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Daily Pivots: (S1) 1.2976; (P) 1.3014; (R1) 1.3067; More...

A temporary top should be formed at 1.3050 with current retreat. Intraday bias in USD/CAD is turned neutral first. But still, further rally will remain in favor as long as 1.2712 support holds. Sustained break of 1.3022 fibonacci level will carry larger bullish implications. Next target will be 100% projection of 1.2005 to 1.2947 from 1.2401 at 1.3343. However, break of 1.2712 will indicate rejection by 1.3022 fibonacci level and turn bias to the downside.

In the bigger picture, focus stays on 38.2% retracement of 1.4667 (2020 high) to 1.2005 (2021 low) at 1.3022. Sustained break there should confirm that the down trend from 1.4667 has completed after defending 1.2061 long term cluster support. Further rise would then be seen towards 61.8% retracement at 1.3650. However, rejection by 1.3022 will maintain medium term bearishness. Break of 1.2005 will resume the down trend from 1.4667 and that carries larger bearish implications too.

Daily Pivots: (S1) 0.6905; (P) 0.6946; (R1) 0.6980; More...

AUD/USD's break of 0.7027 minor resistance indicates temporary bottoming at 0.6910. Intraday bias is turned neutral for some consolidations first. But still, near term outlook will remain bearish as long as 0.7265 resistance holds. Break of 0.6910 will extend larger decline from 0.8006 to 0.6756 medium term fibonacci level next.

In the bigger picture, price actions from 0.8006 are seen as a corrective pattern to rise from 0.5506 (2020 low) with fall from 0.7660 as the third leg. Deeper fall should be seen to 50% retracement of 0.5506 to 0.8006 at 0.6756. This coincides with 100% projection of 0.8006 to 0.7105 from 0.7660 at 0.6760. Strong support is expected from 0.6756/60 cluster to contain downside to complete the correction. However, sustained break of 0.6756/60 would argue that AUD/USD is indeed in a medium term down trend.

Inflation is becoming more widespread across a broad swathe of consumer spending categories, raising the risk that it could become entrenched.

As we noted in our CPI preview report on Monday, a reading near economists’ consensus expectations of 8.1% year-over-year for price increases “would be the first meaningful decline in the annualized inflation rate since the depths of the COVID recession.”

As it turns out, inflation remains more stubborn than economists were expecting. The headline US CPI reading for April came in at 8.3% y/y, higher than expected and down only incrementally from last month’s 8.5% reading. Core CPI (excluding food and energy prices) also came in hotter than anticipated, printing at 6.2% vs. 6.0% eyed.

In terms of the individual components, much of the increase was driven by a spike in the price of food (largest 12-month increase since 1980!), which offset a big decline in the price of used cars. Put simply, inflation is becoming more widespread across a broad swathe of consumer spending categories, raising the risk that it could become entrenched.

Market reaction

So far, traders don’t believe this report will prompt the Fed to raise interest rates more aggressively through the summer, with the market still pricing in “just” a ~25% of a 75bps rate hike at one of the next two FOMC monetary policy meetings.

That said, traders in other markets are certainly taking notice of the elevated inflation reading. As we go to press, the US dollar is rallying by about 40 pips against most of its major rivals, US index futures have flipped into negative territory, and yields on US treasury bonds have spiked by 10bps across the curve.

Source: StoneX, TradingView

With this morning’s inflation report confirming that price pressures are NOT rapidly dissipating of their own accord, tightening financial conditions are likely to keep “risk on” trades (global indices, growth stocks, commodity currencies, etc) on the back foot for now.

Consumer price inflation decelerated in April, rising by 0.3% month-on-month (m/m) – a meaningful slowdown from March's 1.2% m/m gain. On a year-over-year (y/y) basis, inflation was up 8.3% – down 0.2 percentage points (pp) from March.

After having increased by over 30% in the last twelve months, energy prices fell by 2.7% m/m – largely a result of gasoline prices declining by 6.1% m/m. Conversely, food prices rose 0.9% m/m – the seventeenth month of consecutive increases  – and are up 9.4% from year-ago levels.

Core (excludes food and energy) inflation rose 0.6% m/m, which was an acceleration from the 0.3% m/m gain in March. On a year-over-year basis, inflation ticked down 0.3 pp, rising by 6.2% y/y.

Shelter costs matched March's gain, rising 0.5% m/m with the rent index (0.6% m/m), owners' equivalent rent (0.5% m/m) and lodging away from home (1.7% m/m) all notching gains on the month. Looking across other service categories, price growth remained relatively broad-based, with transportation (3.1% m/m), medical (0.5% m/m), and recreation (0.4% m/m) services all up in April. Airfares continued to rise sharply – up a whopping 18.6% m/m.

After having declined in March, core goods prices were higher by 0.2% m/m. This was mainly a result of new vehicle prices rising by 1.1% m/m. Conversely, used vehicle prices (-0.4% m/m), apparel (-0.8% m/m) and education and communication goods (-2.6% m/m) were all lower on the month.

Key Implications

After having steadily increased over the past year, inflationary pressures are finally showing signs of cresting, as both the headline and core measures decelerated when compared to year-ago levels. Indeed, base effects are playing a favorable role, as price pressures stemming from supply chain disruptions first started to manifest in March and April of last year.

The modest pullback in April energy prices will do little to ease the pain that consumers are currently experiencing at the pump. Relative to year-ago levels, gasoline prices are up over 43%, equating to an increase of more than $1.25 per-gallon. To make matters worse, weekly data released by the Energy Information Administration has shown that gasoline prices have already turned meaningfully higher through the first part of May, with the average price of regular grade gasoline surpassing its mid-March high.

The lift in core goods prices in April was entirely due to new vehicle prices. However, the Bureau of Labor Statistics implemented a change in how they track new vehicle prices last month, replacing its own dealership survey-based data with transaction data reported by J.D. Power. The methodology may be contributing some noise to the underlying reading. If we were to abstract from this, core goods prices would have continued to decline in April.

Even though modest, the deceleration in price pressures will come as a welcome development to policymakers. Still, the FOMC has its work cut out for them over the remainder of the year, as they quickly move to swing the monetary pendulum from accommodative to outright restrictive in an effort to guide inflation back to target without causing a recession.

Daily Pivots: (S1) 129.97; (P) 130.27; (R1) 130.75; More...

Intraday bias in USD/JPY remains neutral as consolidation from 131.34 is extending. Further is expected as long as 128.61 support holds. Above 131.34 will target 261.8% projection of 109.11 to 116.34 from 114.40 at 133.26. However, firm break of 128.61 will indicate short term topping, and turn bias to the downside for deeper pull back.

In the bigger picture, current rally is seen as part of the long term up trend form 75.56 (2011 low). Sustained trading above 61.8% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 130.04 will pave the way to 100% projection at 149.26, which is close to 147.68 (1998 high). For now, this will remain the favored case as long as 121.27 support holds.

Daily Pivots: (S1) 1.0509; (P) 1.0547 (R1) 1.0569; More...

EUR/USD is staying in consolidation above 1.0470 temporary low and intraday bias remains neutral. Further decline is in favor as long as 1.0641 minor resistance holds. Break of 1.0470 will resume larger down trend to 161.8% projection of 1.1494 to 1.0805 from 1.1184 at 1.0069. On the upside, break of 1.0641 will turn bias to bring stronger rebound instead.

In the bigger picture, the decline from 1.2348 (2021 high) is expected to continue as long as 1.1185 support turned resistance holds. The break of 1.0635 (2020 low) now raises the chance that it's resuming long term down trend from 1.6039 (2008 high). Retest of 1.0339 (2017 low) low should be seen next. Decisive break there will confirm this bearish case.

Daily Pivots: (S1) 1.2280; (P) 1.2327; (R1) 1.2363; More...

GBP/USD is still bounded in right range above 1.2259 temporary low. Intraday bias remains neutral and some more consolidations could still be seen. In case of another recovery, upside should be limited by 1.2637 resistance to bring fall resumption. On the downside, firm break of 161.8% projection of 1.3641 to 1.2999 from 1.3297 at 1.2258 will extend recent down trend to 200% projection at 1.2013 next.

In the bigger picture, based on current momentum, fall from 1.4248 (2018 high) at least at the same degree as the rise form 1.1409 (2020 low). That is, fall from 1.4248 could be a leg inside the pattern from 1.1409, or resuming the longer term down trend. In either case, deeper decline is expected as long as 1.2999 support turned resistance holds. Next target is 1.1409 low.

As initial reactions to higher than expected headline and core CPI readings, Dollar is trying to resume its near term advance, which stocks futures are paring gains. The question is how sustainable the rally could be. Euro was rather indifferent to hawkish comments from ECB officials, who continued to talk up the chance of a July ECB hike.

So far, Dollar, Yen and Euro are still the strongest ones for the week. Commodity currencies are the worst performers. The trend will likely continue for a while after US inflation data. Still, Dollar traders will need to make up their mind on whether to bid the greenback up against Euro and Yen. Technically, the levels to watch remain 1.0470 support in EUR/USD and 131.34 resistance in USD/JPY.

In Europe, at the time of writing, FTSE is up 0.28%. DAX is up 0.34%. CAC is up 0.91%. Germany 10-year yield is up 0.077 at 1.083. Earlier in Asia, Nikkei rose 0.18%. Hong Kong HSI rose 0.97%. China Shanghai SSE rose 0.75%. Singapore Strait Times rose 0.75%. Japan 10-year JGB yield rose 0.0004 to 0.248.

US CPI slowed to 8.3% yoy, core CPI down to 6.2% yoy, but food index surged

US headline CPI rose 0.3% mom in April, above expectation of 0.2% mom. CPI core rose 0.6% mom, above expectation of 0.4% mom. Food index rose 0.9% mom. Energy index declined -2.8% mom.

Over the 12-month period, headline CPI slowed from 8.5% yoy to 8.3% yoy, but beat expectation of 8.1% yoy. CPI core slowed from 6.5% yoy to 6.2% yoy, also beat expectation of 6.0% yoy. Food index rose 9.4% yoy, highest since April 1981. Energy index rose 30.3% yoy.

ECB Lagarde: First hike could come only few weeks after early Q3

ECB President Christine Lagarde indicated in a speech that the asset purchases could end "early" in Q3, and interest rate hikes could start "only a few weeks" after that.

"We will end net purchases under the asset purchase programme. Judging by the incoming data, my expectation is that they should be concluded early in the third quarter," she said.

"The first rate hike, informed by the ECB's forward guidance on the interest rates, will take place some time after the end of net asset purchases," she reiterated.

"We have not yet precisely defined the notion of 'some time', but I have been very clear that this could mean a period of only a few weeks. After the first rate hike, the normalisation process will be gradual," she added.

ECB Muller: We may get to positive rate by end of the year

ECB Governing Council member Madis Müller said the central bank could already outline its interest rate expectations for the coming months at the June meeting. He added that the first step is to end asset purchases in early July, but "we could even discuss if we should end purchases a few weeks earlier."

"The real issue is interest rate increases and we shouldn't have much of a delay there either," Müller added. "The recent data confirm that the monetary policy stance is not appropriate given where inflation is and given inflation expectations,"

"Even if we go by 25 basis point increments, we may get to a positive rate by the end of the year. For the time being, 25 basis points would be an appropriate increment."

Separately, another Governing Council member Francois Villeroy de Galhau told France Inter radio today, "I think that from this summer onwards, the ECB will gradually raise its interest rates." The Ukraine war provided a "negative shock" for the French economy. He added, "inflation is the principal concern of companies and citizens."

Another Governing Council member Bostjan Vasle said, "what started as a one-off shock has now become a more broad-based phenomenon. When the circumstances change, the policy response must follow."

Australia Westpac consumer sentiment dropped to 90.4 in May, lowest since Aug 2020

Australia Westpac-MI consumer sentiment index dropped from 95.8 to 90.4 in May. That's the lowest level since August 2020. The reading was also -8.4% below the average seen in 2019. The -5.6% decline was the largest since the -6.9% fall in June 2016.

Looking at some details, family finances for the next 12 months dropped from 105.1 to 93.3. Economic conditions for the next 12 months dropped from 95.9 to 90.4. Unemployment expectations rose from 99.2 to 109.6.

Westpac said two "stunning developments are clearly unnerving consumers". Firstly, headline inflation surged above 5% for the first time since 2007. Secondly, RBA raised interest rate for the first time since 2010.

Regarding RBA policies, Westpac said "having now begun its tightening cycle the Board is almost certain to follow up the move in May with a further move in June". It added, "the need to avoid an over-shoot later in the cycle is why, despite this disturbing tumble in Consumer Sentiment, we believe the prudent approach in June would be to lift rates by 40bps rather than the 25 bps that is currently favoured by most analysts.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2280; (P) 1.2327; (R1) 1.2363; More...

GBP/USD is still bounded in right range above 1.2259 temporary low. Intraday bias remains neutral and some more consolidations could still be seen. In case of another recovery, upside should be limited by 1.2637 resistance to bring fall resumption. On the downside, firm break of 161.8% projection of 1.3641 to 1.2999 from 1.3297 at 1.2258 will extend recent down trend to 200% projection at 1.2013 next.

In the bigger picture, based on current momentum, fall from 1.4248 (2018 high) at least at the same degree as the rise form 1.1409 (2020 low). That is, fall from 1.4248 could be a leg inside the pattern from 1.1409, or resuming the longer term down trend. In either case, deeper decline is expected as long as 1.2999 support turned resistance holds. Next target is 1.1409 low.

Economic Indicators Update

US headline CPI rose 0.3% mom in April, above expectation of 0.2% mom. CPI core rose 0.6% mom, above expectation of 0.4% mom. Food index rose 0.9% mom. Energy index declined -2.8% mom.

Over the 12-month period, headline CPI slowed from 8.5% yoy to 8.3% yoy, but beat expectation of 8.1% yoy. CPI core slowed from 6.5% yoy to 6.2% yoy, also beat expectation of 6.0% yoy. Food index rose 9.4% yoy, highest since April 1981. Energy index rose 30.3% yoy.

Full release here.

The British Pound started a fresh decline from the 1.2500 resistance against the US Dollar. The GBP/USD pair traded below the 1.2320 support zone, but the bulls appeared near 1.2295 on FXOpen.

A low was formed near 1.2292 and the pair is now correcting higher. It traded above the 1.2320 level and the 50 hourly simple moving average. Besides, there was a move above a bearish trend line at 1.2325 on the hourly chart.

The pair is now facing resistance near the 1.2350 level. If there is a clear upside break above the 1.2350 resistance, the pair could rise steadily towards the 1.2400 level in the near term. The next major resistance sits near the 1.2450 level.

On the downside, an initial support is near the 1.2320 level. The main support is forming near the 1.2300 level. A break below the 1.2300 support could even push the pair below the 1.2280 support.