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Eurozone Sentix Investor Confidence rises

The Eurozone economy continues to recover, but there is plenty of work ahead. The Sentix Investor Confidence index improved to -8.7 in April, above the March read of -11.1 and better than the estimate of -11.7 points. The concerns over an energy crisis in Europe this winter failed to materialize and Germany and the rest of the eurozone came out of the winter better than many had expected, given the weak global economy and the Russia-Ukraine war. Still, the economic outlook remains pessimistic, as Sentix Investor Expectations remain negative in both Germany and the eurozone, at -13 and -11.5, respectively. Still, the markets were pleased with the slight improvement in investor confidence and the euro has responded with gains of around 0.60%.

Eurozone retail sales slipped to -0.8% in February, matching the forecast but contracting after an upwardly revised 0.8% gain in January. Consumers are struggling with high inflation, rising interest rates and uncertain economic conditions and are keeping a tight grip on their wallets and purses.

The ECB meets next on May 4^th and all indications are that it will deliver another oversize rate hike. The central bank has been aggressive, raising rates by 50 and 75 basis points in recent months. The ECB was very slow to join the rate-hiking party and the benchmark rate is only 3.50%, compared to 4.25% for the Bank of England and 5.00% for the Federal Reserve. Inflation in the eurozone has proven to be a tougher foe than expected, and core inflation surprised by accelerating in February.

The US releases the March inflation report on Wednesday. Inflation has been falling, albeit at a slower pace than the Fed had expected. This has necessitated additional rate hikes, with a 25-bp increase expected at the May meeting. Headline inflation is expected to fall to 5.4% in March, down from 6% in February. The core rate is projected to inch higher to 5.6%, up from 5.5%.

EUR/USD Technical

• EUR/USD is testing support at 1.0889. Below, there is support at 1.0804
• There is resistance at 1.0989 and 1.1074

The USDJPY yesterday reached its highs of several weeks.

This was facilitated by:

→ a statement by the new head of the Bank of Japan, Kazuo Ueda, who made it clear that there is no need to rush to curtail the stimulus policy;

→ Friday's US employment report, which strengthened expectations of the Fed's interest rate hike in May. Unemployment fell to 3.5%, indicating the strength of the labour market. Trading on Tuesday, futures on the dollar index opened with a bullish gap;

→ US commercial bank deposits rose towards the end of March for the first time in about a month, a sign that the banking crisis is easing and the dollar is regaining confidence.

The USDJPY weekly chart may give the idea that the bulls are trying to revive a long-term uptrend from the support line (1). However, for this it is necessary to overcome the resistance (2) around 133.75, the level can serve as an indicator of the real strength of demand.

The dollar index edges lower on Tuesday, following a brief recovery in past few sessions, as markets return to business after Easter break.

Bounce from new multi-week low at 101.07 (Apr 5) stalled at initial Fibo barrier at 102.20 (23.6% of 105.85/101.07 fall) , with today’s drop generating an initial signal of bull-trap.

Near-term action returned below daily Tenkan-sen (101.90) with daily close below, to increase pressure, as technical studies on daily chart remain in bearish setup (MA’s/negative momentum).

Markets turn focus on the US inflation report (due tomorrow) which will give more clues about Fed’s next steps and subsequently impact dollar’s performance.

Inflation in the US is expected to ease to 5.2% y/y in March from 6.0% in February, but core inflation, which excludes volatile components and is closely watched by the central bank, is forecasted at 5.6% in March vs 5.5% previous month.

Core CPI in line or above expectations would add to concerns that inflation is entrenched and more difficult to be curbed, which will contribute to current about 70% chance of 25 basis points hike on Fed’s May 3 policy meeting and offer fresh support to the greenback.

Conversely, the dollar could weaken if core CPI falls below expectations.

Initial supports lay at 101.50 zone, ahead of 101.07 pivot and more significant 100.66/00 (2023 low/psychological, while 102.20/46 (cracked Fibo 23.6%/Monday’s high) mark pivotal barriers, which guard 102.90/103.14 (Fibo 38.2%/daily Ichimoku cloud base).

Res: 102.20; 102.46; 102.90; 103.14.
Sup: 101.50; 101.00; 100.66; 100.00.

The Canadian dollar is almost unchanged, trading at 1.3501 in Europe. With no Canadian events and no tier-1 releases out of the US, we can expect a quiet day for USD/CAD. The markets will be listening closely as Fed members Goolsbee, Harker and Kashkari will speak. Wednesday should be much busier for the Canadian dollar, with key releases in both Canada and the US. The Bank of Canada will make a rate announcement and the US releases the inflation report for March.

Bank of Canada likely to hold rates

The Bank of Canada meets on Wednesday and is widely expected to pause rates for a second straight time, leaving the cash rate at 4.50%. Governor Macklem announced a “conditional pause” on rates, saying that the central bank would pause if warranted by the data. The key to the Bank’s rate path is inflation, which the central bank is committed to wrestling back to the target of 2%.

The battle against inflation is moving in the right direction, with CPI falling to 5.2% in February, down from 5.9% a month earlier. The employment market remains robust, with the economy adding 34,700 jobs in March, up from 21,800 in February. A rate hike would help cool the labour market but would dampen growth and hurt consumers and businesses which are struggling under the weight of high interest rates. With a pause being the likely decision, the tone of the rate statement could affect the movement of the Canadian dollar on Wednesday.

US inflation

The US releases March inflation on Wednesday. This will be the last CPI release prior to the Fed’s May 3^rd meeting and will play a key factor in the Fed’s rate decision. Currently, the markets have priced in a 25-basis point hike at 67%, according to the CME Group, and an unexpected inflation reading will very likely lead to the repricing of rate hike bets. Inflation fell from 6.4% to 6.0% in February and is expected to ease to 5.4% in March.

USD/CAD Technical

• USD/CAD tested support at 1.3486 earlier today. Below, there is support at 1.3397
• 1.3566 and 1.3629 are the next resistance lines

Bitcoin has finally broken through its recent range to the upside, surpassing 30k level for the first time since June 2022. While some observers may attribute the rally since mid-March to safe-haven flows amid banking turmoil, it seems more likely that Bitcoin is moving in tandem with tech stocks, in anticipation of Fed nearing a pause in tightening.

With 100% projection of 15452 to 25242 from 19552 at 29342 now surpassed, the next target is 161.8% projection at 35392. Even if a retreat occurs, outlook will remain bullish as long as 27,808 support holds.

Focus now shifts to the upside momentum of the current move and the reaction to the 35392 projection target. This level is close to the 38.2% projection of 68986 to 15452 at 35901.

Strong upside momentum and a decisive break of the 35k/36k zone would suggest that the rise from 15452 is a of a medium-term impulsive up trend, potentially leading to further gains. Conversely, weak momentum and rejection by the 35k/36k zone would indicate that rebound from 15452 remains just a corrective move.

Another question arising is whether NASDAQ can follow suit and decisively break through 38.2% retracement of 16,212.22 to 10,088.82 at 12,427.95, confirming the underlying bullish momentum in tech-related sectors.

Eurozone Sentix Investor Confidence increased from -11.1 to -8.7 in April, surpassing the expected -14.0. The Current Situation index experienced its sixth consecutive rise, moving from -9.3 to -4.3, reaching its highest level since March 2022. The Expectations index, however, remained unchanged at -13.0.

Sentix commented on the data, stating, "There is no doubt that the Eurozone economy has come through the winter months better than many feared in the autumn." However, when considering the future, investors are less optimistic, citing "still considerable uncertainty about the further course of the Ukraine war, concerns about a lasting burden on the energy-intensive industrial sector, and - new - question marks about the state of the US economy."

Despite these concerns, the Sentix Theme Barometer indicates that negative expectations regarding inflation and central bank policy have noticeably decreased. While not an all-clear signal, the negative momentum seems to be weakening.

Full Eurozone Sentix release here.

Eurozone retail sales volume dropped -0.8% mom in February, matched expectations. Volume of retail trade decreased by -1.8% for automotive fuels, by -0.7% for non-food products and by -0.6% for food, drinks and tobacco.

EU retail sales declined -0.9% mom. Among Member States for which data are available, the largest monthly decreases in the total retail trade volume were registered in Slovenia (-10.5%), Hungary and Poland (both -2.0%) and Sweden (-1.6%). The highest increases were observed in Cyprus (+1.6%), Luxembourg (+0.8%) and Belgium (+0.7%).

Full Eurozone retail sales release here.

Daily Pivots: (S1) 1.0823; (P) 1.0870; (R1) 1.0908; More...

EUR/USD is staying in consolidation below 1.0972 and intraday bias stays neutral. With 1.0787 support intact, further rally is expected. On the upside, above 1.0972 will resume the rally from 1.0515 to retest 01.1032 high. Firm break there will resume larger up trend from 0.9534. However, break of 1.0787 will turn bias back to the downside for 1.0711 support instead.

In the bigger picture, rise from 0.9534 (2022 low) is in progress with 38.2% retracement of 0.9534 to 1.1032 at 1.0460 intact. The strong support from 55 week EMA (now at 1.0625) was also a medium term bullish sign. Next target is 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273. Sustained break there will solidify the case of bullish trend reversal and target 1.2348 resistance next (2021 high).

Daily Pivots: (S1) 132.33; (P) 133.10; (R1) 134.37; More...

Focus stays on 133.74 resistance in USD/JPY. Firm break there will resume the rebound form 129.62 and target 137.90 resistance again. However, on the downside, below 130.62 will resume the fall from 137.90 through 129.62 to retest 127.20 low.

In the bigger picture, corrective pattern from 127.20 might be extending. But after all, down trend from 151.93 is expected to resume at a later stage. Break of 127.20 will resume this down trend and target 61.8% projection of 151.93 to 127.20 from 137.90 at 122.61. This will now be the favored case as long as 137.90 resistance holds.

Daily Pivots: (S1) 1.2338; (P) 1.2390; (R1) 1.2436; More...

GBP/USD is staying in consolidation from 1.2524 and intraday bias remains neutral at this point. Further rally is expected with 1.2203 resistance turned support intact. On the upside, break of 1.2524 will target 1.2759 fibonacci level first. Firm break there will target 61.8% projection of 1.0351 to 1.2445 from 1.1801 at 1.3095.

In the bigger picture, the rise from 1.0351 medium term term bottom (2022 low) is in progress for 61.8% retracement of 1.4248 (2021 high) to 1.0351 at 1.2759. Sustained break there will add to the case of long term bullish trend reversal. Further break of 61.8% projection of 1.0351 to 1.2445 from 1.1801 at 1.3095 could prompt upside acceleration to 100% projection at 1.3895. For now, this will remain the favored case as long as 1.1801 support holds, even in case of deep pull back.