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EUR/USD has ticked higher on Wednesday. Currently, the pair is trading at 1.1171, up 0.08% on the day. On the release front, there are no major German or eurozone events. It’s a quiet day in the U.S. as well. Today’s highlight is the minutes of the Federal Reserve’s policy meeting earlier in May. Thursday will be busy, as Germany releases GDP and Ifo Business Climate. The eurozone and Germany release service and manufacturing PMIs, while the ECB posts the minutes of the April meeting. The U.S. releases unemployment claims.

With a dearth of data so far this week, it’s no surprise that the euro has shown a lack of movement. The currency could get a wake-up call, starting with the release of the Fed minutes later in the day. At the May 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.

It’s election time in the European Union, as the bloc contends with an economic slowdown and the U.K’s imminent departure. Voters head to the polls for a 4-day election, beginning on Thursday, to elect members to the European Parliament. Key issues included the economic slowdown, the migrant crisis and the rise in Euroskpeticism. Euro-skeptics increased their representation in parliament from 12% to 25% in the last election, and with the dramatic increase in strength of populist parties, this trend could well continue. A strong showing by parties with an anti-EU agenda could weaken the euro. As well, the outcome of the vote could have an impact on the choice of the new head of the ECB, as Mario Draghi steps down in October, after an eight-year term.

Gold has been out of luck for the majority of the year so far. The year to date (YTD) performance of the precious metal sits at -0.46 percent and this is despite the fact that the Federal Reserve has adopted a dovish stance towards their monetary policy and there are serious concerns over the ongoing Trade War between the United States and China. In fact, the mainstream Chinese media has adopted a very aggressive tone against the U.S. with the Chinese media sending a clear warning that the dispute is going to hurt U.S. companies the most because of their exposure in China. According to the ‘Treaty damage to the U.S. hinterland‘ a 25% tariff increase on Chinese companies is going to impact 1 million U.S. jobs and will also anchor the financial market turmoil further.

However, despite this major uncertainty there is no appetite among trader for holding the safe haven- gold. The chart below shows that the SPDR Gold ETF has experienced its largest outflow since 2016, with an outflow exceeding $926 million in the first week of May alone. Having said this, the bleeding didn’t get much worse and this is because as of the last week, the inflow was $120 million which is better than the previous week’s outflow number of $303 million.

The relation of the Dollar Index to the gold price is always interesting, one goes up and the other goes down, mostly. The chart below shows that the gold price has lost value due to the strength in the Dollar Index and this trend is still robust.

The question which comes to mind is: why is the Dollar Index still strong if the Fed isn’t going to change its monetary policy?

To answer the above question, one needs to look at the US economic data and see how it has performed against the forecast. Remember, the Fed is usually behind the curve and market participants have it right most of the time. Therefore, the Bloomberg US Economic Surprise Index is helpful in this situation. In the chart below, you can see that the economic data has started to perform extremely well since March. Although, the current reading is -0.18, still in the negative territory, but the improvement in this index has been extremely strong. This is because back in March the index was well below the -0.50 level. Also, the correlation between the gold price and the Economic Surprise Index since October 2018 has been negative - one goes up and the other moves lower.

Today’s FOMC minutes will be of particular importance because traders will be looking at two things: firstly, if the Fed is going to acknowledge that the trade war is a catastrophe. And secondly, the economic slowdown in global growth. If the minutes do not show any concerns about these two important issues, I think the path of the least resistance would remain skewed to the upside.

Overall, I think the Dollar Index is going to continue its move to the upside. We will see only see it losing steam if the Fed starts to pay attention to what Donald Trump wants, because one thing is for certain, the economic data isn’t falling off the cliff and this means that the upside for the gold price may be limited.

Notes/Observations

Asia:

• US Trump administration said to be considering placing Hikvision to the blacklist along with 4 other companies, the final decision could be made in the coming weeks (largest provider of video surveillance equipment with internet enabled)
• China Ambassador to US Tiankai: China remains ready to hold trade talks with US; China is ready to address trade imbalance with US, buy more US products and services
• US State Department and White House National Security reportedly support imposing China sanctions under Magnitsky Act

Europe/Mideast:

• UK PM May leadership in the balance after an offer of a second referendum to push through a Brexit deal backfired. The 1922 committee of Conservative Back Benchers are are said try push through a confidence vote putting pressure on PM May to resign.
• UK Inflation for April comes in slightly softer then expected while remaining slightly above the BoE's 2% target, with an increase in Energy prices offset by declines in food prices.

Americas

• US Federal Judge Lucy Koh rules against Qualcomm in Federal Antitrust Case on the basis of tactics on patent licensing, Chip Sales unlawfully suppressed competition

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 -0.07% at 379.20, FTSE +0.38% at 7,357.10, DAX +0.03% at 12,149.60, CAC-40 -0.19% at 5,375.12, IBEX-35 +0.14% at 9,252.02, FTSE MIB -0.17% at 20,663.50, SMI +0.02% at 9,625.80, S&P 500 Futures -0.21%]

Market Focal Points/Key Themes:

Equities

• European Indices trade mixed across the board with FTSE 100 slightly outperforming amid cable testing new multi-months lows and Brexit talks falling apart. U.S. futures trade in negative territory after strong session yesterday.
• On the corporate front, Oriflame Cosmetics in Sweden trades 33% higher on acquisition offer made by Jochnick family. Casino Guichard-Perrachon trades little changed on French press reports that European Commission agents visited Casino's Paris HQ yesterday.
• On the earnings front, U.K. retail giant Marks & Spencer trades sharply lower after earnings and confirmation of rights issue to fund Ocado JV. Royal Mail rises 9% on smaller than expected dividend cut and earnings release also beating expectations. Industrial firm Babcock and utilities company SSE both fall on earnings and trading updates while IG Group, SimCorp and Pets at Home among notable risers.
• In other news, Dialog Semiconductor fell 3.5% on analyst note.
• Looking ahead, notable earners include Target Corp., Lowe's Corporation, Analog Devices and VF Corp.
• Consumer discretionary: Marks & Spencer [MKS.UK] -4% (earnings; confirms rights issue), Oriflame Cosmetics [ORI.SE] +35% (acquisition), Royal Mail [RMG.UK] +9% (earnings; dividend cut), Casino Guichard-Perrachon [CO.FR] n/c (European Commission agents visited Casino's Paris HQ yesterday), Pets at Home [PETS.UK] +10.5% (earnings)
• Industrials: Babcock [BAB.UK] -4% (earnings), Daimler [DAI.DE] -1% (annual meeting), MAN [MAN.DE] +1% (Volkswagen affirms outlook)
• Technology: Dialog Semiconductor [DLG.DE] -3.5% (analyst action), SimCorp [SIM.DK] +7.5% (earnings)
• Financials: IG Group [IGG.UK] +10.5% (trading update)
• Utilities: SSE [SSE.UK] -2.5% (earnings; post earnings comments)
• Consumer staples: Salmar [SALM.NO] -7% (earnings)

Speakers

• (CN) China Foreign Min Spokesman Lu Kang: China opposes U.S. using national powers to smear Chinese companies
• (UK) Environment Min Gove: will publish Brexit deal bill later today, May 22; he will NOT wote for second Brexit referendum
• (IT) Italy Dep PM Salvini: The Government will not collapse after EU vote even if his league party does well; - Only 15% tax rate can bring back the boom of the 1950s and 60s
• (EU) ECB's Draghi: monetary transmission impaired by bank fragmentation
• (IT) Italy Business Lobby Confindustria head Boccia: Rome needs to craft a €32B budget for next year to comply with EU rules, this could have a recessive impact
• (PL) Poland Central Bank's Sura: does not see need to change interest rates in 2019, a rise in 2020 is not ruled out
• (RU) Kremlin Spokesperson: On report that the US told Ankara to cancel S-400 Missile deal with Russia or face consequences, such ultimatums are unacceptable
• (CN) China President Xi: we should defeat various domestic, foreign risks and challenges

Currencies/ Fixed Income

• The dollar index continued to rise yesterday while negotiations between Trump and Xi have stopped. We also have FOMC meetings minutes today that could send the dollar flying if Powell continues his downplay of a rate cut.
• EUR/USD The Euro continues its sideways trend as the week has been quite for comments and figures until we get to the Flash PMI figures due out Thursday which if weaker could see us test the yearly low of 1.11 area.
• GBP/USD With the comments from May yesterday sending the Cable trading above the 1.28 handle, only to turn right back around and now make a new low below 1.27. Also, CPI was out today and came in slightly lower than expected with a quite muted move. Now we wait to see the progression of Brexit talks and retail sales due out this Firday.**Economic Data**

Economic Data

• (UK) APR CPI M/M: 0.6% V 0.7%E; Y/Y: 2.1% V 2.2%E; CPI Core Y/Y: 1.8% v 1.9%e
• (UK) APR PPI INPUT M/M: 1.1% V 1.3%E; Y/Y: 3.8% V 4.5%E
• (UK) APR PUBLIC FINANCES (PSNCR): -£7.1B V +£8.9B PRIOR; PUBLIC SECTOR NET BORROWING: £5.0B V £5.1BE
• (UK) Mar ONS House Price Index Y/Y: 1.4% v 1.0%e
• (IS) Iceland Central Bank (Sedlabanki) cuts 7-Day Term Deposit Rate by 50bps to 4.00%
• (SE) Sweden FSA Financial Stability Report
• (SE) Sweden Q1 Industry Capacity: 90.9% v 90.4% prior
• (PL) Poland Apr PPI M/M: 0.4% v 0.3%e; Y/Y: 2.6% v 2.4%e
• (PL) Poland Apr Sold Industrial Output M/M: -3.6% v -4.0%e; Y/Y: 9.2% v 9.0%e
• (IS) Iceland Apr Wage Index M/M: 1.5% v 0.2% prior; Y/Y: 6.8% v 5.5% prior

Fixed Income Issuance

• (SE) Sweden sells total SEK1.5B vs .SEK1.5B indicated in 2023 and 2032 bonds
• (DK) Denmark sells DKK2.64B combined 2022 and 2029 DGB Bonds

Looking Ahead

• 06:00 (IL) Israel Mar Manufacturing Production M/M: No est v 3.2% prior
• 06:00 (IE) Ireland Apr PPI M/M: No est v 1.4% prior; Y/Y: No est v -6.8% prior
• 07:00 (US) MBA Mortgage Applications w/e May 17th: No est v % prior
• 08:00 (RO) Romania Central Bank (NBR) May Minutes
• 08:00 (UK) Daily Baltic Dry Bulk Index
• 08:30 (CA) Canada Mar Retail Sales M/M: No est v 0.8% prior; Retail Sales (Ex-auto) M/M: No est v 0.6% prior
• 09:00 (MX) Mexico Mar Retail Sales M/M: No est v 1.2% prior; Y/Y: No est v 1.8% prior
• 10:30 (US) Weekly DOE Crude Oil Inventories
• 14:00 (US) FOMC May Minutes
• 15:00 (AR) Argentina May Economic Activity Index (Monthly GDP) M/M: No est v 0.2% prior; Y/Y: No est v -4.8% prior

Bulls are taking a breather under new two-week high at 110.67, posted after Tuesday’s strong rally, which generated strong bullish signal on break and close above important Fibo barrier at 110.31.

The dollar benefited from risk mode driven by rising trade tensions between the US and China, which slightly eased after US eased restrictions on Huawei, but the sentiment remains fragile.

Traders booked some profits ahead of Fed minutes that keeps the dollar on hold but near-term bulls remain in play.

FOMC will release the minutes from last meeting and traders will look for hints whether the central bank will remain in line with broadly neutral stance that would keep the dollar supported, while dovish shift may cause stronger negative impact on the greenback.

Broken Fibo barrier at 110.31 now marks solid support which guards rising 5SMA (110.17) and pivotal 10SMA support (109.90) loss of which will be bearish.

Converged daily 20/100SMA’s on track to form bear-cross, weakening momentum and south-turning overbought stochastic work in favor of corrective action.

Res: 110.51, 110.71, 110.95, 111.04
Sup: 110.31, 110.17, 110.01, 109.90

EUR/USD

Current level - 1.1153

Although pretty weak, the overall bias is negative, for a test of 1.1110 lows. Intraday resistance comes at 1.1180.

USD/JPY

Current level - 110.42

The break through 110.30 signals a bullish bias, for a test of 111.00 area. Initial support lies at 110.30.

GBP/USD

Current level - 1.2695

The recent rebound was capped at 1.2810 resistance and the overall bias remains bearish, for a slide towards 1.2580.

A breakout occurred through the lower boundary of an ascending channel pattern at 1.3421 during yesterday's trading session.

The exchange rate is expected to make a pullback towards a resistance level formed by the 50-hour simple moving average at 1.3421.

If the resistance level holds, the currency exchange rate might continue its southern movement within this session.

However, if the USD/CAD currency pair passes the 50-hour SMA, a surge towards the weekly pivot point at 1.3460 could be expected today.

The New Zealand Dollar depreciated about 40 base points against the US Dollar on Tuesday. The currency pair is currently moving towards a support level formed by the weekly S1 at 0.6485.

If the exchange rate passes the support level, a decline towards the lower boundary of a descending channel pattern at 0.6460 could be expected during the following trading session.

However, if the given support level holds, the currency exchange rate could make a brief retracement towards the 50-hour simple moving average at 0.6519 in the shorter term.

The Australian Dollar depreciated against the US Dollar, following the Australian Employment data set release on Thursday at 01:30 GMT. The AUD/USD exchange currency rate lost 34 pips or 0.48% right after the release. The Aussie continued trading at the 0.6915 level against the Greenback.

Australian Bureau of Statistics released the Australian Unemployment Rate data, which came out worse-than-expected of 5.2% compared with forecast of 5.0%. Also, the Australian Employment Change data was released at the same time.

Everything being equal, it is likely that the currency exchange rate will continue its decline within this session.

The moment of truth is approaching for Modi's National Democratic Alliance as federal election results are released on Thursday. Six of seven polls are predicting an absolute majority for the coalition led by PM Narendra Modi Bharatiya Jana Party (BJP), which is expected to surpass the majority mark of 272 seats in the lower house of parliament. This sounds very positive for investors, since a return of PM Modi’s with a stronger position would leave the government free to set up its spending plan without much objections.

Indeed, as economic growth is slackening at six-quarter low (Q4 2018 y/y GDP: 6.60%), the BJP is willing to push for a 5-year plan consisting of infrastructure spending for a total of 100 trillion rupees ($1.44 trillion) and 25 trillion rupees ($358.68 billion) on agriculture and rural development. This decision would also be timely for the Reserve Bank of India, which has already reduced its current rate (currently 6%) twice this year and is about to implement a further 0.25 percentage point reduction in June 2019 amid persisting trade tensions. There is therefore a limited upside potential for INR looking forward, although a positive headline with regard to current election results would mostly benefit Indian equities, bonds and INR.

Currently trading at 69.6687, USD/INR is heading along 69.46 short-term as the Fed’s April/May meeting minutes are released this evening.

The Eurozone single currency appreciated about 106 base points against the Japanese Yen on Tuesday. The exchange rate made a new high at 123.73 during yesterday's trading session.

The currency pair is currently testing the 50-hour simple moving average at 123.06.

If the support level formed by the 50-hour SMA holds, a surge towards the monthly pivot point at 123.81 could be expected within this session.

On the other hand, if the EUR/JPY currency exchange rate passes the support level, bears are likely to aim for the lower boundary of an ascending channel pattern at 122.59.