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Sterling declined after a report that Theresa May had accepted to resign as Prime Minister. According to the Financial Times, she has told senior conservative MPs that she has set out a timetable for that resignation. In recent months, May has been under pressure to resign after MPs rejected her Brexit deal. Hours before her decision, Boris Johnson confirmed his bid for Tory leadership.

The New Zealand dollar rose slightly after the country released the PMI number for April. The number showed that the PMI rose to 53, which was lower than the expected 54.5 but better than the previous 51.9. The PPI input, which measures the change in the price of goods and raw materials purchased by manufacturers, declined by -0.9%. This was worse than the expected growth of 1.4%. The PPI output, which measures the change in price of goods sold by manufacturers, declined by -0.5%, which was worse than the expected growth of 1.3%.

The euro was little moved ahead of important CPI data from the EU. Data is expected to show that the headline and core CPI remained unchanged at 1.7% and 1.2% respectively. On a MoM basis, the CPI is expected to decline to 0.7% from the previous 1.0% while the core CPI is expected to remain unchanged at 0.9%.

EUR/USD

The EUR/USD pair is trading at 1.1180, which is slightly higher than the previous low of 1.1165. On the hourly chart, this price is below the 50-day and 25-day moving averages and between the middle and lower lines of the Bollinger Bands. The RSI has emerged from the oversold level and is currently at 40. Today, the pair will likely move up slightly before resuming the downward trend.

GBP/USD

The GBP/USD pair continued to decline reached a low of 1.2780. This was the lowest level since February 14th 2019. On the six-hour chart, the price is along the lower line of the Bollinger Bands. The price is also slightly below the 50-day and 25-day moving averages. The Relative Vigor Index (RVI) has dropped to the oversold level while volumes have declined. The pair will likely attempt to make a recovery by trying to move upwards.

NZD/USD

The NZD/USD pair started to decline on March 27. Since then, it has dropped from a high of 0.6935 to a low of 0.6525. On the six-hour chart below, this price is below all the short and medium-term moving averages. The RSI has remained relatively unmoved at the current level of 34. The momentum indicator too has remained unchanged. Today, the pair will likely see smaller movements because there is no major data from the US and New Zealand.

USD/CNH's decline resumed overnight and hit as high as 6.9446 so far. For now, the selloff in Yuan looks unstoppable as there is no end in sight in US-China trade war, which just escalated. But Reuters reported, based on unnamed source, that the PBoC won't allow USD/CNH to break through 7 handle.

The source was quoted saying "at present, rest assured they will certainly not let it break 7... Breaking 7 is beneficial to China because it can reduce some of the effects of tariff increases, but the impact on our renminbi confidence is negative and funds will flow out."

We remain doubtful on whether China will intervene this time given that they're been generally refrained in both currency and stock markets in the past few months. Barring any government intervention, we maintain the view that, based on current momentum, USD/CNH should surge bass 6.9800 and 7.000 handle with relative ease. Next target is 61.8% projection of 6.2354 to 6.9800 from 6.6699 at 7.1306.

Rates: China's disinterest brings risk-off back on the table
The risk relief on financial markets yesterday proves short-lived as Chinese media signaled a lack of interest for China to continue trade talks with the US. Core bonds resume the upward trend this morning and are set to profit further from a deteriorating sentiment. The University of Michigan consumer confidence is today's sole eye catcher on the eco calendar.

Currencies: dollar received interest rate support, but for how long?
The dollar succeeded broad-based gains, supported by higher US yields. The move was supported by good US data and a rebound of equities. This morning, the odds for the dollar to get additional interest rate support look rather small as uncertainty on the trade war persists. USD/JPY is most vulnerable. The picture for EUR/USD is more mixed.

The Sunrise Headlines

• US stock markets rebounded around 1% yesterday. Risk sentiment sours again overnight with Chinese stocks down 2% and gains for US Treasuries and the Japanese yen as China threatens to walk away for US talks.
• Chinese media signal little willingness from the government to continue trade talks with the US under the current tariff threat. They also report that the administration will step up stimulus to defend the local economy.
• Swedish deputy central bank governor Floden said he was unhappy with the slide of the Swedish krone against other major FX rates. It's something the central bank will take into consideration for setting its policy.
• Washington Fed-based governor Brainard said that the Federal Reserve should be prepared to allow for an inflation overshoot (without raising interest rates) to more credible demonstrate its commitment to the 2%-goal.
• The US has cut tariffs on Turkish steel from 50% to 25%. The US President lifted this import levy last year over a row about the detention of a US pastor. There's no reaction in EUR/TRY this morning.
• UK PM May said she would set out the timetable of her resignation after UK Parliament holds its 4th vote on Brexit legislation, whether it passes or not. The vote is expected in early June.
• Today's economic calendar contains University of Michigan consumer confidence. Fed Clarida and Williams are scheduled to speak. EU Finance Ministers meet in Brussels.

Currencies: Dollar Received Interest Rate Support, But For How Long?

USD gains on rate support, but for how long?

EUR/USD initially hovered in a tight range in the 1.12 area yesterday as markets pondered the consequences of recent developments in the trade war saga. Risk sentiment improved in the run-up to the US session. US eco data were better than expected. US yields rose. A wider US-German yield spread finally tilted the balance in favour of the dollar. EUR/USD dropped below 1.12 to close the session at 1.11.74. USD/JPY also profited from the equity rally and closed at 109.85.

This morning, Asian markets are mixed with China underperforming. Yesterday's relative trade optimism is again questioned this morning as a China government related source questioned whether it is appropriate for China to continue trade talks under current threats from the US. At the same time, the comment suggested that China might step efforts to support growth. The yuan is ceding further ground. USD/CNY jumped above the 6.90 barrier this morning. USD/JPY touched the 110 area this morning, but reversed initial gains (currently at 109.65). EUR/USD hovers in the 1.1175 area. AUD/USD slipped below the 0.69 level as the country is headed for elections this weekend.

Later today, the EMU final April CPI (expected at 1.7% headline and 1.2% core) is published. In the US, the Michigan consumer confidence is expected to stabilize at a decent level. At the same time, this morning's price action suggest that it won't be easy for the risk rally to continue.

Over the previous days the dollar (temporary)?) outperformed the yen and the euro. Yesterday, the dollar was supported by a rebound in US yields both due to good US eco data and a better risk sentiment. Especially, the risk context suggests that further USD interest rate support won't be that evident. If so, it is in the first place a negative for USD/JPY. The picture for EUR/USD is more mixed. Selling pressure from EUR/JPY might make a EUR/USD rebound more difficult. Even so, we maintain the working hypothesis that the EUR/USD 1.1110 level won't be easy to break without real negative EMU news.

Sterling lost further ground yesterday as the debate on the departure/ succession of UK PM May as leader of the conservative party continues. The outcome of the process and its consequences for Brexit are highly uncertain and this continues to weigh on sterling. EUR/GBP settled above the 0.8723 previous ST range top. May will try a last attempt to get her deal approved early June, but markets are not convinced it will succeed. Sterling will probably stay in the defensive.

EUR/USD: dollar rally to slow as rise in US yields might be temporary

EUR/USD

Current level - 1.1178

My outlook here is bearish, for a break through 1.1170 hurdle, towards 1.1110 low, en route to 1.1015 target zone. Crucial on the upside is 1.1220.

USD/JPY

Current level - 109.66

The rebound above 109.00 is obviously corrective in nature, thus preceding another dip to 108.50 zone. Key resistance  lies at 110.30.

GBP/USD

Current level - 1.2787

The downtrend is intact, heading towards 1.2690 area. Initial minor resistance lies at 1.2810-15 and crucial on the upside is 1.2890.

BoJ Governor Haruhiko Kuroda reiterated the central bank's forward guidance that "there's a good chance current low interest rates will be maintained beyond (the spring of 2020) depending on future developments". In a speech he emphasized "when we say we will keep rates low for an extended period of time, we mean it will be maintained for quite a long time."

On the economy, Kuroda expects it to continue to expand moderately. Though, "if overseas growth takes longer than expected to pick up, Japanese companies - manufacturers in particular - could become cautious about spending on capital expenditure".

While the economy is facing some risks, Kuroda dismissed that the so called "Modern Monetary Theory" as being a "wrong idea". He said "when a central bank monetizes debt unlimitedly, it will most certainly trigger hyper-inflation and cause huge damage to the economy." And, "it's a common understanding among central banks of advanced economies that they ought not monetize debt.

Kuroda's full speech here.

The USD/JPY needs to break above the resistance trend lines (red) before a larger bullish breakout can take place. The break would also confirm the potential for a larger reversal and a new uptrend. A break below the support trend line (blue) and the previous bottom, however, could indicate that the bullish price action is only a pullback within the downtrend.

The USD/JPY is unable to move away from the top of wave 1 (pink), which could either indicate a corrective pattern or multiple wave 1-2 patterns. An impulsive breakout is needed to confirm a larger bullish reversal. Price needs to stay above the 100% Fibonacci level of wave 2 vs 1 otherwise the wave 2 (blue) is invalidated.

Daily Pivots: (S1) 140.24; (P) 140.53; (R1) 140.85; More...

GBP/JPY's fall is in progress and intraday bias stays on the downside. Current decline should target 61.8% retracement of 131.51 to 148.87 at 138.14 next. Sustained break there will pave the way to retest 131.51 low. On the upside, above 141.64 minor resistance will turn intraday bias again and bring consolidations, before staging another decline

In the bigger picture, current development suggests that GBP/JPY was rejected by 149.98 key resistance. And medium term fall from 156.59 is still in progress. Break of 131.51 will target 122.36 (2016 low). On the other hand, decisive break of 149.98 should confirm that medium term fall from 156.59 (2018 high) has completed at 131.51 already. Further rally would be seen back to 156.59 resistance and above.

Daily Pivots: (S1) 122.51; (P) 122.74; (R1) 122.95; More....

A temporary low is in place at 122.08 in EUR/JPY and intraday bias is turned neutral for consolidations. Upside of recovery should be limited by 124.09 support turned resistance to bring fall resumption On the downside, break of 122.08 will extend the decline from 127.05 to retest 118.62 low.

In the bigger picture, current development argues that rebound from 118.62 is merely a correction and has completed at 127.50. EUR/JPY is staying in long term falling channel from 137.49 (2018 high). Decisive break of 118.62 will confirm resumption of this medium term fall and target 109.20 low. For now, this will be the favored case as long as 125.23 resistance holds.

Daily Pivots: (S1) 1.6149; (P) 1.6201; (R1) 1.6265; More...

Intraday bias in EUR/AUD remains on the upside at this point. Current rise from 1.5683 in in progress for retesting 1.6765 high. On the downside, below 1.6127 minor support will turn intraday bias neutral and bring consolidation first, before staging another rally.

In the bigger picture, as long as 1.5346 support holds, outlook will still remain bullish. Up trend from 1.1602 (2012 low) is expected to resume sooner or later. Break of 1.6765 will target 61.8% retracement of 2.1127 (2008 high) to 1.1602 at 1.7488 next. However, firm break of 1.5346 key support will indicate trend reversal, with bearish divergence condition in weekly MACD, and turn outlook bearish.

Daily Pivots: (S1) 0.8714; (P) 0.8732; (R1) 0.8749; More...

Intraday bias in EUR/GBP remains on the upside for the moment. Consolidation pattern from 0.8472 is extending with another rising leg. Further rise could be seen to 0.8840 resistance. On the downside, break of 0.8668 minor support will turn bias back to the downside for 0.8472 low instead.

In the bigger picture, medium term decline from 0.9306 (2017 high) is seen as a corrective move. Current development suggests that it's extending through 0.8312 support towards 50% retracement of 0.6935 (2015 low) to 0.9306 at 0.8121. We'll look for strong support around there to contain downside to complete the correction. But for now, break of 0.8681 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish in case of recovery.