardly changed). The dollar didn’t profit from the Bullard comments. On the contrary, DXY eased from 102.10 to 101.75. EUR/USD rebounded to close at 1.0972. Sterling initially tried to capitalize on strong labour market data, but the momentum gradually faded. EUR/GBP closed the day little changed at 0.883.

There is again no really high profile (eco) news to guide trading this morning. Asian equities mostly trade with modest losses. US yields are trending higher (1-3 bps) after higher than expected UK CPI data (cf infra). The dollar is gaining a few ticks (USD/JPY 134,35; EUR/USD 1.0965). Later today, there are again few eco data in the US and EMU. Speeches of ECB’s Lane, Knot, de Cos and Schnabel are worth to keep an eye on. Later this evening, the Fed will publish the Beige Book, preparing the May 3 policy meeting. EUR/USD trading for now is guided by a short-term consolidation pattern between 1.0831 and 1.1076. On yields markets, the US 2-y and 10-y yield face important resistance respectively near 4.25% and 4.64%.

UK March price data printed well above expectations. Headline CPI inflation rose 0.8% M/M and 10.1% Y/Y (0.5% and 9.8% expected). Core inflation stabilized at 6.2% while a decline to 6% was expected. PPI was also higher than expected. Combined with yesterday’s strong labour market data, the report gives the BoE little choice but to continue its hike cycle at the May 11 meeting. Sterling gains immediately after the release. EUR/GBP dropped to the 0.882 area. However, yesterday’s price action showed that one should be cautious to draw early conclusions.

News and views

Hungary’s central bank deputy governor Virag said the “multi-step” interest rate normalization may start at next week’s monetary policy meeting. The MNB in first instance could change the width of the interest rate corridor by cutting the top-end “by a significant margin”. This top-end collateralized lending rate currently stands at 25%. Modifying the O/N 18% tender rate, the de facto policy rate, would only be on the agenda at the subsequent rate meetings. Hungarian inflation barely eased from 25.4% in February to 25.2% last month. Virag nevertheless expects the disinflationary process to speed up from April. Helping the MNB’s inflation fight is the recent HUF strengthening. Boosted by the 18% interest rate, the forint appreciated from briefly above EUR/HUF 400 mid-March to the low 370 area yesterday. At EUR/HUF 371.09, the currency closed at the strongest level since April 2022.

EU negotiators yesterday agreed on a final version of a €43bn plan to turn Europe into a key player in the market of semiconductors after “just” 14 months. The continent is keen in ramping up own output in the wake of the pandemic and subsequent supply chain disruptions and in a context of rising geopolitical tensions. The European Union’s ambition is to manufacture about 20% of world’s production by 2030, up from 10% currently. The Chips Act allows EU member states to provide financial support for “first-of-a-kind” semiconductors. It is the first of a series of industrial plans that let governments increasingly intervene in the supply chain..

UK CPI slowed from 10.4% yoy to 10.1% yoy in march, above expectation of 9.8% yoy. CPI all goods index slowed from 13.4% yoy to 12.8% yoy. But CPI all services was unchanged at 6.6% yoy. On a monthly basis, CPI rose 0.8% mom, above expectation of 0.5% mom. Core CPI (CPI excluding energy, food, alcohol and tobacco) was unchanged at 6.2% yoy, above expectation of 6.0% yoy.

Also released, RPI was up 0.7% mom, 13.5% yoy, above expectation of 0.6% mom, 13.3% yoy. PPI input was at 0.2% mom, 7.6% yoy, versus expectation of -0.4% mom, 9.8% yoy. CPI output was at 0.1% mom, 8.7% yoy, versus expectation of -0.1% mom, 8.7% yoy. PPI core output was at 0.3% mom, 8/.5% yoy, versus expectation of 0.2% mom, 9.8% yoy.

Full UK CPI release here.

Daily Pivots: (S1) 166.20; (P) 166.60; (R1) 167.04; More...

Intraday bias in GBP/JPY remains on the upside for the moment. Current rally is part of the whole rise from 155.33. Next target is 169.26 resistance first. However, considering bearish divergence condition 4 H MACD. Break of 165.38 minor support will argue that a short term top was already formed. Intraday bias will be turned back to the downside for 162.75 support instead.

In the bigger picture, as long as 38.2% retracement of 123.94 (2020 low) to 172.11 (2022 high) at 153.70 holds, medium term bullishness is retained. That is, larger up trend from 123.94 (2020 low) is still in progress. Break of 172.11 high to resume such up trend is expected at a later stage.

The markets have been somewhat directionless this week, with most major currencies remaining within last week's trading ranges against one another, excluding a few Yen pairs. US stock indexes are consolidating in tight ranges with minor pullbacks, while the 10-year yield struggles below a short-term resistance level. Gold prices are recovering weakly, and oil prices are slightly retreating from last week's highs.

Today's UK CPI data will be a key market focus. Sterling gained ground yesterday due to robust job data and strong wage growth, but buying pressure has not followed through. In a recent Reuters poll, 33 out of 61 economists predicted a 25 bps BoE rate hike to 4.50% at the May 11 meeting, while 28 expected rates to remain unchanged. The decision will depend on clear evidence of slowing inflation. Today's crucial data includes the expected drop in CPI from 10.4% yoy to 9.8% yoy in March and a decline in core CPI from 6.2% to 6.0% yoy.

Technically, GBP/USD is visibly losing upside momentum as observed in D MACD. A downside surprise in today's UK CPI could trigger a selloff below 1.2343, potentially prompting a deeper pullback to the 55 D EMA (now at 1.2243). On the other hand, a bounce from the current level could pave the way for a break through 1.2545 resistance, resuming the overall uptrend from 1.0351.

In Asia, at the time of writing, Nikkei is down -0.37%. Hong Kong HSI is down -0.49%. China Shanghai SSE is down -0.21%. Singapore Strait Times is up 0.17%. Japan 10-year JGB yield is down -0.0001 at 0.476. Overnight, DOW dropped -0.03%. S&P 500 rose 0.09%. NASDAQ dropped -0.04%. 10-year yield dropped -0.019 to 3.572.

ECB Lane signals another hike in May, emphasizes data dependence

ECB Chief Economist Philip Lane has indicated in a Bloomberg TV interview that another rate hike in May is appropriate, given the current economic landscape. He stated, "As of now, two weeks away, I think the baseline is that we should increase interest rates in May but what we do in terms of scale, I'm not going to set a default number."

However, Lane emphasized the importance of waiting for more data before making a final decision. He highlighted the central bank's reliance on data, saying, "We are now in an intense phase of data dependence. I'm very much in wait-and-see mode."

He also discussed the ECB's deposit rate, which is currently at 3%, and suggested that it would likely remain at its peak for a prolonged period if inflation returns to 2% and the eurozone avoids a recession, as officials predict. "It would be appropriate to keep rates at the plateau level for a while before returning back to normal," Lane added.

Australia's Westpac Leading Index signals below-trend growth, RBA expected to hike rates in May

Australia Westpac-Melbourne Institute Leading Index rose slightly from -0.79% to -0.75% in March, marking the eighth consecutive negative reading. This indicates below-trend growth throughout 2023. Westpac forecasts a modest 1% growth for Australia in 2023, while IMF recently revised its growth forecast for the country from 1.9% to 1.6%. RBA also predicts just 1.6% growth in 2023.

Westpac anticipates a further 25bps increase in the cash rate to 3.85% at RBA's May 2 meeting. The April RBA minutes revealed additional concerns about the inflation outlook, including rising demand due to increased immigration, pressures in the housing market, and risks associated with growing wage growth, particularly in the public sector. The March quarter inflation report, scheduled for release on April 26, will be a crucial data point for the central bank's decision-making process.

Looking ahead

UK CPI is the major focus in European session while RPI and PPI will also be released. Eurozone will also publish March CPI final. Later in the day, Canada will release housing starts, IPPI and RMPI. Fed will publish Beige Book economic report.

GBP/JPY Daily Outlook

Daily Pivots: (S1) 166.20; (P) 166.60; (R1) 167.04; More...

Intraday bias in GBP/JPY remains on the upside for the moment. Current rally is part of the whole rise from 155.33. Next target is 169.26 resistance first. However, considering bearish divergence condition 4 H MACD. Break of 165.38 minor support will argue that a short term top was already formed. Intraday bias will be turned back to the downside for 162.75 support instead.

In the bigger picture, as long as 38.2% retracement of 123.94 (2020 low) to 172.11 (2022 high) at 153.70 holds, medium term bullishness is retained. That is, larger up trend from 123.94 (2020 low) is still in progress. Break of 172.11 high to resume such up trend is expected at a later stage.

Economic Indicators Update

Australia Westpac-Melbourne Institute Leading Index rose slightly from -0.79% to -0.75% in March, marking the eighth consecutive negative reading. This indicates below-trend growth throughout 2023. Westpac forecasts a modest 1% growth for Australia in 2023, while IMF recently revised its growth forecast for the country from 1.9% to 1.6%. RBA also predicts just 1.6% growth in 2023.

Westpac anticipates a further 25bps increase in the cash rate to 3.85% at RBA's May 2 meeting. The April RBA minutes revealed additional concerns about the inflation outlook, including rising demand due to increased immigration, pressures in the housing market, and risks associated with growing wage growth, particularly in the public sector. The March quarter inflation report, scheduled for release on April 26, will be a crucial data point for the central bank's decision-making process.

Full Australia Westpac leading index release here.

ECB Chief Economist Philip Lane has indicated in a Bloomberg TV interview that another rate hike in May is appropriate, given the current economic landscape. He stated, "As of now, two weeks away, I think the baseline is that we should increase interest rates in May but what we do in terms of scale, I'm not going to set a default number."

However, Lane emphasized the importance of waiting for more data before making a final decision. He highlighted the central bank's reliance on data, saying, "We are now in an intense phase of data dependence. I'm very much in wait-and-see mode."

He also discussed the ECB's deposit rate, which is currently at 3%, and suggested that it would likely remain at its peak for a prolonged period if inflation returns to 2% and the eurozone avoids a recession, as officials predict. "It would be appropriate to keep rates at the plateau level for a while before returning back to normal," Lane added.

Key Highlights

• Gold price started a downside correction from the $2,050 zone.
• It traded below a major bullish trend line with support at $2,020 on the 4-hour chart.
• EUR/USD remained well-bid above the 1.0880 support zone.
• Crude oil prices started a downside correction below $81.20.

Gold Price Technical Analysis

Gold price struggled to clear the $2,050 level against the US Dollar. The price traded as high as $2,048 and recently started a downside correction.

The 4-hour chart of XAU/USD indicates that the price declined below the $2,020 support. It also traded below a major bullish trend line with support at $2,020. The decline was such that the price spiked below the $2,000 level and tested the 100 Simple Moving Average (red, 4 hours).

It seems like there is major support forming near the $1,980 level. A close below the $1,980 support might send the price toward the $1,950 support or the 200 Simple Moving Average (green, 4 hours).

Immediate resistance near the $2,015 level. The next major resistance is near the $2,020 level. Any more gains might send the price toward the $2,050 level.

To continue higher, the bulls need to clear the $2,050 resistance region. If they succeed, the price might start a steady increase toward $2,080. In the stated case, the price may perhaps rise toward the $2,120 level in the coming sessions.

Looking at EUR/USD, the pair was supported above the 1.0880 level and it seems like the bulls might attempt a fresh increase.

Economic Releases to Watch Today

• UK Consumer Price Index for March 2023 (YoY) – Forecast +9.8%, versus +10.4% previous.
• UK Core Consumer Price Index for March 2023 (YoY) – Forecast +6.0%, versus +6.2% previous.
• Euro Zone CPI for March 2023 (YoY) - Forecast +6.9%, versus +6.9% previous.
• Euro Zone CPI for March 2023 (MoM) - Forecast +0.9%, versus +0.9% previous.

BoC Governor Tiff Macklem, during a parliamentary committee hearing, spoke on the progress made in curbing inflation. He stated, "Inflation is coming down quickly—data this morning show it fell to 4.3% in March. And we forecast it to be around 3% this summer."

He emphasized the need for inflation expectations, services price inflation, wage growth, and corporate pricing behavior to normalize before inflation can reach the 2% target. He warned, "if monetary policy is not restrictive enough to get us all the way back to the 2% target, we are prepared to raise the policy rate further to get there."

Macklem, expects inflation to return to 2% by the end of 2024 and noted that Canadian GDP growth would be weak for the rest of this year, gradually picking up in 2024 and through 2025.

He identified the biggest upside risk as the stickiness of services price inflation and the key downside risk as a global recession. While acknowledging that the risks around the inflation forecast are roughly balanced, he noted, "with inflation still well above our target, we continue to be more concerned about the upside risks."

Full statement of BoC Macklem here.

Fresh weakness emerges from persisting worries about further increase of US interest rates and darkened growth outlook, with much stronger than expected China’s GDP data being insufficient to improve negative near-term sentiment.

Investors are particularly concerned about the situation in the US, after the economy was shaken by the collapse of two banks and not fully convinced that the worst is over.

In addition, further tightening in the monetary policy is very likely and tighter credit conditions would further undermine economic growth, still fragile according to the latest US economic data.

Further pressure on oil prices comes from signals that Iraq is on the way to resume oil exports, which were stopped last month.

Technical picture on daily chart is bullish overall, but loss of bullish momentum suggests that the near-term action may stand at the back foot for some time.

Dips so far face strong headwinds at psychological $80 support, which marks the upper boundary of pivotal support zone between $80 and $79 (the latter marks Fibo 23.6% retracement of 64.34/83.51 rally and Apr 3 low when the market opened with nearly $5 gap higher.

Immediate bullish structure is expected to remain intact while the action holds above these levels, though deeper dips cannot be ruled out, mainly dependent on fundamentals.

Larger bulls won’t be significantly harmed as long as gap remains unfilled, with extended pullback to face solid supports at $77.00/$76.00 zone.

Broken 10DMA reverted to immediate resistance ($81.31), violation of which would improve near-term structure and open way for fresh attack at key barriers at $82.75/$83.51 (200DMA / Apr 12 peak).

Res: 81.31; 81.98; 82.75; 83.51
Sup: 80.00; 79.35; 78.98; 78.14