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GBP/USD continues to lose ground this week. Currently, the pair is trading at 1.2647, down 0.45% on the day. The pound touched a low of 1.2641 earlier on Wednesday, its lowest level since early January. On the release front, British CPI jumped to 2.1% in April, up from 1.9% in March. Still, this missed the estimate of 2.2%. The U.K. deficit jumped to GBP 5.0 billion, shy of the estimate of GBP 5.2 billion. This marked a 5-month high. Today’s highlight is the minutes of the Federal Reserve’s policy meeting earlier in May. On Thursday, the U.S. releases unemployment claims.

Prime Minister May will try (yet again) to push a withdrawal agreement through parliament in early June. The first three attempts were shot down by lawmakers, and it’s doubtful if the fourth attempt will be successful. May has said that this deal will include a compromise on the customs union issue, but Labor and many Conservative MPs have dismissed May’s proposal. May’s days in the prime minister chair may be numbered, as she desperately tries to prevent the U.K. from crashing out of the EU without a deal in place.

At the May policy meeting, the Federal Reserve maintained the benchmark rate for a fourth straight month. The rate statement noted that inflation pressures remain muted and that the FOMC would remain patient regarding future rate movements. Jerome Powell reinforced this stance after the meeting, saying that “we don’t see a strong case for moving in either direction”. Will the minutes point to any bias regarding the next rate move? The Fed is already on record as saying it does not expect to raise rates before 2020, and with inflation levels persistently below the Fed’s target of 2.0%, the Fed can afford to continue its wait-and-see stance.

Daily Pivots: (S1) 1.1140; (P) 1.1163; (R1) 1.1186; More.....

Intraday bias in EUR/USD remains neutral at this point. Price actions from 1.1111 is a correction pattern and could have completed at 1.1263. Decisive break of 1.1111 will resume larger down trend for 100% projection of 1.1448 to 1.1183 from 1.1324 at 1.1059. Though, on the upside, above 1.1224 minor resistance will turn bias back to the upside to extend the consolidation from 1.1111 first.

In the bigger picture, down trend from 1.2555 (2018 high) is still in progress. Such decline would target 78.6% retracement of 1.0339 (2016 low) to 1.2555 (2018 high) at 1.0813 next. Sustained break there will pave the way to retest 1.0339. On the upside, break of 1.1448 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

Daily Pivots: (S1) 1.2657; (P) 1.2735; (R1) 1.2785; More....

GBP/USD's decline continues to as low as 1.2624 so far. Intraday bias remains on the downside at this point. Current fall from 1.3381 should now target 1.2391 low. Larger decline from 1.4376 might be resuming. Break of 1.2391 will target 61.8% projection of 1.4376 to 1.2391 from 1.3381 at 1.2154 next. On the upside, above 1.2812 minor resistance will turn intraday bias neutral again for more consolidation first.

In the bigger picture, current development suggests that medium term decline from 1.4376 (2018 high) is not completed, and is possibly ready to resume. Decisive break of 1.2391 would target a test on 1.1946 long term bottom (2016 low). For now, we don't expect a firm break there yet. Hence focus will be on bottoming signal as it approaches 1.1946. In any case, medium term outlook will stay bearish as long as 1.3381 resistance holds, in case of rebound.

Daily Pivots: (S1) 1.0087; (P) 1.0103; (R1) 1.0128; More...

USD/CHF is still staying in consolidation from 1.0050 temporary low and intraday bias remains neutral. Also, with 1.0126 support turned resistance intact, another decline is mildly in favor. On the downside, break of 1.0050 will resume the fall from 1.0237 to retest 0.9879 key support. However, firm break of 1.0126 will turn bias back to the upside for 1.0237 resistance.

In the bigger picture, as long as 0.9879 support holds, medium term up trend form 0.9186 is still in progress. Break of 1.0237 will target 1.0342 resistance next. For now, we'd be cautious on strong resistance from there to limit upside, until we see medium term upside acceleration. However, decisive break of 0.9879 will be a strong sign of medium term reversal. Focus will be turned back to 0.9716 support for confirmation.

Daily Pivots: (S1) 110.11; (P) 110.39; (R1) 110.77; More...

No change in USD/JPY's outlook. Corrective recovery from 109.02 might extend higher. But upside should be limited by 55 day EMA (now at 110.84) to bring another fall. On the downside, below 109.81 minor support will turn bias back to the downside for 109.02. Break there will extend the decline from 112.40 to retest 104.69 low. However, sustained trading above 55 day EMA will indicate completion of the fall from 112.40 and bring retest of this high.

In the bigger picture, USD/JPY is staying inside falling channel from 118.65. Currently development suggests that rebound from 104.69 is only a corrective move. And fall from 118.65 is not completed yet. Decisive break of 104.69 will extend the down trend towards 98.97 support (2016 low). For now, we'd expect strong support above there to bring rebound.

Markets

Core bonds extended gains today. UK Gilts outperformed after UK PM May’s umpteenth failed attempt to broker a brexitdeal. They didn’t push the Bund and US Note future higher though. Core bonds started gaining traction in the run-up to US dealings. Stock markets managed some gains in the European part of the session, but started drifting away as US participants entered dealings. Eco/events played no role of importance with US-Sino trade-related talk pulling the strings. First, the NY Times reported on possible US action against Chinese surveillance companies. Next, UK and Japanese telco’s took actions because of the US ban against Huawei. The former pulled the Chinese phones from their 5G networks while the latter delayed the launch of a new Huawei smartphone. Cautiousness remains warranted with a Chinese counter probably still looming. The German yield curve bull flattened with yields 0.3 bps (2-yr) to 2.2 bps (30-yr) lower. Changes on the US yield curve vary between -1.9 bps (30-yr) and -3 bps (5-yr). 10-yr yield spread changes vs Germany are broadly unchanged with Greece (+4 bps) underperforming.

Euro and dollar trading was again driven by headlines on the trade war. Media reported on the US measures against Huawei which might disturb the company’s supply chain. The uncertainty about the availability of updates from US suppliers is causing some if its clients to stop buying new Huawei products. Investors are looking out for Chinese retaliation measures. The trade tensions this time didn’t help the dollar. EUR/USD reversed an earlier dip and is again trading in the 1.1165/70 area. The pair still shows no clear trend at all in a broader perspective. US-German interest rate spreads narrowed again slightly in the disadvantage of the US currency. The yen outperforms, but the gains are far from spectacular. USD/JPY is trading in the 109.35/40 area. The Fed publishes the minutes of the May 01 meeting this evening. At that time, trade tension were still more modest than is currently the case. So, one can assume the majority of the Fed governors to have been rather comfortable with the wait-and-see bias. We don’t expect a big USD reaction. In theory the minutes might be tentatively USD supportive.

Sterling faced additional headwinds as UK PM May’s final Brexit proposition wasn’t only rejected by the labour opposition but also by her DUP ally and even by a big group of MP’s of her conservative party. This broad rejection of May’s proposal suggests that no Brexit deal will be approved any time soon. It also accelerates the process of the UK PM being replaced, probably by a brexit headliner of her conservative party. This suggests an even more bumpy road ahead for the Brexit process. UK April inflation data also printed softer than expected today. However, UK data are currently only of second tier importance for sterling trading. Even so, the report further questioned the BoE’s intentions to raise its policy rate in the foreseeable future. Sterling extended its intraday downtrend after the data. EUR/GBP is trading in the 0.8825 area. Cable dropped to the lowest level since mid-January and trades currently in the 1.2650 area.

News Headlines

UK headline CPI returned north of the 2.0% BoE inflation target, printing at 2.1% in April from 1.9% in March. A rise in electricity tariffs and transportation were to blame for the rise. Still, the April price rise was less pronounced than expected. Other pipeline inflation measures also indicated modest price rises to come. Aside from the inflation data, UK house prices rose a faster than expected 1.4% Y/Y in March. April government budget data were close to expectations, but the 2018/19 budget deficit was revised lower to 1.1% from 1.2%.

Daily Pivots: (S1) 1.3385; (P) 1.3414; (R1) 1.3433; More...

USD/CAD drops sharply through 1.3376 support to as low as 1.3357 so far. Current fall is seen as part of the consolidation pattern from 1.3521. Thus, in case of deeper decline, downside should be contained above 1.3274 support to bring rally resumption. On the upside, firm break of 1.3521 will resume the whole rise from 1.3068 to retest 1.3664 high. However, decisive break of 1.3274 support will indicate completion of rise from 1.3068 and turn outlook bearish.

In the bigger picture, USD/CAD is staying well inside medium term rising channel (support at 1.3296). Thus, the up trend from 1.2061 (2017 low) should be in progress. On the upside, decisive break of 61.8% retracement of 1.4689 (2016 high) to 1.2061 at 1.3685 will pave the way to 78.6% retracement at 1.4127 next. This will remain the favored case as long as 1.3068 support holds. However, sustained break the channel support will be the first sign of medium term reversal. Firm break of 1.3068 would confirm.

US stocks open slightly lower today while major European indices are trading in red. But it's too early to say if risk aversion in back. US-China trade war is the biggest risks to the global economy and there is no end insight. Instead, it's reported that US is going to extend the sanctions on Huawei to video surveillance firm Hikvision. Treasury Secretary Steven Mnuchin also indicates that there is currently no plan to travel to China to resume trade negotiations yet.

On the other hand, China continues their hard line rhetoric, with Xi calling for the country to prepare for the "new Long March" to overcome "major risks and challenges. Top diplomat Wang Yi condemned that "the use of US power to suppress China's private enterprises, such as Huawei, is typical economic bullying." There is no sign of softening from both sides.

In the currency markets, Swiss Franc and Yen are both broadly higher today, probably helped by weakness in stocks and yield. Though, Canadian Dollar is also strong together, as boosted by upside surprises in retail sales data. Sterling remains the weakest ones. UK Prime Minister Theresa May's PMQ did nothing to help her on the "new" Brexit bill, which was rejected by a majority of MPs. Pound was also weighed by weaker than expected CPI reading. Kiwi and Aussie follow as next weakest.

Focus will turn to minutes of May 1 FOMC meeting. Back then, Fed decided to keep interest rates unchanged and more importantly, chair Jerome Powell indicated there is no need to adjust monetary policy in either direction for the near term. Markets would like to dig into details of discussions that might hint on the chance of rate cuts. But based on recent comments by Fed officials, it's likely to have some strong voices for rate cut during the meeting. Fed policymakers have been generally patient and talked down the imminent need of rate cut.

Technically, USD/CAD drops through 1.3376 support after the retails . But at the point, current fall is seen as part of consolidation pattern from 1.3521. Hence we'd expect strong support above 1.3274 to contain downside. GBP/USD is extending recent decline while EUR/GBP is extending recent rise. GBP/JPY could soon follow by breaking 139.54 temporary low. Selloff in USD/CHF today kept the pair well below 1.0126 resistance That also reaffirm that fall from 1.0237 is still in progress and could resume through 1.0050 temporary low soon.

Currently, DOW is down -0.33%. S&P 500 is down -0.34%. NASDAQ is down -0.29%. 10-year yield is down -0.024 at 2.405. 2.4 handles looks vulnerable again. In Europe, FTSE is up -0.03%. DAX is down -0.26%. CAC is down -0.38%. German 10-year yield is down -0.0232 at -0.083 still way above -0.1 handle. Earlier in Asia:, Nikkei rose 0.05%. Hong Kong HSI rose 0.18%. China Shanghai SSE dropped -0.49%. Singapore Strait Times dropped -0.00%. Japan 10-year JGB yield dropped -0.0057 to -0.05.

Canadian retail sales rose 1.1%, ex-auto sales jumped 1.7%, USD/CAD dives

Canadian Dollar jumps notably after stronger than expected retail sales data. Headline sales rose for the second consecutive month, up 1.1% mom. to CAD 51.3B in March, above expectation of 1.00%. Ex-auto sales was even stronger, up 1.7% mom versus expectation of 0.8% mom.

UK CPI accelerated to 2.1%, but missed expectations

In April, UK headline CPI accelerated to 2.1% yoy, up fro 1.9% yoy but missed expectation of 2.2% yoy. Core CPI was unchanged at 1.8% yoy, also missed expectation of 1.9% yoy. RPI, however, jumped sharply to 3.0% yoy, up from 2.4% yoy and beat expectation of 2.8% yoy.

ONS noted that rising energy prices and air fares, which were influenced by the timing of Easter, produced the largest upward contributions to change in the rate between March and April 2019. The largest, offsetting, downward contribution came from across a range of recreational and cultural items, which included computer games and package holidays.

PPI input rose to 3.8% yoy, up from 3.7% yoy but missed expectation of 4.4% yoy. PPI output slowed to 2.1% yoy, down from 2.4% yoy and missed expectation of 2.3% yoy. PPI output core was unchanged at 2.2% yoy, matched expectations.

Also from UK, house price index rose 1.4% yoy in March, well above expectation of 1.0% yoy. Public sector net borrowing rose GBP 5.0B in April.

Italy's Istat downgrades 2019 growth forecast to 0.3%, down from 1.3%

Italy's Istituo Nazionale di Statistica (Istat) EU downgrades the country's growth forecast in 2019 significantly. It now projects GDP to grow just 0.3% in real terms. Back in November, it projected GDP to grow 1.3% in real terms. Domestic demand is expected to provide 0.3% to GDP growth (1.3% projected in November). while foreign demand and inventories will provide a null contribution.

Labor market assessment was downgraded t "stabilize over the forecasting period", from "improve over the forecasting period". Employment is expected to grow 0.1% in 2019 and unemployment will rise slightly to 10.8%, much higher than November expectation of 10.2%.

Separately, Deputy Prime Minister Matteo Salvini said "must get out from the cage", as EU policy over the past decade had brought "precariousness and despair". He criticized that budget rules limiting the deficit and debt should be removed to free up the bloc's economies.

BoJ Harada: If weak economy deteriorates, should strengthen easing without delay

BoJ dove Yutaka Harada said today that "the economy has been weak recently, and the same can be said about prices". Also, "there's a risk the current sluggishness observed in prices will spill over to inflation expectations, further delaying a pick-up in inflation." In addition, "the impact of the consumption tax hike scheduled for October this year also is a concern."

Harada warned "if the economy deteriorates to the extent that achieving our price target in the long-term becomes difficult, it's necessary to strengthen monetary easing without delay." He also dismiss claims that the ultra-loose monetary policy hurts banks' profits. He said "the deterioration of banks' profitability is actually caused by a structural problem, which is that they are accumulating deposits despite a lack of borrowers."

Released from Japan, trade surplus narrowed to JPY 60.4B in April. Exports dropped -2.4% yoy while imports rose 6.4% yoy. In seasonally adjusted terms, trade deficit narrowed to JPY -110.9B.Exports rose 0.6% while imports dropped -0.1%. Machine orders rose 3.8% mom in March, above expectation of 0.0% yoy.

Also released, New ZEaland retail sales rose 0.7% qoq in Q1 versus expectation of 0.6% qoq. Core retail sales rose 0.7% qoq versus expectation of 0.9% qoq. Austalia Westpac leading index dropped -0.1% mom in April. Construction work done dropped sharply by -1.9% in Q1.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.3385; (P) 1.3414; (R1) 1.3433; More...

USD/CAD drops sharply through 1.3376 support to as low as 1.3357 so far. Current fall is seen as part of the consolidation pattern from 1.3521. Thus, in case of deeper decline, downside should be contained above 1.3274 support to bring rally resumption. On the upside, firm break of 1.3521 will resume the whole rise from 1.3068 to retest 1.3664 high. However, decisive break of 1.3274 support will indicate completion of rise from 1.3068 and turn outlook bearish.

In the bigger picture, USD/CAD is staying well inside medium term rising channel (support at 1.3296). Thus, the up trend from 1.2061 (2017 low) should be in progress. On the upside, decisive break of 61.8% retracement of 1.4689 (2016 high) to 1.2061 at 1.3685 will pave the way to 78.6% retracement at 1.4127 next. This will remain the favored case as long as 1.3068 support holds. However, sustained break the channel support will be the first sign of medium term reversal. Firm break of 1.3068 would confirm.

Economic Indicators Update

China appears in no rush to respond to the US latest efforts on ramping up the trade war.  The latest move from the US is the consideration of blacklisting up to five Chinese surveillance firms.  This action would require US companies seek government approval to supply components to China’s Hikvision, Zhejiang Dahua Tech and a few others.  In addition to dealing with the effects of the Huawei ban, Chinese markets have been fairly resilient due to stimulus from the PBOC.

US stocks appear stuck in limbo as China’s response could take aim at crippling US technology firms and that might be what is needed to motivate both sides to resume talks.  This round of talks needs to get uglier before progress can be made, and right now, only the US is throwing punches.

The base still remains for a deal to be done, possibly by mid-summer, but nothing is certain as China’s rhetoric seems content to dragging this out longer and possibly closer to US Presidential election.

• Brexit – May’s WAB DOA
• Minutes – Might try to ease calls for cuts
• Lowes/Target – Tariffs concerns weigh on outlooks
• Oil – API shows stockpiles increased 2.4m bbl last week
• Gold – Vulnerable as dollar continues to advance

Brexit

Prime Minister May’s latest withdrawal agreement bill (WAB) was met with staunch refusal from conservative MPs, Tories and Labour, implying her deal is “dead on arrival”.  She was hoping her fourth attempt for a deal would fair better, but she is seeing opposition now from key Tories that supported her earlier bill.  The writing is on the wall for PM May and the calls for her resignation should grow.  ERG members will likely provide a round of interventions aiming at bringing on a confidence vote on the PM.  This will be difficult for Sir Graham Brady to support this since he just gave the PM until June before she will resign regardless of the outcome of her bill.

The British pound dropped to 6-month lows following PM May’s latest efforts which likely cement the end of her tenure.  Cable did catch a small short-lived bid after inflation in Britain climbed in April back above the BOE’s target rate as energy prices and airfares rose.

Minutes

The minutes from the April/May FOMC meeting should provide additional detail to the transitory pressures that are causing weakness in core inflation.  Fed Chair Powell’s recent comments strong job creation and rising wages since the rate decision have been fairly hawkish and markets will look to see if the Committee takes aim at squashing rate cut bets.

The Fed may provide extra clarity on their balance sheet policy and on the deviation to more a broad target for inflation.  The patient script is likely to be the focal point of the minutes.

Lowes/Target

The home-improvement retailer’s turnaround is not going as planned.  Lowe’s Cos delivered an earnigns miss and slashed their guidance.  Cost pressures are growing, but they seemed fairly optimistic on the US consumer, noting that they are healthy.

Target delivered a good enough quarter to see shares pop in pre-market trade.  Comparable climbed 4.8%, a strong beat of the 4.3% analysts were targeting.  Target’s performance breaks a recent string of poor results from retailers, such as Nordstrom, JC Penney and Kohls Corp.

Tariff concerns are weighing on the US consumer and best of breed is likely to excel is this uncertain environment.  Big retailers might have the advantage in the short-term.

Oil

Oil prices declined 1% as global growth concerns linger and following a big build from the API report.  The weekly crude inventories rose by 2.4 million barrels last week, higher than the analyst forecast of a build of 1.7 million barrels.

Crude prices are seeing the effects of the OPEC and allies production cuts fade away and growth concerns remain high on trader’s radar as China could deliver their retaliatory response at any moment. The DOE crude inventory report later this morning is eyeing a draw of 1.3 million barrels.  A surprise build could see WTI attempt fall another percentage point.

Gold

Gold is bouncing off two-week lows as trade jitters keeps demand for safe-havens in play.  Potentially forming a triple-bottom pattern, the yellow metal is barely holding onto the $1,270 level.  A strong dollar has kept gold ground and deflationary conditions have put a dent in most rallies.  Until we see a significant move lower in the dollar, gold prices may struggle to rally even during peak flight-to-safety moments throughout the conclusion of the US/China trade war.

The US dollar index is still rising above the 50-day moving average, edging towards the 23-month high of 98.05 achieved on April 25. However, the short-term bias is tilted to the downside as the RSI indicator is turning marginally lower in the positive region, while the stochastic oscillator posted a bearish crossover within the %K and %D lines in the overbought territory, indicating an overreached rally.

If the price posts a bearish retracement as the momentum oscillators signal, support is coming at the 96.85 level, which stands near the 50-day SMA. More losses could challenge the uptrend line, which overlaps with the 200-day SMA, currently at 96.10.

Alternatively, if the index moves higher, the 23-month high of 98.05 could attract traders’ attention once again and any violation above this hurdle could open the way for the 98.70 resistance, posting a higher high in the long term.

In the bigger picture, the dollar index has held in an upside tendency, however, looking at the very short-term, the price is trying to post a higher high confirming the ascending profile.