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Daily Pivots: (S1) 1.0792; (P) 1.0864 (R1) 1.0904; More...

EUR/USD quickly retreated after breaching 1.0922 resistance and intraday bias remains neutral at this point. On the upside, firm break of 1.0922 should confirm short term bottoming at 1.0756. Intraday bias will be back on the upside for 1.1184 structural resistance next. On the downside, though, break of 1.0756 will resume larger down trend. Next target is 100% projection of 1.1494 to 1.0805 from 1.1184 at 1.0495.

In the bigger picture, the decline from 1.2348 (2021 high) is expected to continue as long as 1.1494 resistance holds. Firm break of 1.0635 (2020 low) will raise the chance of long term down trend resumption and target a retest on 1.0339 (2017 low) next. Nevertheless, break of 1.1494 will maintain medium term neutral outlook, and extending term range trading first.

Overall markets are relatively mixed. Euro's rebound attempt yesterday was rather disappointing, but it's nonetheless still the best performer for the week. Dollar staged a strong rebound overnight, with help from hawkish Fed and rising yield, but there is no clear follow through buying yet. Commodity currencies were generally hammered by risk off sentiment. Yen is staying in consolidation, which would extend for a while longer.

Technically, despite breaching 1.0922 minor resistance, EUR/USD lacked follow through buying and dipped back into middle of a near term range. EUR/GBP's is also capped below 0.8379 minor resistance so far. Thus, there is no confirmation of Euro's underlying strength yet. The levels will continued to be watched.

In Asia, at the time of writing, Nikkei is down -1.78%. Hong Kong HSI is down -0.49%. China Shanghai SSE is down -0.07%. Singapore Strait Times is up 0.10%. Japan 10-year JGB yield is down -0.0057 at 0.249. Overnight, DOW dropped -1.05%. S&P 500 dropped -1.48%. NASDAQ dropped -2.07%. 10-year yield rose 0.077 to 2.917.

Fed Powell: 50bps on the table for May FOMC meeting

Fed Chair Jerome Powell said in an IMF discussion that with inflation running three times the 2% target, "it is appropriate to be moving a little more quickly." He added that "fifty basis points will be on the table for the May meeting."

"We have had an expectation that inflation would peak around this time and come down over the course of the rest of the year and then further," Powell said. "These expectations have been disappointed in the past...We are not going to count on help from supply side healing. We are going to be raising rates."

BoE Bailey: We're walking a very tight line between inflation and recession

BoE Governor Andrew Bailey said yesterday that the UK is "walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that that could create a recession and pushes too far down in terms of inflation."

"We are now in a period of unprecedentedly large shocks," he said, referring to both the pandemic and the war in Ukraine.

BoC Macklem prepared to be as forceful as needed

BoC Governor Tiff Macklem said he's "not going to rule anything out",. when he was asked whether he could considering hiking more than 50bps at next meeting. He added, "we're prepared to be as forceful as needed and I'm really going to let those words speak for themselves."

"If we start to see demand pressures internally moderate and we start to see those international price pressures abating, you should see those quarter-over-quarter inflation rates start to come down," Macklem said.

Japan CPI core accelerated to 0.8% yoy in Mar

Japan all item CPI rose fro 0.9% to 1.2% in March, below expectation of 1.3% yoy. CPI core (ex-food) rose form 0.6% yoy to 0.8% yoy, matched expectations. CPI core-core (ex-food and energy) improved from -1.0% yoy to -0.7% yoy, better than expectation of -1.1% yoy.

The core CPI rate was the fastest in over 2 years. Energy prices jumped 20.8% yoy, largest gain since 1981, with kerosene up 30.6% and gasoline up 19.4%.

Japan PMI manufacturing dropped to 53.4 in Apr, services rose to 50.5

Japan PMI Manufacturing dropped from 54.1 to 53.4 in April, above expectation of 53.3. PMI Services rose from 49.4 to 50.5, signalling the first expansion since last December. PMI Composite rose from 50.3 to 50.9.

Usamah Bhatti, Economist at S&P Global, said: "The latest Flash PMI data showed that Japanese private sector activity improved at a sharper rate at the start of the second quarter of 2022. Services companies recorded an expansion in activity for the first time since last December, while manufacturers saw output levels rise for the second successive month.

"April data signalled the sharpest expansion in four months, though the pace of growth was only marginal. Moreover, growth in incoming business in the private sector stagnated amid increased headwinds.

Australia PMI manufacturing rose to 57.9, services rose to 56.6

Australia PMI Manufacturing rose from 57.7 to 57.9 in April, a 5-month high. PMI Services rose from 55.6 to 56.6. PMI Composite rose from 55.1 to 56.2.

Jingyi Pan, Economics Associate Director at S&P Global said: "The expansion of the Australian economy continued in April, according to the S&P Global Flash Australia Composite PMI, buoyed by the easing of COVID-19 disruptions. Foreign demand played a part as well with new export business rising for the first time since December 2021.

"Price pressures persisted, however, for private sector firms that faced higher costs across raw material to wages. Input costs rose at the fastest pace since data collection began in May 2016, reflecting the impact from both the Ukraine war and lockdowns in China.

"Higher employment levels in April remained a bright spot to highlight, though the lack of suitable candidates have contributed to a slowdown of hiring activity. Meanwhile, despite better output growth, business confidence eased in April which is a worrying trend."

Looking ahead

UK retail sales and PMIs, Eurozone PMIs will be the main feature in European session. Later in the day, Canada will release retail sales, IPPI and RMPI. US will release PMIs.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.0792; (P) 1.0864 (R1) 1.0904; More...

EUR/USD quickly retreated after breaching 1.0922 resistance and intraday bias remains neutral at this point. On the upside, firm break of 1.0922 should confirm short term bottoming at 1.0756. Intraday bias will be back on the upside for 1.1184 structural resistance next. On the downside, though, break of 1.0756 will resume larger down trend. Next target is 100% projection of 1.1494 to 1.0805 from 1.1184 at 1.0495.

In the bigger picture, the decline from 1.2348 (2021 high) is expected to continue as long as 1.1494 resistance holds. Firm break of 1.0635 (2020 low) will raise the chance of long term down trend resumption and target a retest on 1.0339 (2017 low) next. Nevertheless, break of 1.1494 will maintain medium term neutral outlook, and extending term range trading first.

Economic Indicators Update

Australia PMI Manufacturing rose from 57.7 to 57.9 in April, a 5-month high. PMI Services rose from 55.6 to 56.6. PMI Composite rose from 55.1 to 56.2.

Jingyi Pan, Economics Associate Director at S&P Global said: "The expansion of the Australian economy continued in April, according to the S&P Global Flash Australia Composite PMI, buoyed by the easing of COVID-19 disruptions. Foreign demand played a part as well with new export business rising for the first time since December 2021.

"Price pressures persisted, however, for private sector firms that faced higher costs across raw material to wages. Input costs rose at the fastest pace since data collection began in May 2016, reflecting the impact from both the Ukraine war and lockdowns in China.

"Higher employment levels in April remained a bright spot to highlight, though the lack of suitable candidates have contributed to a slowdown of hiring activity. Meanwhile, despite better output growth, business confidence eased in April which is a worrying trend."

Full release here.

Japan PMI Manufacturing dropped from 54.1 to 53.4 in April, above expectation of 53.3. PMI Services rose from 49.4 to 50.5, signalling the first expansion since last December. PMI Composite rose from 50.3 to 50.9.

Usamah Bhatti, Economist at S&P Global, said: "The latest Flash PMI data showed that Japanese private sector activity improved at a sharper rate at the start of the second quarter of 2022. Services companies recorded an expansion in activity for the first time since last December, while manufacturers saw output levels rise for the second successive month.

"April data signalled the sharpest expansion in four months, though the pace of growth was only marginal. Moreover, growth in incoming business in the private sector stagnated amid increased headwinds.

Full release here.

Japan all item CPI rose fro 0.9% to 1.2% in March, below expectation of 1.3% yoy. CPI core (ex-food) rose form 0.6% yoy to 0.8% yoy, matched expectations. CPI core-core (ex-food and energy) improved from -1.0% yoy to -0.7% yoy, better than expectation of -1.1% yoy.

The core CPI rate was the fastest in over 2 years. Energy prices jumped 20.8% yoy, largest gain since 1981, with kerosene up 30.6% and gasoline up 19.4%.

BoC Governor Tiff Macklem said he's "not going to rule anything out",. when he was asked whether he could considering hiking more than 50bps at next meeting. He added, "we're prepared to be as forceful as needed and I'm really going to let those words speak for themselves."

"If we start to see demand pressures internally moderate and we start to see those international price pressures abating, you should see those quarter-over-quarter inflation rates start to come down," Macklem said.

BoE Governor Andrew Bailey said yesterday that the UK is "walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that that could create a recession and pushes too far down in terms of inflation."

"We are now in a period of unprecedentedly large shocks," he said, referring to both the pandemic and the war in Ukraine.

Fed Chair Jerome Powell said in an IMF discussion that with inflation running three times the 2% target, "it is appropriate to be moving a little more quickly." He added that "fifty basis points will be on the table for the May meeting."

"We have had an expectation that inflation would peak around this time and come down over the course of the rest of the year and then further," Powell said. "These expectations have been disappointed in the past...We are not going to count on help from supply side healing. We are going to be raising rates."

Following an expected substantial lift in underlying inflation for the March quarter and a fall in the unemployment rate from 4% to 3.8% in April we expect the RBA will decide to lift the cash rate by 40 basis points at its Board meeting on June7.

Inflation and the Labour Market

Yesterday we released our forecast for the March quarter Consumer Price Index. This Report is due to print on April 27.

We have lifted our forecast for underlying inflation in the quarter from 0.9% to 1.2%.

At 1.2% the annual rate will be 3.4%. That represents an increase in the annual rate from 2.6% in the December quarter and from 2.1% in the September quarter.

An increase in the annual rate of 0.8 ppt's over one quarter and 1.3 ppt's over two quarters is matched only by 2007/08 in recent times.

In 2007, annual underlying inflation increased from 2.8% in the June quarter and 2.9% in the September quarter to 3.6% in the December quarter (and 4.2% in the March quarter).

Following the news on the December quarter inflation the RBA responded with 25 basis point rate hikes in both February and March 2008 bringing the rate to 7.25% (significantly above neutral).

That was despite it being quite clear to markets that the world was on the brink of a major financial crisis, (later in 2008 and early 2009 the RBA was obliged to cut the cash rate back to 3% from 7.25%).

This episode just emphasises the sensitivity of the RBA to large movements in underlying inflation.

It is now generally accepted that the RBA will begin the tightening cycle on June 7.

Because the current cash rate is an unusual 10 basis points we had expected that the first move would be 15 basis points to restore the cash rate to 25 basis points.

However, given our expectations of a rapid further increase in underlying inflation and a forecast fall in the unemployment rate for April (to print on May 19) to a 48 year low of 3.8% we expect the Board will decide on a bolder initial lift in the cash rate.

We accept that there is a risk that the Board would be concerned about such a large move at the beginning of the cycle with implications for Confidence.

A possibility might be for a more cautious 25 basis point lift in June to be followed by the 40 basis point move in July.

However, we anticipate that market and media expectations will shift towards a 40 basis point move over the next six weeks and the anticipated shock to confidence will be contained.

This decision will be in the context of the Federal Reserve Open Market Committee (FOMC) having lifted the federal funds rate by 50 basis points on May 4 and the certain prospect of a further 50 basis point increase at the June FOMC meeting which is scheduled for the week after the RBA's June Board meeting.

Both the Bank of Canada (April 13) and the Reserve Bank of New Zealand (April 13) have recently opted for 50 basis point increases in their policy rates.

The April Board Minutes

On April 12 the minutes of the Reserve Bank Board meeting for April noted" Central banks in many advanced economies, including the United States, had responded to higher inflation by increasing interest rates from their historically low levels and had signalled that further increases were likely."

This quote was significant because it figured at the beginning of the key section in the minutes "Considerations for monetary policy".

In the minutes of earlier meetings this key "considerations" section only covered issues around the Australian economy. As noted in his speeches, in the last few years the Governor saw Australia's position as being quite different to other developed economies.

Including reference to the actions of other central banks in such a prominent position in the minutes indicates the Board is now taking a more global approach in responding to Australia's surging inflation rate.

Market Pricing

Markets are currently priced for the cash rate to reach around 40–45 basis points by the June meeting.

At present that is made up of around 10 basis points at the May meeting and a further 30 points at the June meeting.

Our "golden rule" for tracking central banks is that their guidance beyond three months is dependent on their forecasts. If you have a different set of forecasts to the central bank then when your forecasts prove to be correct the central bank will have to respond in a way that will be consistent with the conditions and contrary to their current guidance.

It was that thinking that prompted us to be "very early leavers" from the "no hike till 2024 "Club in June last year; and the "no hike till 2023" Club in January this year.

But when the Bank is giving very near-term guidance then we listen intently.

The minutes noted that "Over coming months, important additional evidence will be available on both inflation and labour costs". The labour cost information will be available on May 18 (Wage Price Index) and May 19 (April Employment Report).

That guidance is sufficient for us to accept that the RBA will wait until June for the first move.

At the May 3 meeting we expect the Board will adopt a clear tightening bias in anticipation of a move in June.

That should be sufficient to encourage the market to maintain its expectation that, despite steady policy in May, the cash rate will reach 40–50 basis points at the June meeting.

Our research shows that the RBA is influenced by market pricing near the time of a Board meeting. If the market persists with a 40 basis point expectation it is unlikely that the Board would persist with a 15 basis points move.

The Profile of the full Cycle-Terminal Rate is Unchanged at 2% We expect that the RBA will "bring forward" the tightening to accelerate the unwinding of the emergency cuts in 2020 (65 basis points) given that the emergency has passed; inflation is rising rapidly and the unemployment rate has reached 48 year lows. We do not envisage a higher terminal rate in the cycle.

That stays at 2% and is still timed for mid-2023 (May rather than June).

It is interesting that, at this stage, the RBA may have a similar target in mind. In the April Financial Stability Review a centre piece of the Review was a scenario analysis of the sensitivity of household balance sheets to a 200 basis point lift in the variable mortgage rate.

Under our previous scenario of a 15 basis point lift in June we expected 25 basis point increases to follow in July and August, with a pause in September to be followed by two more increases of 25 basis points in both October and November. With the exception of the larger increase in June the rest of the profile remains in place with the rate by November reaching 1.5% rather than 1.25%.

The expected pause in December also remains with two 25 basis point hikes in February and May.

Compared to the previous profile the cash rate reaches 1.5% by year's end, up from 1.25%, while there are only two increases of 25 basis points in February and May compared to the three increases in the previous profile.

How dependent is this profile on the Inflation Report?

We always endeavour to provide readers with internally consistent forecasts.

The lift in the inflation forecast is consistent with a more decisive response from the RBA.

Recognition in the minutes of the actions of other central banks also had an impact on this change of view.

As discussed above, the Bank might respond with a 25 basis point move in June to be followed by a 40 basis point move in July.

That strategy is a genuine possibility but does not represent the better policy option.

Key Highlights

• USD/JPY rallied further above 128.00 and traded to a new multi-year high.
• A crucial bullish trend line is in place with support near 127.75 on the 4-hours chart.
• EUR/USD failed to surpass 1.0920, and GBP/USD struggled below 1.3100.
• Gold price might correct lower towards $1,920.

USD/JPY Technical Analysis

The US Dollar remained in a strong uptrend above 125.00 against the Canadian Dollar. USD/JPY traded to a new 20-year high and even climbed above 128.50.

Looking at the 4-hours chart, the pair settled above the 128.00 level, the 200 simple moving average (green, 4-hours), and the 100 simple moving average (red, 4-hours).

A high was formed near 129.40 before there was a downside correction. The pair declined below the 128.00 level. However, the bulls were active near the 127.50 level. There is also a crucial bullish trend line in place with support near 127.75 on the same chart.

The pair is now rising and might climb above 128.80. The next major resistance is seen near the 129.40 level, above which the pair could rise towards 130.00.

If there is a downside correction, the USD/JPY pair might test the trend line or 127.60. The next major support is near the 127.20 level. Any more losses may perhaps open the doors for a move towards the 126.00 level.

Looking at EUR/USD, the pair attempted an upside break above the 1.0900 and 1.0920 resistance levels, but failed to gain pace. Similarly, GBP/USD failed to clear the 1.3080 and 1.3100 resistance levels.

Economic Releases

• UK Retail Sales for March 2022 (YoY) - Forecast +2.8%, versus +7% previous.
• UK Retail Sales for March 2022 (MoM) - Forecast -0.3%, versus -0.3% previous.