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Gold dropped notably this week on the back of strong Dollar. Rising treasury yield, with 10-year yield breaching 3% handle for the first time since 2018, also weigh on the precious metals.

Gold's fall from 1998.23 resumed after slightly stronger than expected recovery last week. Such fall is seen as the third leg of the decline from 2070.06, and should target 100% projection of 2070.06 to 1889.79 from 1998.23 at 1817.86 next. In any case, more downside is expected for the near term as long as 1919.63 resistance holds.

Also, such decline is seen as the third leg of the corrective pattern from 2074.84 (2020 high). Sustained trading below 55 week EMA (now at 1843.71) would pave the way back to 1682.60 support, where is should finish the pattern and bring long term up trend resumption.

Key Highlights

• GBP/USD declined sharply below the 1.2620 support zone.
• It is now attempting a recovery wave above the 1.2550 level.
• EUR/USD is showing signs of more losses below 1.0500.
• The US ISM Manufacturing Index declined from 57.1 to 55.4 in April 2022.

GBP/USD Technical Analysis

The British Pound declined heavily after it broke the 1.2800 support against the US Dollar. GBP/USD traded below the 1.2720 support to enter a bearish zone.

Looking at the 4-hours chart, the pair tumbled below the 1.3620 level. It even settled below 1.3600, the 200 simple moving average (green, 4-hours), and the 100 simple moving average (red, 4-hours).

Finally, there was a move below the 1.2500 level and the pair traded to a new multi-month low at 1.2411. It is now correcting losses above the 1.2500 level. There was a move above a short-term bearish trend line at 1.2520 on the same chart.

An immediate resistance is near the 1.2600 level or the 23.6% Fib retracement level of the key decline from the 1.3090 swing high to 1.2411 low.

The next major resistance is seen near the 1.2750 level or the 50% Fib retracement level of the key decline from the 1.3090 swing high to 1.2411 low. A close above 1.2720 and 1.2750 could open the doors for a move towards the main 1.2920 resistance.

If not, there is a risk of more losses below 1.2500. The next major support is near the 1.2420 level. Any more losses may perhaps open the doors for a move towards the 1.2300 support zone.

Fundamentally, the US ISM Manufacturing Index for April 2022 was released yesterday by the Institute for Supply Management. The market was looking for a rise from 57.1 to 57.6.

The actual result was disappointing, as the US ISM Manufacturing Index declined from 57.1 to 55.4 in April 2022. Besides, the ISM New Orders Index declined from 53.8 to 53.5.

Looking at EUR/USD, the pair is still trading in a bearish zone and there is a risk of a move below the 1.0450 level.

Economic Releases

• Euro Zone Unemployment Rate for March 2022 - Forecast 6.7%, versus 6.8% previous.

Short Term Elliott Wave View in CADJPY suggests cycle from December 20, 2021 has ended with wave ((1)) at 102.96. Pullback in wave ((2)) is currently in progress to correct that cycle. Internal subdivision of wave ((2)) is unfolding as a zigzag Elliott Wave structure. Down from wave ((1)), wave 1 ended at 99.8 and rally in wave 2 ended at 101.02. Pair resumes lower in wave 3 towards 99.13, wave 4 ended at 99.74, and wave 5 ended at 98.96. This completed wave (A) in higher degree.

Wave (B) rally ended at 102.46 with internal subdivision as a zigzag structure in lesser degree. Up from wave (A), wave A ended at 100.12, pullback in wave B ended at 99.43, and wave C ended at 102.46 which completed wave (B). Expect pair to extend lower in wave (C) with internal subdivision as another 5 waves in lesser degree. Down from wave (B), wave 1 ended at 100.59. While wave 2 rally fails below wave (B) at 102.46, and more importantly below wave ((1)) at 102.96, pair should resume lower. Potential target for wave (C) lower is 100% – 161.8% Fibonacci extension of wave (A) which comes at 96 – 98.4.

CADJPY 45 Minutes Elliott Wave Chart

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The price of crude is down more than 3% by the start of the New York trading session with a tug-of-war around $100 a barrel of WTI. And this is a rather remarkable market reaction, given reports that EU countries are dropping their veto on the Russian oil embargo one by one.

Germany, followed by Austria, Hungary, and Slovakia, have withdrawn their vetoes to ban oil purchases from Russia. Moreover, the German finance minister has pointed to the technical possibility of an immediate embargo.

This news, in practice, has not triggered a new wave of oil purchases by speculators. A stronger dollar and signs of slowing activity in China and the US continue to weigh on global demand for risky assets and oil.

Global investor wariness is preventing oil from making full use of market conditions, raising questions about the sustainability of the latest rally in December.

The signal for a break in the uptrend would be for oil to consolidate below the area of previous local lows at $95. However, one can draw a downtrend through the March and April peaks. Potentially, this situation leads to a strong move after exiting the two-month consolidation.

The week ahead is full of critical macro events that could throw the markets off their fragile balance, from the OPEC+ meeting and EU sanctions to the announcement of FOMC decisions and the monthly US employment statistics.

The March ISM manufacturing index registered 55.4, missing expectations of a 57.6 print. The index fell 1.7 percentage points from the March reading of 57.1.

New orders fell by 0.3 percentage points to 53.5, while new export orders fell by 0.5 percentage points to 52.7.

The backlog of orders sub-index came in at 56.0, falling 4.0 percentage points from March's 60.0 print.

The production index decreased 0.9 percentage points to 53.6, while the employment index fell 5.4 percentage points to 50.9.

The supplier deliveries sub-index rose to 67.2 points from 65.4 in March. The sub-index continues to reflect difficulties in improving delivery rates due to production issues related to the pandemic.

17 of 18 manufacturing industries reported growth in January. Growth was led by Apparel, Leather & Allied Products; Machinery; Plastics & Rubber Products; Nonmetallic Mineral Products; Computer Electronic Products; and Food, Beverage & Tobacco Products.

Key Implications

The manufacturing sector continues to expand but the PMI has now contracted for the second consecutive month and has recorded its lowest reading since July 2020.

On the supply side, inventories expanded at their slowest rate since July 2021 and supplier delivery times expanded at their fastest pace since last November. Looking forward, the ongoing lockdowns in China threaten to renew bottlenecks in deliveries, raising the prospect of renewed inventory drawdowns. Moreover, rising energy prices are helping push transportation and production costs higher. With strong wage growth supporting demand, these costs will continue to be passed on to consumers, adding pressure to goods inflation.

April's ISM reflects an economy that continues to expand despite facing increasing headwinds. Employment in the manufacturing sector registered only a moderate expansion while the production subindex has continued to trend downwards. With the global outlook becoming increasingly gloomy and U.S. consumers shifting spending away from manufactured goods, it could be a bumpy ride over the coming months.

EUR/USD suffered a dismal week, plunging 2.33%. The euro broke below the 1.05 line on Thursday but has managed to recover.

The ECB doesn’t meet until June, but policy makers will be closely monitoring eurozone inflation, which continues to climb. It was only a few months ago that ECB President Lagarde was dismissive about rising inflation, saying that it was a transient development (readers will recall the exact same stance from Fed Chair Powell). We certainly won’t be hearing the ‘T” word anymore with regard to eurozone inflation, which hit a massive 7.5% in April. The ECB may not stay in sync with the pace of tightening by the Fed and other major central banks, but the ECB is signalling that the issue is not whether to hike, but when and by how much. There are hawkish voices within the ECB calling for a June hike, but September could be the month to circle in the calendar, which will give policy makers additional data to review before making any moves.

In the case of the Fed, tighter rates are a given, with spiralling inflation, a tight labor market and robust growth. It’s a trickier scenario for the ECB, as eurozone growth has not been as strong and the Ukraine war and Russian sanctions have dampened economic growth. There are concerns about stagflation, and these risks will rise as the ECB raises rates. We can expect the ECB to tighten policy in the coming months, but at a much slower pace than the Fed.

The FOMC meets on Wednesday and a half-point hike from the Fed is practically a done deal. This will be a significant move, as the Fed hasn’t delivered such a large rate increase in 20 years. The Fed has hinted at additional half-point rates in June and July, and some analysts are even predicting super-supersize hikes of 0.75%, which hasn’t happened since 1994. The Fed is in full throttle trying to catch up to the inflation curve, and this widening of the US/Europe rate differential could push the euro to 1.03 and perhaps even to parity in the coming months.

EUR/USD Technical

• There is resistance at 1.0612 and 1.0699
• 1.0408 is providing support, followed by 1.0321

WTI oil price fell near $100 support on Monday, extending weakness after Friday’s rally stalled, ending trading in bearish candle with long upper shadow and closing below the upper boundary line of the triangle, formed on daily chart.

Fresh weakness was sparked by renewed fears about demand from China, the world’s biggest oil importer, that sidelined fears about stronger supply disruption by potential EU ban on Russian crude oil.

Near-term price action continues to move within the narrowing range, limited by a triangle and without clear direction, with mixed daily techs adding to the picture.

Bearish scenario would be activated on firm break of $100 level, but initial signal would look for confirmation on extension below triangle support line ($96.92) that would expose key supports at $92.92/64 (Mar / Apr higher base).

On the other side, sustained break above cracked triangle’s upper boundary ($103.59) would generate initial bullish signal which would look for verification on lift $107.09 (Fibo 38.2% of $130.48/$92.64), with bulls to tighten grip and sideline downside risk on lift above $110 barrier.

Res: 103.59; 105.12; 107.09; 107.95.
Sup: 100.25; 100.00; 96.92; 95.27.

It was a dismal week for the Japanese yen, as USD/JPY climbed for an eighth successive week. In the European session, USD/JPY is trading quietly at the symbolic 130 level.

Fed expected to hike by 0.50%

Japanese markets are closed for a holiday on Tuesday and Wednesday, but it will likely be a busy mid-week for the yen, as the Federal Reserve holds a key policy meeting on Wednesday. The Fed is virtually certain to raise rates by 0.50% at the meeting, but there is still an air of anticipation in the air, even though the oversize rate increase has been priced in.

First, the Fed hasn’t raised rates by 0.50% in 20 years, so such a move would certainly be a monumental event. A large hike sends a strong message to the markets that the Fed is determined to push inflation back down to its 2% target, and is looking to raise rates to a neutral level of 2.5% and then slow the pace of tightening. The challenge for the Fed is to raise rates without stalling the economy. Investors are already looking ahead to the June and July meetings, which are also likely to feature 0.50% hikes. Some analysts are projecting 0.75% hikes at future meetings, an event we haven’t since 1994. The fact that a super-super hike of 0.75% is being bandied around shows how far the Fed has fallen behind in the inflation curve, as it plays a desperate game of catch-up.

With the Fed showing an aggressive tightening mode, the outlook for the dollar is positive, and I expect the yen to remain under strong pressure. USD/JPY has broken above the 130 line much more quickly than expected, and with US yields on a strong upswing, the US/Japan rate differential continues to widen, as the BoJ is fiercely defending its yield curve control.

USD/JPY Technical

• USD/JPY has broken below support at 129.89. Next, there is support at 1.2807
• There is resistance at 1.3122 and 1.3304

Markets

An awful close on WS Friday and a new batch of negative data on China economic growth (composite PMI and non-manufacturing PMI both tumbling further into contraction territory to 42,7 and 41.9 respectively) were a bad omen for sentiment at the start of the new trading week. Investors in risky assets also still ponder additional headwinds for growth due to further mutual retaliatory sanctions between Russia and Europe. European equities opened with losses of 1.0%+. A reportedly Nordic driven-driven (short-lived) flash crash didn’t help to calm nerves. Neither were EC confidence data. Economic confidence (combination of consumer & business confidence) declined further from a downwardly revised 106.7 to 105, the lowest level since March last year. Business sentiment series eased but still showed some resilience. However consumers clearly are unsettled by persistent uncertainty on the war in Ukraine and inflation eroding purchasing power (-22.0 from -16.9 ). European equities maintained a downside bias with the EuroStoxx currently losing about 2.0%. US futures initially tried to regain a few ticks after Friday’s sell-off, but cash markets open marginally in red. The risk-off/fear for some kind of a stagflationary context again hardly caused any safe haven bid for core European bonds. The German curve steepens, with the 2-y declining 2 bps but the 10-y/30-y still rising marginally (2.1/2.8bps). European swap rates simply continue their uptrend, with the 10-y setting a new cycle peak near 1.77%! Intra-EMU spreads versus Germany show a mixed picture, but the steepening in the EMU curve clearly doesn’t help LT spreads. Italy again underperforms (10-y, +6 bps vs Germany). At 2.84%, the yield spike at the peak of the corona panic is coming with reach. The US yield curve also bear steepens as expected decisive Fed action raises real yields (10-y real yield again in positive territory at 0.06%). The 2-y rises 1 bp. The 30-y (+5 bps) again surpasses the 3.0% mark. An easing in some cyclical commodities including oil (Brent $103.51 p/b) or copper for now hasn’t any meaningful impact on the trend dynamics in core interest rate markets.

Moves in the major FX cross rates were rather guarded today. The DXY USD-index regains part of Friday’s correction. At 103.50, the cycle top of 103.93 is again within reach. USD/JPY tries to regain the 130 barrier. EUR/USD struggles not to fall back below the 1.05 handle, with last week’s low (1.0472) last intermediate support ahead of the 1.0341 2017 low. Sterling still slightly outperforms the euro (EUR/GBP 0.8375) as markets assume that the BoE can’t afford to stay on the sidelines despite the cost of living crisis eroding growth and consumer spending. The risk-off also weakens the CE currencies (EUR/CZK 24.68; EUR/HUF 380.4, EUR/PLN 4.691) even as the CNB and the NBP are expected to continue their anti-inflation crusade later this week.  

News Headlines

The Ukrainian central bank urged Kiev to rely on other sources of finance to shore up its economy and fund the war. The monetary authority began direct purchases of government bonds after the war erupted late February and added in April 50bn hryvnia  (some $1.7bn) to its debt portfolio. This brings the tally to 70bn so far. For now, printing money is justified and used to finance “critical” government needs only, deputy governor Nikolaychuk said. But he added that once signals of overheating, including soaring inflation, emerge, it will be a signal to stop. The central bank lifeline turned out to be the third most important source of funding, after war bonds and IMF loans.

Japanese institutional investors are offloading US Treasuries by the billions. Over the past three months (until the week of April 22), they sold about $55bn, Japanese data showed last week. That amount is expected to grow in the coming weeks/months: extreme divergent US/Japanese monetary policy has sent the yen into the abyss (USD/JPY 130.07 today). The sharp spike in volatility causes currency-hedging to become so expensive that it dents the appeal of higher US nominal yields. The effective yield today is about as high as one year ago, even with the US yields surged ever since. Combined with the unusual high amount of uncertainty about inflation as well as the historic pace of Fed tightening, it may keep US bond buyers in Japan sidelined for a little while longer.