Sample Category Title

• Dow Jones reversed from support level 34140.00
• Likely to rise to resistance level 34920.00

Dow Jones recently reversed up from the support level 34140.00 (former resistance from March) intersecting with the 38.2% Fibonacci correction of the upward wave B from February.

The support zone near the support level 34140.00 was further strengthened by the lower daily Bollinger Band.

Dow Jones can be expected to rise further toward the next resistance level 34920.00 (top of the previous waves (iv) and (ii)).

• GBPJPY broke resistance level 164.35
• Likely to rise to resistance level 168.00

GBPJPY is under the bullish pressure after the price broke above the key resistance level 164.35 (which stopped wave 3 at the end of March).

The breakout of the resistance level 164.35 accelerated the active impulse waves 5 and (C).

GBPJPY can be expected to rise further toward the next resistance level 168.00 (target price for the completion of the active impulse wave (iii)).

The Australian dollar is back in positive territory on Tuesday, after four straight losing sessions. In the North American session, AUD/USD is trading at 0.7384, up 0.51% on the day.

RBA hints at an earlier rate hike

The RBA sent a hawkish message to the markets, as the minutes from the April meeting provided a strong hint that a rate hike is coming sooner than had been expected. The minutes cited rising inflation and a tightening labor markets as developments that have “brought forward the likely timing of the first increase in interest rates”.

The last time the RBA raised rates was back in 2010, so the markets are eagerly awaiting the lift-off of what is expected to be a rate-hike cycle. All four of Australia’s major banks are predicting that the RBA will hit the rate trigger in June. With Australians going to the voting booths on May 21^st, the RBA would prefer to stay quietly on the sidelines in the middle of an election campaign. Still, the May meeting should be considered live, at least until the April inflation report comes out on April 27^th.  A sharp gain in CPI could force the RBA to respond with a rate hike in May, with a strong possibility of a large hike of 0.40%.

Things appear much simpler for the Federal Reserve, which is widely expected to increase rates by 0.50% at its meeting in early May. Fed members, including the more dovish ones, have been sending out the message that the Fed must take aggressive action in order to contain soaring inflation, which hit 8.5% in March. On Monday, Fed member Bullard, a hawk, said that the Fed rate might need to rise to a “neutral” rate of 3.50% and suggested that a 0.75% hike was a possibility. Bullard’s stance isn’t a reflection of Fed policy, but the very suggestion of a 0.75% hike illustrates that the Fed plans to come out swinging come May.

AUD/USD Technical

• There is resistance at 0.7427, followed closely at 0.7462
• There is support at 0.7324 and 0.7256

The Eurozone economy is losing power. A recession has become a real possibility and the upcoming PMI business surveys on Friday will tell investors exactly how high that risk is. The French TV debate between Macron and Le Pen on Wednesday could also be crucial for the euro, which remains under heavy pressure. 

Losing steam

The invasion of Ukraine was a game-changer for the European economy. Energy and food prices went berserk in the aftermath, raising the cost of living for consumers. That ultimately means people have less money to spend on everything else, which is bad news for economic growth.

Then there’s the slowdown in China to consider. With major Chinese cities going into lockdown, demand for European exports has started to fade, dealing a second blow to the economy.

The third and final strike comes from the European Central Bank itself. Inflation continues to spiral upwards, so the central bank has its hands tied. It needs to raise interest rates to cool inflationary pressures, even if that means dampening growth further.

PMI disappointment? 

Economists expect the PMIs to take a hit in April, but only slightly. The composite index for the Eurozone, which blends the manufacturing and service sectors, is forecast to decline to 53.9 from 54.9 previously. Any number above 50 signals expansion in the economy.

The logic seems to be that the continued rollback of covid measures across Europe helped nullify the impact for businesses - that’s what happened back in March. However, this might be a miscalculation.

The war continues to drag on, energy prices keep pushing higher, many companies are complaining that supply chain problems have worsened, and the hit on demand will be clearer by now. Several surveys have already rolled over and the PMIs could follow suit.

Adding everything up, there is scope for worse-than-expected numbers on Friday. In that case, euro/dollar could head lower for another test of the 1.0755 zone. A break would solidify the downtrend, turning the spotlight towards 1.0725 next.

French election another risk

The French presidential TV debate on Wednesday will also be crucial ahead of the second round of voting on Sunday. Opinion polls are running at 53% for Macron against 47% for Le Pen, so the race is tight and the debate could make a real difference.

Le Pen doesn’t want to take France out of the European Union or the euro anymore, but her new policies would essentially paralyze the bloc from the inside. She wants to slash contributions to the EU budget, tighten immigration laws, and she would almost certainly block any further economic integration steps like Eurobonds - policies that Macron championed.

Therefore, if opinion polls tighten any further after the debate, that could keep the euro under pressure heading into the weekend as investors ramp up hedging. Of course, the opposite is true as well - a strong performance by Macron like back in 2017 could spark a relief rally in the euro. In that case, euro/dollar could encounter initial resistance around the 1.0950 region.

In the bigger picture, it’s just difficult to be optimistic about the euro until the outlook for economic growth improves. Any relief rallies could remain relatively shallow until there is some good news around Ukraine that helps cool energy prices down.

The latest flash PMI and retail sales figures for the UK are due on Friday at 06:00 GMT and 08:30 GMT, respectively. These will be the last batch of major indicators before the Bank of England’s policy decision on May 5 so investors will be gauging them to get a sense of policymakers’ thinking on further rate hikes this year. Worries about slowing growth amid the cost of living crisis have been weighing on sterling since Russia’s invasion of Ukraine. Can the numbers lift the British currency out of the doldrums?

End of Covid rules is boosting services

Recent data out of the United Kingdom have been mixed. GDP grew a mere 0.1% month-on-month in February, but the survey data have been a lot more upbeat. The dominant services sector is still benefiting from the lifting of all virus curbs while the labour market continues to tighten. These effects were probably enough to sustain economic momentum in the early parts of April.

The services PMI is expected to moderate from 62.6 in March to 60.3 in April, remaining comfortably above the 50-neutral level that separates expansion from contraction.

Manufacturers are feeling more gloomy

However, the PMI indices globally are being inflated from record increases in their price components, overstating the true strength in business activity. Moreover, optimism is weakening, not just from the worsening cost pressures, but also from the uncertain outlook due to the heightened geopolitical tensions.

These have already begun to weigh on manufacturing firms, much more so than on services industries. UK manufacturers reported waning demand for consumer goods from both domestic and overseas clients in March and this trend likely accelerated in April. The manufacturing PMI is forecast to decline from 55.2 to 54.0 this month.

The big consumer squeeze is here

Higher food and fuel prices have started to eat into households’ disposable incomes, so consumers are naturally spending less on other goods as inflation hits 30-years highs. The full reopening of the British economy at the end of February has been a further drag on retailers as people have preferred to enjoy going to theatres and restaurants with no restrictions rather than to hit the high street.

Retail sales are expected to have fallen by 0.3% m/m in March. When excluding fuel sales, the drop is projected to have been slightly bigger at 0.4%. But what is more worrying is that the squeeze on consumers is only just starting. Many UK households will see their electricity and gas bills jump in April after the country’s regulator raised the cap energy firms can charge their customers. Adding to the pain, the national insurance rate went up for many taxpayers at the beginning of April, dealing a double blow to consumers.

BoE has been less hawkish lately

With the war in Ukraine also not looking like it will end anytime soon either, the growth outlook has dimmed significantly in the last few months, prompting the Bank of England to take a more precautionary stance against rapid rate increases. Despite that, expectations for how many times the BoE will have to raise rates by year-end remain elevated, with investors anticipating six additional 25-basis-point hikes on top of the 50 bps already delivered.

But those hawkish bets haven’t done the pound any favours, at least not against the US dollar. Concerns that the UK is headed for a stagflationary environment has been a major dampener on the pound this year. Cable brushed a 17-month low of $1.2970 earlier this month and is struggling to regain a foothold above the $1.30 handle.

Cable is testing $1.30 level again

Should the upcoming releases disappoint, intensifying fears about a slowdown or even a recession, sterling could slip as low as $1.28, which is just below the 161.8% Fibonacci extension of the December-January uptrend.

On the other hand, positive surprises in the data could help the pound regain some bullish posture and bring into scope the 50-day moving average at $1.3238.

Nevertheless, the odds of a big upside reversal are low at the moment for cable. A slightly more hawkish-than-expected tone by the BoE at the May meeting could potentially go some way in changing its fortunes around. But as things stand, the pound’s best hope is a de-escalation of the Russia-Ukraine conflict.

Markets

European markets after the long weekend resumed trading in a familiar way. Persistent uncertainty on growth in Europe but also in the several Asian countries, combined with inevitable policy tightening to address inflation is raising questions on the valuation of (some) risky assets. Headlines on Russia stepping up their attacks toward the Donbas region didn’t help to provide comfort. European equities are losing up to 0.85% (EuroStoxx50). At the same time, interest rate markets continue to the push the ECB to prioritize inflation whatever the outlook for growth. Thursday’s rather vague ECB communication on when and how fast they will address runaway inflation and unravelling inflation expectations only reinforced markets to do at least their part of the job. The German yield curve again bear steepened with yields rising between 3.5 bps (2-y) and 10 bps (10-y). EMU 10-y inflation swaps are rising further north of the 3.0 % mark (3.05%).The German 10-y is reaching the highest level since July 2015, nearing the key 1.0%/1.06% (peak 2015) area. The 10-y European swap (1.66%) already surpassed comparable references earlier. In this context, it is bit remarkable to seen peripheral spreads narrowing 2 bps for the likes of Italy and Spain and up to 5 bps for Greece. The curve move in the US was different from Europe, but nevertheless quite interesting too. The US curve bear flattened with the 2-y rising an additional 9 bps. The 30-y is printing 4.5 bps higher. Investors apparently learned not to row against comments from hawkish members (Bullard keeping the option open of a 75 bps hike if necessary). US housing starts (1793 k) rising at the fastest pace since 2006 for sure wasn’t an important driver for the rise in US yields. However, it adds to other evidence that several parts of the US economy show resilience both to the consequences of the crisis in Ukraine as well as to the prospect of higher interest rates. Oil is easing slightly intra-day, but at $110 p/b keeps most of its recent rebound. US equities gain 0.2%/0.5%.

Moves in FX markets were more modest but the dollar remains in the driver’s seat. The DXY trade-weighted index tested the next big figure at 101. The combination of a strong dollar and the yen trading in free-fall modus propelled the USD/JPY cross rate to 128.75 area, the highest level since April 2002! Verbal warnings from the Japanese Ministry of finance clearly don’t counterbalance monetary policy divergence. EUR/USD this morning touched a new correction low near 1.0761, but apparently found some support from a further rise in EMU yields. The pair even tries to regain the 1.08 barrier. Sterling also underperforms. Cable is falling below the 1.30 handle. EUR/GBP rebound back north of 0.83(10). The World Bank sharply reducing UK 2022/2023 growth maybe played a role.

News Headlines

The IMF downgraded its growth forecasts for 2022 and 2023 from 4.4% and 3.8% in January to 3.6% and 3.6%. Economic damage from the war in Ukraine contributes to the significant slowdown in global growth in 2022 (from 6.1% in 2021) and adds to inflation. Beyond 2023, global growth is forecast to decline to about 3.3 percent over the medium term. Unusually high uncertainty surrounds the outlook with downside risks dominating: a worsening of the Russian war, an escalation of sanctions on Russia, a sharper-than-anticipated slowdown in China, and a renewed flare-up of the pandemic in case of new Covid-variants. War-induced commodity price increases and broadening price pressures have led to a 2022 inflation projections of 5.7% in advanced economies and 8.7% in emerging market and developing economies, from 3.9% and 5.9% in January. Inflation in both zones is expected to slow to 2.5% and 6.5% respectively in 2023. The IMF cited a rising risk that inflation expectations become unanchored, prompting more aggressive central bank tightening. Worsening supply-demand dynamics could end with a similar outcome.

Bulgarian inflation accelerated by 2.2% M/M in March to 12.4% Y/Y (from 10% in February). It’s the fastest inflation pace since the summer of 2008. Largest M/M price increases were reported in transport (7.9% M/M), food and non-alcoholic beverages (3.3% M/M) and restaurants and hotels (+2.8% M/M).

The pressure on the Japanese yen persists in the markets. The USDJPY has been hitting 20-year highs almost daily since last week, rising 11.8% to 128.40 since early March.

Since the beginning of the year, the yield spread between the 10-year US and Japanese bonds has doubled to 2.7%, on the back of rising US performance, which has sharply increased the attractiveness of US long-term bonds. The currency in such an environment works as a shock absorber, returning competitiveness to the economy.

However, in the USDJPY equilibrium exchange rate equation, you also must add the changed reality with the surge in prices of commodities and energy imports in Japan. Capital is leaving the country, taking refuge in the USA or commodity-exporting countries that can now enforce the tighter monetary policy.

A hand-tied Bank of Japan is unlikely to be able to offer anything serious to reverse the yen. It’s also not in the interests of the country’s finance ministry, which could use a weaker yen to deflate its enormous government debt.

This opens the yen up for further declines, potentially into the region of 140 per dollar, where the exchange rate was last seen during the Asian debt crisis, and even earlier, in the early 1990s, when the world last experienced a similarly high rate of consumer inflation.

Daily Pivots: (S1) 126.50; (P) 126.75; (R1) 127.25; More...

Intraday bias in USD/JPY remains on the upside at his point. Current up trend should target 130.04 long term projection level next. On the downside, below 126.78 minor support will turn intraday bias neutral and bring consolidations. But downside of retreat should be contained by 125.09 resistance turned support to bring another rally.

In the bigger picture, the break of 125.85 resistance (2015 high) suggests that whole up trend from 75.56 (2011 low) is resuming. Further rise should be seen to 61.8% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 130.04. Sustained break there wave the way to 147.68 (1998 high). For now, this will remain the favored case as long as 121.27 support holds.

Daily Pivots: (S1) 0.9425; (P) 0.9440; (R1) 0.9460; More....

Intraday bias in USD/CHF stays on the upside for the moment. Rise from 0.9149 is resuming and should target 61.8% projection of 0.8756 to 0.9471 from 0.9149 at 0.9591. On the downside, below 0.9408 minor support will delay the bullish case and turn intraday bias neutral first.

In the bigger picture, medium term outlook will be neutral at best as long as 0.9471 resistance holds. Larger down trend could still extend through 0.8756 (2021 low). However, firm break of 0.9471 will argue that whole down trend form 1.0342 (2016 high), has completed with three waves down to 0.8756. A medium term up trend should be set up to target 1.0237/0342 resistance zone.

Daily Pivots: (S1) 1.2989; (P) 1.3027; (R1) 1.3049; More...

GBP/USD is still bounded in consolidation from 1.2971 and intraday bias remains neutral first. Further decline is expected with 1.3165 resistance intact. On the downside, break of will resume larger down trend from 1.4248. Next target is 61.8% projection of 1.3641 to 1.2999 from 1.3297 at 1.2900. On the upside, firm break of 1.3165 will confirm short term bottoming, and turn bias back to the upside for 1.3297 resistance and above.

In the bigger picture, rise from 1.1409 (2020 low) has completed at 1.4248. Decline from 1.4248 could still be a corrective move, or it could be the start of a long term down trend. In either case, deeper decline would be seen back to 61.8% retracement of 2.1161 to 1.1409 at 1.2493. In any case, break of 1.3748 resistance is needed confirm completion of the fall from 1.4248, or outlook will stay bearish.