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Consumer price inflation rose by 1.0% month-over-month (m/m) in May – an acceleration from the 0.3% recorded the month prior. On a year-over-over basis, inflation accelerated by 0.3 percentage points from April, rising to 8.6%.

Energy prices were a big contributor to the monthly gain – rising 3.9% m/m – as both gasoline (4.1% m/m) and energy services (3.0% m/m) were up on the month. Food prices also continued to accelerate, rising 1.2% m/m and are now up over 10% on year-ago basis.

Core inflation (excludes food and energy) rose 0.6% m/m – matching April's gain. On a year-over-year basis, core inflation edged lower by 0.2 percentage points compared to April, rising by 6.0% y/y.

Price growth across service categories remained relatively broad-based, with core service prices rising 0.6% m/m. Shelter costs (0.6% m/m) were again a meaningful contributor, though transportation (1.3% m/m) and medical services (0.4% m/m) also notched gains. Airline fares decelerated relative to April, though were still up by 12.6% m/m.

After having shown some signs of easing in recent months, core goods prices – includes all goods except food and energy commodities – accelerated by 0.6% m/m. Gains were seen across all major categories, with used (1.8% m/m) and new (1% m/m) vehicle prices seeing the biggest moves, while apparel was up 0.7% m/m.

Key Implications

After having shown some signs of easing in April, headline inflation reversed course and accelerated to a new multi-decade high in May. Unfortunately, the recent move higher in energy prices will only exacerbate the problem over the near-term, and keep sustained upward pressure on the headline measure through the summer months.

The broad-based acceleration in core goods prices came as a surprise, particularly after having shown some signs of softening in recent months. With many big box retailers reportedly carrying excess inventory, and consumer demand already showing some signs of pivoting towards more service-based consumption, we'll likely start to see some discounting in seasonal items in the months ahead – helping to ease some of the price pressures on select core goods items.

The job ahead for the FOMC is not an enviable one. Inflation pressures are proving to be both more persistent and far-reaching than previously thought, implying more policy action will need to be taken in the months ahead. We expect the Federal Reserve to raise rates by an additional 50bps next week (taking the policy rate to 1.5%) and also signal more 50bps moves to come through the second half of the year.

Daily Pivots: (S1) 133.53; (P) 134.04; (R1) 134.90; More...

Intraday bias in USD/JPY stays neutral as consolidation from 134.55 is still extending. Downside of retreat should be contained above 131.34 resistance turned support. Break of 134.55 will resume larger up trend to 61.8% projection of 114.40 to 131.34 from 126.35 at 136.81. Firm break there will target 100% projection at 143.29.

In the bigger picture, current rally is seen as part of the long term up trend form 75.56 (2011 low). Next target is 100% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 149.26, which is close to 147.68 (1998 high). This will remain the favored case as long as 126.35 support holds.

Daily Pivots: (S1) 0.9745; (P) 0.9781; (R1) 0.9839; More...

Intraday bias in USD/CHF stays on the upside for the moment. Rise from 0.9543 should target a test on 1.0063 high. Firm break there will resume larger up trend. On the downside, below 0.9722 minor support will turn intraday bias neutral first.

In the bigger picture, down trend from 1.0342 (2016 high) should have completed with three waves down to 0.8756 (2021 low) already. Rise from 0.8756 is likely a medium term up trend of its own. Next target is 1.0237/0342 resistance zone. This will remain the favored case as long as 0.9471 resistance turned support holds. However, sustained break of 0.9471 will extend long term range trading with another falling leg.

Daily Pivots: (S1) 1.0561; (P) 1.0668 (R1) 1.0724; More...

Intraday bias in EUR/USD stays on the downside at this point. Rebound from 1.0348 should have completed at 1.0786, , after multiple rejection by 55 day EMA. Deeper fall would be seen back to retest 1.0348 low, and more importantly 1.0339 long term support. On the upside, above 1.0651 minor resistance will turn intraday bias neutral first.

In the bigger picture, focus stays on 1.0339 long term support (2017 low). Decisive break there will resume whole down trend from 1.6039 (2008 high). Next target is 61.8% projection of 1.3993 to 1.0339 from 1.2348 at 1.0090. However, firm break of 1.0805 support turned resistance will delay this bearish case. Rise from 1.0348 is at least a correction to the down trend from 1.2348. Stronger rebound would be seen to 38.2% retracement of 1.2348 to 1.0348 at 1.1112.

Daily Pivots: (S1) 1.2469; (P) 1.2514; (R1) 1.2540; More...

GBP/USD's break of 1.2429 minor support argues that rebound from 1.2154 has completed at 1.2666 already. Intraday bias is back on the downside for retesting 1.2154 low. Firm break there will resume larger down trend. Next target is 61.8% projection of 1.3297 to 1.2154 from 1.2666 at 1.1960. For now, risk will stay on the downside as long as 1.2666 resistance holds, in case of recovery.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2999 support turned resistance holds. On resumption, next target is 1.1409 low.

Dollar rises strongly in early US session after CPI data. Headline inflation reaccelerated with strong rise in energy and food prices From this perspective, there is little scope for Fed to pause tightening in September. It might instead continue its 50bps per meeting plan for longer. The greenback is now the strongest one for the week, followed by Sterling. Swiss Franc is the worst performing, followed by Yen. Euro is mixed despite ECB's clear hawkish stance while Aussie is weighed down by risk-off sentiment.

Technically, GBP/USD's break of 1.2429 minor support is another evidence of Dollar strength. One focus before the end of the week would be 0.7034 minor support in AUD/USD. Also, there is some knee jerk actions in Gold, which breached 1828.29 support briefly. Attention will also be on whether Gold's selloff will come back quickly on Dollar strength, and break through 1828.29 firmly.

In Europe, at the time of writing, FTSE is down -1.61%. DAX is down -1.69%. CAC is down -1.90%. Germany 10-year yield is down -0.0113 at 1.421. Earlier in Asia, Nikkei dropped -1.49%. Hong Kong HSI dropped -0.29%. China Shanghai SSE rose 1.42%. Singapore Strait Times dropped -0.87%. Japan 10-year JGB yield rose 0.0038 to 0.254.

US CPI rose to 8.6% yoy, highest since 1981, food price rose 10.1% yoy

US CPI accelerated again from 8.3% yoy to 8.6% yoy in May, well above expectation of 8.2% yoy. That's the highest level since December 1981. CPI core slowed from 6.2% yoy to 6.0% yoy, above expectation of 5.9% yoy. Energy index rose 34.6% yoy, largest 12-month increase since September 2005. Food index rose 10.1% yoy, first rise above 10% since March 1981.

CPI rose 1.0% mom, above expectation of 0.7% mom. Core CPI rose 0.6% mom, above expectation of 0.5% mom.

Canada employment rose 39.8k in May, unemployment rate dropped to 5.1% record low

Canada employment rose 39.8k in May, above expectation of 28.5k. Full time work rose 135k while part time jobs dropped -96k. Services producing jobs rose 81k while goods-producing jobs dropped -41.

Unemployment rate dropped form 5.2% to 5.1%, below expectation of 5.2%. That's a new record low. Total hours worked rose 5.1% yoy. Average hourly wages rose 3.9% yoy.

Bundesbank: Germany inflation to hit 7% or higher, resolute action needed

Bundesbank revised down growth projection for Germany's GDP in 2022 and 2023, and upgraded inflation projection for 2022, 2023, and 2024.

2022 GDP growth is slashed from 4.2% to just 1.9%. 2023 growth was cut from 3.2% to 2.4%. But 2024 growth was raised from 0.9% to 1.8%.

2022 HICP inflation forecast was raised from 3.6% to 7.1%. 2023 HICP forecast was raised from 2.25% to 4.5%. 2024 HICP forecast was raised from 2.2% to 2.6%.

President Joachim Nagel said: "Inflation this year will be even stronger than it was at the beginning of the 1980s. Price pressures have even intensified again recently, which is not fully reflected in the present projections. If this development is assumed to continue, the annual average HICP rate for 2022 could be considerably above 7%".

Euro area inflation rates won't fall by themselves," Nagel added. "Monetary policy is called upon to reduce inflation through resolute action."

Villeroy: ECB will pursue gradual but sustained rate hikes to neutral

ECB Governing Council member Francois Villeroy de Galhau told French radio that inflation is "not only too high but also too broad". The ECB will purse a "gradual but sustained" rate hikes until reaching neutral range. He estimated that it's "somewhere between 1% and 2%".

Separately, another Governing Council member Robert Holzmann said, "financial markets reacted very well to yesterday's announcement." "Even if we had started with a 50 bps rate hike it might have an effect on credibility but it would have raised expectations of bigger rate rises afterwards," he added.

China PPI slowed to 14-mth low, CPI unchanged

China PPI slowed notably from 8.0% yoy to 6.4% yoy in May, below expectation of 6.5% yoy. That's also the lowest level in 14 months since March 2021. CPI was unchanged at 2.1% yoy, below expectation of 2.5% yoy. Core CPI, excluding food and energy, was unchanged at 0.9% yoy.

"In May, the pandemic control continued to improve, with overall sufficient supplies in the consumer market, CPI has decreased compared to last month, and the year-on-year increase remained stable," said senior NBS statistician Dong Lijuan. "As a great amount of fresh vegetables entered the market and logistics gradually smooth, prices of fresh vegetables fell by 15 per cent".

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2469; (P) 1.2514; (R1) 1.2540; More...

GBP/USD's break of 1.2429 minor support argues that rebound from 1.2154 has completed at 1.2666 already. Intraday bias is back on the downside for retesting 1.2154 low. Firm break there will resume larger down trend. Next target is 61.8% projection of 1.3297 to 1.2154 from 1.2666 at 1.1960. For now, risk will stay on the downside as long as 1.2666 resistance holds, in case of recovery.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2999 support turned resistance holds. On resumption, next target is 1.1409 low.

Economic Indicators Update

Canada employment rose 39.8k in May, above expectation of 28.5k. Full time work rose 135k while part time jobs dropped -96k. Services producing jobs rose 81k while goods-producing jobs dropped -41.

Unemployment rate dropped form 5.2% to 5.1%, below expectation of 5.2%. That's a new record low. Total hours worked rose 5.1% yoy. Average hourly wages rose 3.9% yoy.

Full release here.

US CPI accelerated again from 8.3% yoy to 8.6% yoy in May, well above expectation of 8.2% yoy. That's the highest level since December 1981. CPI core slowed from 6.2% yoy to 6.0% yoy, above expectation of 5.9% yoy. Energy index rose 34.6% yoy, largest 12-month increase since September 2005. Food index rose 10.1% yoy, first rise above 10% since March 1981.

CPI rose 1.0% mom, above expectation of 0.7% mom. Core CPI rose 0.6% mom, above expectation of 0.5% mom.

Full release here.

The Euro is trading within a narrow consolidation in European session on Friday, but keeps negative tone, following 0.92% post-ECB drop on Thursday.

The single currency lost ground as traders were disappointed by a lack of firmer signals from the ECB about more aggressive steps in coming months, which were widely anticipated ahead of the policy meeting.

The structure on daily chart has weakened after falling daily Ichimoku cloud repeatedly capped the action and subsequent fall left large bearish daily candle (the biggest daily loss since May 12).

Rising bearish momentum adds to negative near-term outlook, along with formation of Doji reversal pattern on weekly chart.

Fresh bears cracked pivotal Fibo support at 1.0619 (38.2% of 1.0349/1.0786 upleg) but need a clear break to confirm negative signal on completion of failure swing pattern on daily chart.

Fibo 50% and 61.8% of 1.0349/1.0789 (1.0568, 1.0516) mark next targets.

On the other side, broken 20DMA (1.0655) reverted to resistance which needs to cap and maintain bearish bias, while bounce and close above 10DMA (1.0696) would sideline bears.
Markets focus on key event today – US inflation data for May.

Annualized figure is expected to remain unchanged at 8.3%, but monthly inflation is seen rising in May (0.7% f/c vs 0.3% in Apr), while encouraging signals come from expectations that closely-watched core CPI (stripped from volatile components) is expected to ease in May, that adds to speculations of peak inflation.

Top US officials continue to describe current levels of inflation as unacceptable, as it hurts the economy as well as politics as anger among Americans rises as prices on petrol stations and supermarkets continue to rise.

The Euro may benefit on inflation peak scenario as this will ease tensions and pressure dollar, while the signal that prices continue to rise will boost expectations for more aggressive steps from Fed and deflate the greenback.

Res: 1.0619; 1.0655; 1.0683; 1.0700
Sup: 1.0568; 1.0516; 1.0500; 1.0452

The Canadian dollar has extended its losses today. USD/CAD is trading at 1.2743, up 0.35% on the day.

Thursday saw the US dollar gives its Canadian cousin a spanking, as USD/CAD jumped 1.13%, its highest daily gain this year. A rise in US Treasury yields helped boost the US dollar, as the 10-year yield remains above 3%. As well, US unemployment claims disappointed, rising to 229 thousand. This was higher than the previous release of 202 thousand and above the estimate of 210 thousand. The rise in claims was not massive, but nonetheless has fed into the market’s nervousness over the US economy, and the result was a drop in risk appetite which sent the Canadian dollar tumbling lower.

It could be a busy end to the trading week, with Canada’s employment report and US inflation on today’s schedule. Canada’s job numbers for May are expected to be solid – the economy is projected to have created 30.0 thousand new jobs, up from 15.3 thousand in April. The unemployment rate is forecast to remain unchanged at 5.2%.

All eyes on US inflation

The highlight of the week will be US inflation for May. Headline inflation is expected at 8.3% (unchanged), while Core CPI is forecast to fall to 5.9%, down from 6.2%. If inflation does indeed drop, there will likely be voices proclaiming that the long-sought inflation peak is finally here. It would, however, be premature to assume that inflation is on a downswing based on one reading alone. Still, there is plenty of anticipation around the inflation release, such that it could be a binary outcome for USD/CAD – if inflation outperforms, Fed hiking expectations will rise. If, however, inflation drops, we could see a move to sell US dollars.

USD/CAD Technical

• USD/CAD is testing resistance at 1.2703. Above, there is resistance at 1.2812
• There is support at 1.2628 and 1.2519