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Russian President Putin’s speech at Victory Day didn’t deliver the feared escalation in the war against Ukraine. Markets reacted stoic, avoiding the trap to turn positive on the likelihood of a near-term cease-fire. Oil prices cede ground though in a move which was also inspired by a Bloomberg report that the EU will drop a proposed ban on EU-owned vessels transporting Russian oil to third countries. That would be an easing of the latest sanctions package against the country. The final element at play are the continued and stricter Chinese lockdowns (Beijing, Shanghai). Brent crude slid from $113/b to below $110/b after failing to take out $113.61 to $115.73 resistance over the past couple of sessions. Other commodities trade on the back foot as well with most metals losing 2% to 3% and Nickel (-6%) underperforming. Soft commodities paint a more mixed picture.

The setback in commodities didn’t set the stage for a turnaround on other markets. Rate markets remain in the driver’s seat in absence of other eco data and events. The German yield curve steepens with yield changes ranging between -6.1 bps (2-yr) and +3.5 bps (30-yr). We admit that bonds are off worst intraday levels as US investors joined the fray. The German 10-yr yield set a new recovery high at 1.2% with the EU 10y swap rate briefly above the psychologic 2% mark for the first time since end 2014. The same reasoning goes for US Treasuries with US yield changes currently ranging between -8.6 bps (2-yr) and +4.1 bps (30-yr). The US 10-yr yield set a new YTD high at 3.2%. Sentiment on European stock markets remained sour with main indices giving away 1.5% and more. The EuroStoxx50 is dropping towards the YTD sell-off low at 3387. Main US indices open with 1%+ losses.

EUR/USD tested the 1.05 big figure for an eighth session running, but a break lower was again avoided. The risk adverse market setting and decline in commodities might have suggested otherwise. At EUR/USD 1.0542 it’s hard to talk about a sustained rebound either. EUR/GBP is going nowhere near last week’s best levels around 0.8550. Northern Ireland’s election outcome (see below) had no impact. Thursday’s UK Q1 GDP numbers will be closely monitored against the grim eco outlook for the remainder of the year.

News Headlines

UK Secretary of State for Northern Ireland Lewis will meet leaders from the country’s two political parties, Sinn Féin and the DUP, and insist on both to quickly form a government. The DUP came second during last week’s elections for the Stormont assembly which saw the Sinn Féin nationalists become the largest party for the first time since the power-sharing executive was created in 1998. The DUP has refused to join the coalition as long as the NI protocol is in place, saying it disrupts trade with mainland UK. Sinn Féin, looking to unite Ireland, is fine with the arrangement. Except for the political instability this standoff may trigger, it also adds another layer to UK discussions with the EU regarding the protocol. On the EU’s current proposals, PM Johnson’s spokesperson Blain said they “don’t go anywhere near far enough to make the protocol sustainable”. It may eventually lead the UK to trigger Article 16, suspending key parts of the agreement unilaterally.

The Reserve Bank of India intervened in all FX markets to protects the rupee, a person familiar said. The Indian rupee gapped lower to an all-time low (USD/INR >77) this morning before depreciating further to USD/INR 77.46 in the close at noon. The RBI is sitting on a pile of about $600bn in reserves that it will put to use against speculators, the person said, adding that the central bank is seeking an orderly depreciation. High inflation and an aggressive Fed tightening cycle is putting many emerging markets under pressure, including India. The central bank last week raised policy rates at an unscheduled meeting to 4.4% in a vain attempt to stem the currency slide.

Daily Pivots: (S1) 130.16; (P) 130.49; (R1) 130.87; More...

Breach of 131.24 resistance argues that USD/JPY's up trend is resuming. Intraday bias is mildly on the upside for 261.8% projection of 109.11 to 116.34 from 114.40 at 133.26. For now, outlook will remain bullish as long as 128.61 support holds. 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) 0.9845; (P) 0.9869; (R1) 0.9909; More....

USD/CHF's rally is still in progress and intraday bias remains on the upside for 261.8% projection of 0.9149 to 0.9459 from 0.9193 at 1.0005 next. On the downside, break of 0.9708 support is needed to indicate short term topping. Otherwise, outlook will stay bullish in case of retreat.

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. Sustained trading above 100% projection of 0.8756 to 0.9471 from 0.9149 at 0.9864 will pave the way to 161.8% projection at 1.0306, which is close to 1.0342 (2016 high). This will remain the favored case as long as 0.9459 resistance turned support holds.

Daily Pivots: (S1) 1.2285; (P) 1.2332; (R1) 1.2389; More...

GBP/USD recovers slightly after hitting forming a temporary low at 1.2259, just ahead of 161.8% projection of 1.3641 to 1.2999 from 1.3297 at 1.2258. Intraday bias is turned neural for consolidations first. But upside of recovery should be limited by 1.2637 resistance to bring fall resumption. Firm break of 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.

Daily Pivots: (S1) 1.0487; (P) 1.0543 (R1) 1.0603; More...

EUR/USD recovers mildly today as consolidation from 1.0470 extends. Intraday bias remains neutral for the moment. In case of another recovery, upside should be limited by 1.0756 support turned resistance to bring fall resumption. On the downside, firm 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.

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.

Risk aversion is the theme of the day, with major European indexes trading in red, while US futures are also diving. Australian Dollar is leading other commodity currencies lower. While Dollar is firm, it's losing some momentum entering into US session. In particular, the greenback is retreating after failing to break through a near term resistance against Euro again. Sterling is currently the stronger one, followed by Euro, will help from buying against Swiss Franc too.

Technically, Gold dips notably today but it's still hold on above 1850.18 temporary low. For now, near term outlook in Gold stays bearish with 1919.63 resistance intact. Deeper decline is expected, sooner or later, through 1850.18. Next target is 100% projection of 2070.06 to 1889.79 from 1998.23 at 1817.96. Break of this projection level could prompt downside acceleration. Attention will be on how Gold' next move correlate to FX pairs too.

In Europe, at the time of writing, FTSE is down -1.76%. DAX is down -1.37%. CAC is down -1.68%. Germany 10-year yield is up 0.010 at 1.145. Earlier in Asia, Nikkei dropped -2.53%. China Shanghai SSE rose 0.09%. Singapore Strait Times dropped -0.51%. Japan 10-year yield rose 0.0054 to 0.251.

Fed Bostic: No need to be moving more aggressively than 50bps

Atlanta Fed President Raphael Bostic told Bloomberg today that last week's 50bps rate hike was "already a pretty aggressive move". He added, "I don't think we need to be moving even more aggressively."

"I think we can stay at this pace and this cadence and really see how the markets evolve ... We are going to move a couple times, maybe two, maybe three times, see how the economy responds, see if inflation continues to move closer to our 2% target, then we can take a pause and see how things are going," he said.

Fed Kashkari: Virtually all of that news is in the wrong direction

Minneapolis Fed President Neel Kashkari said in a CNBC interview, "I'm confident we are going to get inflation back down to our 2% target, but I am not yet confident on how much of that burden we're gonna have to carry versus getting help from the supply side."

He added that "virtually all of that news is in the wrong direction," pointing to Ukraine war and lockdowns in China.

He also emphasized that Fed is focused on its dual mandate, price stability and full employment. If data comes in different from expectations, Fed will change its policy approach.

Eurozone Sentix investor confidence dropped to -22.6, war only knows victims

Eurozone Sentix Investor Confidence dropped from -18.0 to -22.6 in May, worse than expectation of -20.8. The's the third decline in a row, and the lowest reading since June 2020. Current Situation index dropped from -5.5 to -10.5, worst since March 2021. Expectations index dropped from -29.8 to -34.0, worst since December 2008.

Germany Sentix Investor Confidence dropped from -17.1 to -20.5, lowest since May 2020. Current Situation index dropped from -4.8 to -7.3, lowest since March 2021. Expectations index dropped from -28.8 to -32.8, all-time low.

Sentix said: "War only knows victims. The traces of the Ukraine conflict are also becoming increasingly visible in the economy. The sanctions against Russia are having an effect, on enemies and friends alike. Last month, the "first mover" economic index clearly pointed the way towards recession. At the beginning of May, the downturn deepened further. Europe is hit particularly hard. The overall Eurozone index drops to -22.6 points. And for Germany we report an all-time low in economic expectations. In other words: it's coming thick and fast."

Yuan selloff accelerates as China tightens up Shanghai lockdown again

The selloff in Chinese Yuan accelerates again today as the Chinese government tightened up city-wide lockdown in Shanghai again. The decision came after President Xi Jinping's pledge last week to double down on the "battle" against the coronavirus.

USD/CNH (offshore Yuan) hits as high as 6.7763 so far today, highest level since late 2020. Technically, Current rise is at least in the same degree as the down trend from 7.1961 (2020 high). Further rise is expected as long as 6.6111 support holds. Next target is 61.8% retracement of 7.1961 to 6.3057 at 6.8560.

Also, released from China earlier today, exports rose 3.9% yoy in April, above expectation of 3.2% yoy. Imports dropped -2.0% yoy, versus expectation of -3.0% yoy. Trade surplus widened from USD 47.4B to USD 51.1B, basically in-line with expectations.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0487; (P) 1.0543 (R1) 1.0603; More...

EUR/USD recovers mildly today as consolidation from 1.0470 extends. Intraday bias remains neutral for the moment. In case of another recovery, upside should be limited by 1.0756 support turned resistance to bring fall resumption. On the downside, firm 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.

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.

Economic Indicators Update

Atlanta Fed President Raphael Bostic told Bloomberg today that last week's 50bps rate hike was "already a pretty aggressive move". He added, "I don't think we need to be moving even more aggressively."

"I think we can stay at this pace and this cadence and really see how the markets evolve ... We are going to move a couple times, maybe two, maybe three times, see how the economy responds, see if inflation continues to move closer to our 2% target, then we can take a pause and see how things are going," he said.

Minneapolis Fed President Neel Kashkari said in a CNBC interview, "I'm confident we are going to get inflation back down to our 2% target, but I am not yet confident on how much of that burden we're gonna have to carry versus getting help from the supply side."

He added that "virtually all of that news is in the wrong direction," pointing to Ukraine war and lockdowns in China.

He also emphasized that Fed is focused on its dual mandate, price stability and full employment. If data comes in different from expectations, Fed will change its policy approach.

G-7 commits to ban Russian oil

The euro has started the week quietly, although there have important developments in the West’s sanction battle with Russia. On Sunday, G-7 leaders pledged to phase out or ban the import of Russian oil.

As the war in Ukraine continues, the West has ratcheted up its sanctions against Moscow. Some European countries, such as heavy-weight Germany, have been reluctant to embrace an outright ban on Russian oil, since 25% of Germany’s oil comes from Russia. The war has taken a toll on the eurozone economy, and there are concerns that a complete ban on Russian oil would tip Germany into a recession.  The G-7 commitment to “phase out” Russian oil is a compromise that will allow eurozone nations to find alternative sources as they cut back on Russian oil imports.

Despite the slowdown in eurozone growth, inflation in the bloc isn’t showing any signs of easing. In April, CPI remained at a record 7.5% YoY, edging up from 7.4% in March. The combination of rising prices and weaker economic growth has raised fears of stagnation and increased uncertainty about the economic outlook. This has taken a toll on the euro, which has plunged around 14% since June 1^st.

The dovish ECB has been slow to respond to the new landscape in Europe, although there are more calls within the ECB to raise rates at least up to zero. On Monday, ECB Governing Council member Olli Rehn, who is head of the Finnish central bank, weighed in and urged the ECB to start raising rates in July. ECB President Lagarde cannot afford to continue ignoring soaring inflation and the ECB will have to hike rates in the coming months.

EUR/USD Technical

• There is weak resistance at 1.0557. Above, there is resistance at 1.0632
• 1.0473 is providing support, followed by 1.0398

• WTI crude oil reversed from resistance zone
• Likely to fall to support level 105.00

WTI crude oil recently reversed down from the resistance zone lying between the key resistance level 108.80 (top of the previous impulse wave 1) and the upper daily Bollinger Band.

The downward reversal from this resistance zone stopped the earlier impulse waves (iii) and 3 of the medium-term impulse wave (3) from the start of April.

WTI crude oil can be expected to correct down further toward the next support level 105.00.