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The economic calendar is packed with data releases from the United Kingdom this week, starting with the latest inflation report at 06:00 GMT on Wednesday. Sterling has taken a heavy beating this year, underperforming even the war-ravaged euro despite a flurry of rate increases from the Bank of England. Until there is some good news from Ukraine that boosts stock markets and hammers energy prices, it is difficult to call for a trend reversal. 

Ransacked 

The British pound has been devastated. It has lost almost 10% of its value against the almighty US dollar and roughly 2% versus the euro this year alone, even though the Bank of England has raised interest rates at every single policy meeting.

Most of this lackluster performance boils down to the strong relationship between the pound and stock markets. The 60-day rolling correlation between Cable and the S&P 500 index currently stands at 0.93, so the two assets have moved in the same direction 93% of the time over the last couple of months.

Sterling is essentially trading like a proxy for global risk sentiment, which has been terrible lately. Surging energy prices and a sharp drop in business confidence that typically foreshadows an economic slowdown have also played a role in the pound’s dreadful performance.

Upcoming data

Turning to this week’s releases, the show will get started on Wednesday with the inflation stats for May. Forecasts suggest inflation reached 9.1% in yearly terms. On the bright side, this would be only a minor acceleration from the 9.0% recorded in April.

As for any surprises, the risks surrounding this inflation print seem tilted to the upside. The S&P Global PMI for the month pointed to another record increase in prices charged by services companies, so the official inflation forecast seems like a ‘lowball’ estimate.

An upside inflation surprise could lend some support to sterling, on expectations that the BoE might accelerate the pace of rate increases. Taking a technical look at Cable, in this case the pair could edge higher for another test of the 1.2400 region.

Then on Thursday, the preliminary PMIs for June will hit the markets ahead of the latest retail sales on Friday. The PMIs are expected to have fallen further while retail sales are seen turning negative on a monthly basis. A soft dataset could cause the pound to give back any inflation-related gains, with downside moves in Cable likely to encounter initial support around 1.2150.

Big picture

All told, the outlook for the pound remains cautiously negative. It’s just difficult to call for any massive recovery while sentiment in stock markets remains so weak and energy prices so high.

Traders also seem to be overestimating what the Bank of England can deliver. Market pricing currently suggests that the Bank Rate will close the year at 3%, from 1.25% currently. This implies the central bank will step up its game and raise interest rates by 50 basis points at three of its next four meetings.

The BoE has not raised rates by 50 bps so far in this cycle while the UK economy was firing on all cylinders - why would it so now that it is losing momentum and whispers of recession are growing louder? There is plenty of scope for disappointment embedded into current market pricing, which implies downside risks for sterling.

Political risk is back on the menu too, with reports that the UK is planning to abandon plans of the Brexit deal it negotiated with the European Union amid disagreement over the rules governing trade in Northern Ireland.

A trend reversal in the pound can be taken seriously only if it is accompanied by a major event that spreads joy in the markets and revives risk appetite - ideally with oil prices coming down as well. Some positive news around the Ukraine conflict could do the trick. Until then, the trend remains negative.

DXY:

On the H4, with prices bouncing off the ichimoku indicator and along the ascending trendline, we have a bullish bias that price will rise to our 1st resistance at 105.620 where the 61.8% fibonacci projection and swing high resistance are from our 1st support at 104.635 in line with the horizontal pullback support and 23.6% fibonacci retracement. Alternatively, price may break 1st support structure and head for 2nd support at 103.954 where the horizontal pullback support and 61.8% fibonacci retracement.

Areas of consideration:

• H4 time frame, 1st resistance at 105.620
• H4 time frame, 1st support at 104.635

XAU/USD (GOLD):

On the H4, with prices moving below the ichimoku indicator, we have a bearish bias that prices will drop from our 1st resistance at 1856.84 where the horizontal swing high resistance and 100% fibonacci projection are to our 1st support at 1807.93 in line with swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance at 1874.20 in line with swing high resistance and 78.6% fibonacci projection.

Areas of consideration:

• H4 time frame, 1st Resistance at 1856.84
• H4 time frame, 1st Support at 1807.93

GBP/USD:

On the H4, with prices moving above the ichimoku indicator, we have a bullish bias that price will rise from our 1st support at 1.22351 where the horizontal swing low support is to our 1st resistance at 1.23987 in line with the 61.8% fibonacci projection, 61,8% fibonacci retracement and overlap resistance. Alternatively, price may break 1st support structure and head for 2nd support at 1.21855 where the horizontal overlap support and 50% fibonacci retracement are.

Areas of consideration:

• H4 1st resistance at 1.23987
• H4 1st support at 1.22351

USD/CHF:

On the H4, with price expected to bounce off the stochastics indicator, we have a bullish bias that price will rise from our 1st support at 0.96315 where the horizontal pullback support and 78.6% Fibonacci retracement is to our 1st resistance at 0.98879 in line with the horizontal pullback resistance and 61.8% Fibonacci retracement. Alternatively, price may break structure and head for 2nd support where the horizontal swing low support is.

Areas of consideration

• 1st support level at 0.96315
• 1st resistance level at 0.98879

EUR/USD :

On the H4, with price moving into the ichimoku cloud, we have a bullish bias that price will rise from the 1st support at 1.05077 in line with the pullback support and 100% fibonacci projection to the 1st resistance at 1.07848 in line with the swing high, 100% fibonacci projection and 50% fibonacci retracement. Alternatively, price may reverse off the 1st support and drop to the 2nd support at 1.03603 in line with the multiple swing lows and 61.8% fibonacci projection.

Areas of consideration :

• H4 1st resistance at 1.07848
• H4 1st support at 1.05077

USD/JPY:

On the H4, with price approaching and expected to reverse off stochastic indicator, we have a bearish bias that price will drop from our 1st resistance at 135.536 in line with the swing high resistance and 61.8% fibonacci projection to our 1st support at 131.607 in line with the swing low support,78.6% fibonacci projection and 50% fibonacci retracement . Alternatively, price may break 1st resistance structure and head for 2nd resistance at 138.846 where the 161.8% fibonacci extension and 78.6% fibonacci projection are.

Areas of consideration:

• H4 time frame, 1st resistance at 135.536
• H4 time frame, 1st support at 131.607

AUD/USD:

On the H4, price bounced off the 1st support at 0.69142 in line with the pullback support, and we have a bullish bias that it will rise to 1st resistance at 0.70657 in line with the swing high, 50% fibonacci retracement and 78.,6% fiboinacci projection. Alternatviely, price may reverse off the 1st support and drop to the 2nd support at 0.68523 in line with the multiple sing lows.

Areas of consideration

• H4 1st resistance at 0.70657
• H4 1st support at 0.69142

NZD/USD:

On the H4, with price moving in the ichimoku cloud, we have a bullish bias that price will rise from the 1st support at 0.62929 in line with the pullback support and 23.6% fibonacci retracement to the 1st resistance at 0.65609 in line with the 100% fibonacci projection at the swing high. Alternatively, price may reverse off the 1st support at drop to the 2nd support at 0.629036 at the horizontal swing low.

Areas of consideration:

• H4 time frame, 1st support at 0.62929
• H4 time frame, 1st resistance at 0.65609

USD/CAD:

On the H4, with price expected to reverse off the stochastics indicator, we have a bearish bias that price will rise from our 1st resistance where the 50% Fibonacci retracement is to our 1st support at 1.28598 in line with the horizontal pullback support and 50% Fibonacci retracement. Alternatively, price may head for 2nd resistance where the horizontal swing high resistance and 161.8% Fibonacci projection is.

Areas of consideration:

• H4 time frame, 1st resistance at 1.30780
• H4 time frame, 1st support at 1.28598

OIL:

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will rise from our 1st resistance at 111.17 where the horizontal pullback resistance is to our 1stsupport at 103.71 in line with the horizontal swing low support. Alternatively, price may head for 2nd resistance where the horizontal pullback resistance and 50% Fibonacci retracement is. Take note that we are waiting for the break of 1st resistance to confirm the bearish continuation.

Areas of consideration:

• H4 time frame, 1st resistance of 112.51
• H4 time frame, 1st support of 103.71

Dow Jones Industrial Average:

On the H4, with price expected to bounce off the stochastics indicator, we have a bullish bias that price will rise from our 1st support at 29748 where the 127.2% Fibonacci extension is to our 1st resistance at 30795 in line with the horizontal pullback support. Alternatively, price may break structure and head for 2nd support where the 161.8% Fibonacci extension is.

Areas of consideration :

• H4 time frame, 1st resistance at 30795
• H4 time frame, 1st support at 29748

• EURJPY reversed from support level 139.30
• Likely to rise to resistance level 144.00

EURJPY currency pair just reversed up from the key support level 139.30 (former strong resistance from the middle of April).

The upward reversal from the support level 139.30 stopped the previous minor ABC correction (ii) .

EURJPY currency pair can be expected to rise further toward the next resistance level 144.00 (top of wave (i) from the start of June).

• USDCAD reversed from resistance level 1.3075
• Likely to fall to support level 1.2940

USDCAD currency pair just reversed down from the strong resistance level 1.3075 (former top of the impulse wave 1 from the start of May) – standing well above the upper daily Bollinger Band.

The downward reversal from the resistance level 1.3075 stopped the previous impulse waves 3 and (3).

Given the strength of the resistance level 1.3075 and the overbought daily Stochastic, USDCAD currency pair can be expected to fall further toward the next support level 1.2940.

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BoE MPC member Catherine Mann explained in a speech that her for a 50bps last week. She said, " a more robust policy move, based on both domestic conjuncture and commensurate with the global factor, reduces the risk that domestic inflation already embedded is further boosted by inflation imported via a Sterling depreciation."

She's open to a policy rate reversal in the medium term "when the domestic supports to demand fade and when weakness in external sources of demand bite."

She said, "the domestic conjunctural situation is characterized by very high inflation and various supports to consumer purchasing power relative to real income". The support factors include "two fiscal packages, strong employment, wide-spread bonuses as well as robust wage growth, strong housing values, accumulated savings, quality trade-down, and borrowing through credit cards among other schemes."

Globally, tightening by Fed and ECB suggests depreciation pressure on Sterling that could "add to inflation particularly in the near term".

Full speech here.

Bulls are consolidating under new two-decade high but remain in play and position for further advance.

The dollar is supported by strong Fed rate hikes and hawkish stance that signals further action, as well as safe-haven demand on economic and geopolitical uncertainty, while Euro remains fragile, and yen is set for further weakness that adds to positive signals for the greenback.

Technical studies are positive and support the action, as rising daily cloud and strong bullish momentum underpin.

The dollar may hold in extended consolidation before bulls regain traction for renewed attack at 105.54 peak, with sustained break to signal bullish continuation and expose Fibo projections at 107.13 and 109.20 (123.6% and 138.2% respectively).

Dips should stay above rising 10DMA (103.89) to keep bulls intact.

Res: 104.54; 104.87; 105.26; 105.54.
Sup: 103.89; 103.62; 103.16; 102.92.

The Japanese yen has steadied on Monday, trading just above the symbolic 135 level.

Is 140 next for the yen?

The BoJ didn’t change its playbook at Friday’s meeting, and what is usually a dull affair had a huge impact on the yen, as USD/JPY surged over 2%. The central bank reiterated its commitment to an ultra-accommodative policy, despite pressure on the yen, which is wallowing close to 24-year lows against the US dollar. The BoJ’s reaffirmation of loose policy and its tenacious defence of its yield curve was all the more noticeable in a week that saw the Fed, BoE and even the SNB tighten policy.

The BoJ has been resisting attacks from bond speculators, who are betting that the Bank will release its cap of 0.25% on 10-year JGBs, but so far the BoJ has refused to blink. The Japanese yen has been bearing the brunt of this policy, with USD/JPY soaring around 17% since May 1^st. With the Fed set to continue to raise rates, the US/Japan rate differential will continue to widen, which means the yen could be headed for 140 shortly.

The BoJ didn’t adjust its policy at the meeting but it was noteworthy that the policy statement added the exchange rate to its list of risks, something we haven’t seen in previous statements. . The Bank is sending a message that it is monitoring the exchange rate, but I question whether this will deter the markets from continuing to test the yen. The BoJ and Ministry of Finance have resorted to verbal intervention to fire warning shots to defend the yen, but so far Tokyo’s cannons have been firing blanks as Japanese officials haven’t shown any concrete signs that they plan to intervene in the exchange rate.

USD/JPY Technical

• There is resistance at 1.3657 and 1.3814
• USD/JPY has support at 1.3404 and 1.3247

In a European Parliament committee hearing, ECB President Christine Lagarde reiterated the policy decision made at June meeting, including ending the asset purchase program, scheduling to raise interest rate by 25bps in July, and to raise interest rates again in September.

As for the September hike, "if the medium-term inflation outlook persists or deteriorates, a larger increment (than 25bps) will be appropriate."

Beyond September, ECB anticipates that "a gradual but sustained path of further increases in interest rates will be appropriate", depending on incoming data.

Full remarks here.

The Euro edges higher on Monday, following Friday’s drop that generated strong signal of recovery stall.

Fresh strength was fueled by weaker dollar and resisted negative news that French President Macron lost an absolute majority in the country’s parliamentary election, however prospects for stronger recovery are very low.

The action remains weighed by thick daily cloud which capped recovery attempts on Thursday and Friday, while 14-d momentum remains deeply in the negative territory and moving averages are in negative setup that supports scenario of limited recovery before larger bears resume.

Bias is expected to remain with bears while the action stays capped by the cloud base, with extended consolidation likely to precede fresh push lower.

Violation of recent lows at 1.0358/49 and more significant 2017 low (1.0340) would open way towards next key supports at 1.0069/1.0000 (Fibo 76.4% of 0.8225/1.6039 / psychological).

Caution on penetration into daily cloud (base is reinforced by converged Tenkan-sen and Kijun-sen) and lift above 1.0623 (Fibo 61.8% of 1.0786/1.0358) that would ease downside risk and allow for stronger correction, but only lift above 1.0786 (May 30 high) would neutralize bears on completion of a double-bottom pattern.

Res: 1.0537; 1.0572; 1.0589; 1.0623.
Sup: 1.0459; 1.0380; 1.0355; 1.0340.