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Market movers today

The highlight for markets today will be the FOMC meeting. We expect the Federal Reserve to hike the target range by 50bp, a view shared by consensus and market pricing, and signal that further 50bp rate hikes are looming this year. We also look for the Fed to announce that the balance sheet run-off will start in mid-May, with a cap set at USD95bn as outlined in the minutes (read more in Fed Preview, 28 April).

Services PMIs are released in the morning in a range of European countries, with the US ISM services index following in the afternoon. Rebounding services activity following the pandemic is an important economic driver at the moment.

The US ADP employment report for April will give some insights into the state of the US jobs market, ahead of non-farm payrolls on Friday.

The 60 second overview

Market sentiment: Markets are tuning in for an FOMC meeting later today with a 50bp hike, the largest since 2000, fully priced in and all eyes on the post-meeting press conference and Powell's comments and tone. Ahead of the meeting, risk sentiment seems sour in thin trading in Asia as the Chinese and Japanese markets are closed. US 10y yields have reversed a bit after breaking 3% yesterday with EUR/USD has retreated back close to 1.05 levels.

New sanctions against Russia: The EU is expected to announce its sixth round of sanctions against Russia today. According to diplomatic sources, new sanctions will target oil imports, Russian banks and disinformation campaigns. The EU countries are expected to agree on a ban for Russian oil imports to be phased in by the end of this year. For an EU-wide decision, unanimity is needed, and hence, the deal is expected to offer exemptions for at least Slovakia and Hungary - the two countries that heavily rely on Russian oil. There are also speculations that Bulgaria and the Czech Republic could join Slovakia and Hungary in demands for exemptions. Meanwhile, according to FT, independent refiners in China, which is the third largest buyer of Russian oil, have been discreetly purchasing Russian oil at steep discounts.

Victory Day looms: With May 9 approaching, we believe Russia is in a hurry to achieve some concrete results in the war in Ukraine to celebrate with the domestic public on next Monday. Last week, we highlighted that the risk of escalation may be growing as the Victory Day is raising the sense of urgency, see Research Russia- Ukraine - Several signals point to an escalation in the war in Ukraine as Victory Day looms, 26 April. According to anonymous sources close to Kremlin, Russia is planning to install occupation governments, order locals to pay with roubles and to set up referendums in some areas to open way for full annexation. Despite the disappointing performance of the Russian army, Kremlin officials remain confident that Russia will secure control over the Donetsk and Luhansk regions. Moscow is also seeking a tighter grip over the southern Kherson and Zaporizhzhia - regions already to some extent controlled by Russians. Securing control of these four regions would leave about fifth of Ukraine's territory and most of its coast under Russian control.

FI: The main event today is the FOMC meeting, where the Federal Reserve is expected to hike rates by 50bp as well as releasing more detail regarding QT. The 50bp hike is fully priced in but the risk of a 75bp rate hike is expected to be small even though it has been called for by Fed governor Bullard. The market reaction will very much depend on the communication from the Federal Reserve and whether the Federal Reserve will increase the front-loading of the rate hikes as well as stepping up the pace on the QT.

FX: EUR/USD is likely to go even lower from here and downside risk to our 12M target at 1.05 seems very relevant to consider. Today, the FOMC meeting will be the key event.

Credit: Credit markets benefitted from the bettering of risk sentiment, which caused iTraxx Xover to tighten 8bp and Main almost 2bp. This took the indices to 419.6bp and 88.3bp, respectively.

Nordic macro

Finnish and Swedish Prime Ministers Sanna Marin and Magdalena Andersson met for a second day of talks with the German Chancellor Olaf Scholz on Tuesday (see Yle news). After the meeting, Finnish PM Marin praised the quality of the talks and said the timing was perfect. She also said Finland and Sweden share the same security environment with their choices being interdependent. Marin hopes the two countries share the same direction and can move in tandem. The Finnish Social Democratic Party, led by PM Marin, is expected to officially announce their NATO stance on May 14, and Finland is expected to proceed in applying for a NATO membership before summer.

Daily Pivots: (S1) 0.7045; (P) 0.7097; (R1) 0.7146; More...

Intraday bias in AUD/USD remains neutral as consolidation from 0.7029 temporary low is extending. Further decline is still expected as long as 0.7228 minor resistance holds. As noted before, fall from 0.7660 is seen as the third leg of the larger correction from 0.8006. Below 0.7029 will target 0.6966 low first. Firm break there will confirm this bearish case and target 0.6756 medium term fibonacci level next. Nevertheless, considering bullish convergence condition in 4 hour MACD, break of 0.7228 should indicate short term bottoming, and turn bias back to the upside for stronger rebound.

In the bigger picture, price actions from 0.8006 are seen as a corrective pattern to rise from 0.5506 (2020 low). Fall from 0.7660 should be the third leg of this pattern. Break of 0.6966 will target 50% retracement of 0.5506 to 0.8006 at 0.6756. On the upside, break of 0.7660 will revive that case that the correction has already completed at 0.6966.

Overall, the markets are pretty quiet as focuses turns to Fed's rate hike and guidance today. Dollar is consolidating in tight range, preparing for the next move. For now, Aussie and Loonie are the stronger ones for the week, but they only have a slim advantage over the greenback. Sterling is the worst, followed by Swiss Franc and Kiwi. Yen is mixed, also awaiting the next move in treasury yields.

Technically, main focuses will be on Dollar pairs today. In particular, break of 1.0470 support in EUR/USD, 1.2410 support in GBP/USD, 0.7029 support in AUD/USD, and 131.24 resistance in USD/JPY would confirm that Dollar buying is back. It would be a strong sign of underlying strength in Dollar if these levels are taken out simultaneously.

In Asia, at the time of writing, Hong Kong HSI is down -1.23%. Singapore Strait Times is down -0.05%. Japan and China are on holiday. Overnight, DOW rose 0.20%. S&P 500 rose 0.48%. NASDAQ rose 0.22%. 10-year yield dropped -0.036 to 2.960.

ECB Schnabel: Rate increase in July is possible

In an interview, ECB Executive Board member Isabel Schnabel "a rate increase in July is possible in my view." But she added, "We of course have to wait and see how the data evolve up to the time of the decision. The first interest rate hike will in any case not take place until after the end of net asset purchases; we have committed to that."

Schnabel also noted that energy is "not the only factor" for the current high inflation. Core inflation also "climbed strongly to 3.5%". So, "we are seeing that inflationary pressures are becoming more broad-based."

"There can be no doubt that we will see higher wage demands if inflation remains so high over a prolonged period. We need to prevent high inflation from becoming entrenched in expectations. Talking is no longer enough, we need to act," she said.

NZ unemployment rate unchanged at 3.2%, high wage inflation

New Zealand employment rose 0.1% qoq in Q1, matched expectations. However, total actual weekly hours worked dropped slightly by -0.2%. Unemployment rate was unchanged at 3.2%, slightly above expectation of 3.1%. Participation rate dropped -0.1% to 70.9%.

Labor cost index rose 0.7% qoq, matched expectations. All sectors wage inflation rose 0.8% qoq. Annual rate jumped from 2.6% to 3.0%. "Wage inflation is at its highest level since the March 2009 quarter," business prices delivery manager Bryan Downes said.

Australia retail sales rose 1.6% mom to new record in Mar

Australia retail sales rose 1.6% mom to new record AUD 33.6B in March, well above expectation of 0.5% mom. Over the 12-month period, sales rose 9.4% yoy.

Director of Quarterly Economy Wide Statistics, Ben James, said the result was up 0.8% on the previous record level set in November 2021. This follows a 1.8% rise in February 2022, a 1.6% rise in January 2022 and a fall of -4.1% in December 2021.

"Rising prices, combined with the continued easing of restrictions across the country has led to rises in turnover in all three months of the March quarter.

Fed to hike 50bps today, but what next?

Fed is widely expected to raise federal funds rate by 50bps to 0.75-1.00% today. With markets pricing in 99.1% chance of that, there is no reason for Fed to rock the boat. Also, Fed is expected to announce the plan for runoff of its USD 9T balance sheeting, at a pace of roughly USD 95B per month (USD 60B in treasuries and USD 35B in MBS). That would be twice the speed of its quantitative tightening back in 2017.

Still, the main question is what next. Fed fund futures are currently pricing in 99.1% chance of another front-loading move in June to 1.50-1.75%. That is, a 75bps hike is near fully priced in for the next meeting. Markets would be eager to get some hints from Chair Jerome Powell on such expectations. But then, Powell is unlikely to give anything concrete.

Here are some previews on FOMC:

• Fed to Speed Up Rate Hikes, But How Far Will Powell Go?
• FOMC meeting preview – Hawkish, but will it be hawkish enough?
• FOMC Meeting Preview: 50bps a "Done Deal" but Balance Sheet Update Will be Key
• Fed Research – Preview: 50bp Rate Hike

In term of market reactions, the first two to note is whether EUR/USD would break through 1.0470 support to resume larger down trend. Second, attention is on whether 10-year yield would power through 3% handle.

Also, if Dollar is going to power up, Gold might re-accelerate downwards to 100% projection of 2070.06 to 1889.79 from 1998.23 at 1817.86, or even through it. Development in Gold would be used to confirm the underlying strength in Dollar.

Elsewhere

Germany trade balance, Eurozone PMI services final and retail sales, UK mortgage approvals and M4 will be featured in European session.

Later in the day, in addition to FOMC rate decision, US will release ADP employment, trade balance and ISM services. Canada will also release trade balance.

AUD/USD Daily Report

Daily Pivots: (S1) 0.7045; (P) 0.7097; (R1) 0.7146; More...

Intraday bias in AUD/USD remains neutral as consolidation from 0.7029 temporary low is extending. Further decline is still expected as long as 0.7228 minor resistance holds. As noted before, fall from 0.7660 is seen as the third leg of the larger correction from 0.8006. Below 0.7029 will target 0.6966 low first. Firm break there will confirm this bearish case and target 0.6756 medium term fibonacci level next. Nevertheless, considering bullish convergence condition in 4 hour MACD, break of 0.7228 should indicate short term bottoming, and turn bias back to the upside for stronger rebound.

In the bigger picture, price actions from 0.8006 are seen as a corrective pattern to rise from 0.5506 (2020 low). Fall from 0.7660 should be the third leg of this pattern. Break of 0.6966 will target 50% retracement of 0.5506 to 0.8006 at 0.6756. On the upside, break of 0.7660 will revive that case that the correction has already completed at 0.6966.

Economic Indicators Update

Fed is widely expected to raise federal funds rate by 50bps to 0.75-1.00% today. With markets pricing in 99.1% chance of that, there is no reason for Fed to rock the boat. Also, Fed is expected to announce the plan for runoff of its USD 9T balance sheeting, at a pace of roughly USD 95B per month (USD 60B in treasuries and USD 35B in MBS). That would be twice the speed of its quantitative tightening back in 2017.

Still, the main question is what next. Fed fund futures are currently pricing in 99.1% chance of another front-loading move in June to 1.50-1.75%. That is, a 75bps hike is near fully priced in for the next meeting. Markets would be eager to get some hints from Chair Jerome Powell on such expectations. But then, Powell is unlikely to give anything concrete.

Here are some previews on FOMC:

• Fed to Speed Up Rate Hikes, But How Far Will Powell Go?
• FOMC meeting preview – Hawkish, but will it be hawkish enough?
• FOMC Meeting Preview: 50bps a "Done Deal" but Balance Sheet Update Will be Key
• Fed Research – Preview: 50bp Rate Hike

In term of market reactions, the first two to note is whether EUR/USD would break through 1.0470 support to resume larger down trend. Second, attention is on whether 10-year yield would power through 3% handle.

Also, if Dollar is going to power up, Gold might re-accelerate downwards to 100% projection of 2070.06 to 1889.79 from 1998.23 at 1817.86, or even through it. Development in Gold would be used to confirm the underlying strength in Dollar.

Australia retail sales rose 1.6% mom to new record AUD 33.6B in March, well above expectation of 0.5% mom. Over the 12-month period, sales rose 9.4% yoy.

Director of Quarterly Economy Wide Statistics, Ben James, said the result was up 0.8% on the previous record level set in November 2021. This follows a 1.8% rise in February 2022, a 1.6% rise in January 2022 and a fall of -4.1% in December 2021.

"Rising prices, combined with the continued easing of restrictions across the country has led to rises in turnover in all three months of the March quarter.

Full release here.

New Zealand employment rose 0.1% qoq in Q1, matched expectations. However, total actual weekly hours worked dropped slightly by -0.2%. Unemployment rate was unchanged at 3.2%, slightly above expectation of 3.1%. Participation rate dropped -0.1% to 70.9%.

Labor cost index rose 0.7% qoq, matched expectations. All sectors wage inflation rose 0.8% qoq. Annual rate jumped from 2.6% to 3.0%. "Wage inflation is at its highest level since the March 2009 quarter," business prices delivery manager Bryan Downes said.

Full release here.

In an interview, ECB Executive Board member Isabel Schnabel "a rate increase in July is possible in my view." But she added, "We of course have to wait and see how the data evolve up to the time of the decision. The first interest rate hike will in any case not take place until after the end of net asset purchases; we have committed to that."

Schnabel also noted that energy is "not the only factor" for the current high inflation. Core inflation also "climbed strongly to 3.5%". So, "we are seeing that inflationary pressures are becoming more broad-based."

"There can be no doubt that we will see higher wage demands if inflation remains so high over a prolonged period. We need to prevent high inflation from becoming entrenched in expectations. Talking is no longer enough, we need to act," she said.

Full interview here.

The Fed is almost certain to raise interest rates by half a percentage point and begin shrinking its enormous balance sheet when it concludes its meeting at 18:00 GMT Wednesday. Then on Friday, the employment report for April will hit the markets and is expected to reaffirm the strength of the US economy. Overall, the dollar will likely remain king until the economic outlook for Europe, China, and Japan begins to improve. 

Fed gets its wish

Fed officials have been talking a big game lately, preparing the markets for a series of rapid-fire rate increases to cool sizzling inflation. Their message has finally gotten across. Ten year real US yields turned positive after a long time as inflation expectations declined, which means that investors are starting to believe the Fed will get the job done.

A half percentage point rate increase is already fully priced in for this meeting, so the market reaction will boil down to the details around the balance sheet reduction process and Chairman Powell’s remarks during his press conference.

It won’t be easy for Powell and his colleagues to outgun market expectations even if they wanted to. The bar has been set quite high with a total of 200 basis points of rate hikes priced in until September. It’s difficult to go any faster than this, otherwise there’s a real risk something breaks - whether it’s the bond market, housing market, or a stock market swimming in leverage.

The Fed wants to avoid sparking panic. With economic growth losing steam, the dollar strengthening so much, and inflation expectations cooling a touch, there’s no great urgency for Powell to ‘go to war’ at this meeting. Instead he might strike a balanced tone, highlighting inflation worries but also noting the risks around growth, especially with Europe and China also slowing.

This may disappoint some US dollar bulls. In this case, euro/dollar could inch higher to test the 1.0635 zone.

Full employment ahead

Then on Friday at 12:30 GMT, the latest US employment report will be released. Nonfarm payrolls are expected to have risen by 400k in April, pushing the unemployment rate down one tick to reach 3.5%.

Such a low unemployment rate was only achieved for a few months before the pandemic - you have to go back to the 1960s to find similar readings. Wage growth is forecast to have remained almost unchanged but with the economy almost back to full employment, wages are likely to pick up soon.

As for any surprises, job market indicators generally favor a strong nonfarm payrolls print. The Markit PMI survey showed that the rate of job creation in April was the strongest in a year while initial jobless claims fell further during the survey week, both pointing to a solid print. A strong report overall could help euro/dollar move back down towards the 1.0470 zone.

There was some cause for concern from the ISM manufacturing survey, where the employment sub-index fell notably. That said, the manufacturing sector accounts for less than 10% of the US workforce, so this signal should be taken with a grain of salt.

Dollar remains king

As for the dollar, it may take a step back this week in case the Fed is not as hawkish as many investors expect, but the overall outlook remains positive. The dollar got here by riding a perfect storm of rising US rates, risk aversion, and storm clouds gathering over every other region.

An energy crisis has brought Europe to its knees, China remains committed to strict lockdowns that will hammer growth, the British pound is trading like a proxy for stock markets, and Japan wants a weaker currency.

Until the outlook for these regions begins to improve, it’s difficult to envision a trend reversal in the dollar - even if the Fed slightly under delivers relative to market expectations. There’s just no real alternative.

DXY:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance at 103.706 where the swing high resistance is from our 1st support at 102.900 in line with the 23.6% and 78.6% Fibonacci retracement. Alternatively, price may break 1st support structure and head for 2nd support where the 127.2% Fibonacci extension and 100% Fibonacci projection is is.

Areas of consideration:

• H4 time frame, 1st resistance at 103.706
• H4 time frame, 1st support at 102.900

XAU/USD (GOLD):

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from our 1st resistance at 1874 where the 38.2% Fibonacci retracement and pullback resistance is to our 1st support at 1849 in line with the horizontal swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal pullback resistance is.

Areas of consideration:

• H4 time frame, 1st Resistance at 1874
• H4 time frame, 1st Support at 1849

GBP/USD:

On the weekly, we expect price to potentially bounce from 1st support level of 1.23627 in line with 61.8% fibonacci retracement towards the 1st resistance level of 1.33634 in line with 50% fibonacci retracement.

On the daily, we expect price to potentially bounce from 1st support level of 1.24385 in line with 61.8% fibonacci retracement towards the 1st resistance level of 1.34739 in line with 78.6% fibonacci retracement.

On the H4, we have a bullish bias that price will bounce from 1st support level of 1.24099 which lines up with a major 61.8% fibonacci retracement towards the 1st resistance level of 1.28160 which lines up with 61.8% fibonacci retracement.

Areas of consideration:

• H4 1st resistance at 1.28160
• H4 1st support at 1.24099
• H4 2nd support at 1.22589

USD/CHF:

On the H4, we expect that price will potentially reverse from 1st resistance level of 0.97986 in line with a major 127.2% fibonacci extension towards the 1st support level of 0.96723 in line with 23.6% fibonacci retracement. Alternatively, price may head for 2nd resistance at our daily resistance.

Areas of consideration

• 1st support level at 0.96723
• 1st resistance level at 0.97986

EUR/USD :

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from our 1st resistance at 1.05826 where the 23.6% Fibonacci retracement is to our 1st support at 1.04814 in line with the horizontal swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the 127.2% Fibonacci extension is.

Areas of consideration :

• H4 1st resistance at 1.05826
• H4 1st support at 1.04814

USD/JPY:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance at 131.240 where the swing high resistance is from our 1st support at 129.374 in line with the horizontal pullback support and 50% and 78.6 Fibonacci retracement. Alternatively, price may break 1st support structure and head for 2nd support where the horizontal swing low support is.

Areas of consideration:

• H4 time frame, 1st resistance at 131.240
• H4 time frame, 1st support at 129.374

AUD/USD:

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from our 1st resistance where the 23.6%, 61.8% Fibonacci retracement is to our 1st support in line with the horizontal swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal swing high resistance is.

Areas of consideration

• H4 1st resistance at 0.71213
• H4 1st support at 0.70348

NZD/USD:

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from our 1st resistance where the 50% Fibonacci retracement is to our 1st support in line with the horizontal swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal pullback resistance and 78.6% Fibonacci retracement is.

Areas of consideration:

• H4 time frame, 1st support at 0.64197
• H4 time frame, 1st resistance at 0.65324

USD/CAD:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance at 1.29023 where the swing high resistance is from our 1st support at 1.27783 in line with the horizontal pullback support, 61.8% and 78.6% Fibonacci retracement. Alternatively, price may break 1st support structure and head for 2nd support where the horizontal swing low support is.

Areas of consideration:

• H4 time frame, 1st resistance at 1.29023
• H4 time frame, 1st support at 1.27783

OIL:

On the Weekly, with price moving above the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance where the swing high resistance is from our 1st support in line with the horizontal pullback support and 50% Fibonacci retracement. Alternatively, price may break 1st support structure and head for 2nd support where the horizontal swing low support is.

Areas of consideration:

• H4 time frame, 1st resistance of 106.99
• H4 time frame, 1st support of 101.15

Dow Jones Industrial Average:

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from our 1st resistance at 33114 where the pullback resistance and 23.6% Fibonacci retracement is to our 1st support at 32559 in line with the horizontal swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal pullback resistance and 38.2% Fibonacci retracement.

Areas of consideration :

• H4 time frame, 1st resistance at 33114
• H4 time frame, 1st support at 32559

Key Highlights

• AUD/USD declined sharply below the 0.7200 support zone.
• A major resistance is forming near 0.7200 and 0.7240.
• Gold price broke the $1,900 support to move into a short-term negative zone.
• The US ADP Employment could change 395K in April 2022, down from 455K.

AUD/USD Technical Analysis

The Aussie Dollar struggled to stay above 0.7400 against the US Dollar. AUD/USD declined heavily and traded below the key 0.7250 support zone.

Looking at the 4-hours chart, the pair extended decline below 0.7220. There was also a close below 0.7200, the 200 simple moving average (green, 4-hours), and the 100 simple moving average (red, 4-hours).

Finally, there was a move below the 0.7050 level and the pair traded to a new multi-month low at 0.7030. It is now consolidating losses above the 0.7050 level.

The pair tested the 23.6% Fib retracement level of the main decline from the 0.7458 swing high to 0.7030 low. The first major resistance is forming near the 0.7200 level. If there is an upside break above 0.7200, the pair could rise to 0.7240.

The 50% Fib retracement level of the main decline from the 0.7458 swing high to 0.7030 low is also near the 0.7245. A close above 0.7240 and 0.7250 could open the doors for a move towards the 0.7300 resistance.

If not, there is a risk of more losses below 0.7050. The next major support is near the 0.7000 level. Any more losses may perhaps push AUD/USD towards the 0.6920 support zone.

Looking at EUR/USD, the pair is struggling to recover above the 1.0600 level. Similarly, GBP/USD is facing an uphill task near the 1.2600 zone.

Economic Releases

• US ADP Employment Change for April 2022 - Forecast 395K, versus 455K previous.
• US ISM Services Index for April 2022 – Forecast 58.5, versus 58.3 previous.