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Market movers today

Much focus will remain on Italy amid the ongoing discussions on forming a viable government. It is still an open question whether new elections will be held and when or whether the Five Star/League or an interim technocratic government will go ahead.

In the euro area, the HICP figures for May are due for release today. On the back of higher-than-expected German (2.2%) and Spanish (2.1%) figures released yesterday, we raise our forecast for today s euro area HICP inflation to 1.8% (1.6% previously) and core inflation to 1.1% (1.0% previously). The magnitude of rebound in core will also have important implications for the timing of the next change of ECB forward guidance (we still expect it to come at the July meeting).

Overnight, we get Chinese Caixin PMI data. We look for a small decline, but reckon there is upside risk to this view after the official manufacturing PMI rose in May.

Selected market news

In China, the manufacturing PMI rose to 51.9 in May from 51.4 in April. Consensus had expected it to stay unchanged, while we had been looking for it to drop to 51.1. Hence, that means economic activity improved in China in May.

The Italian political drama drags on. Although market sentiment recovered somewhat from the sell-off on Tuesday (see also The Italian market panic - drivers and near-term outlook ), the political outlook remains unclear, following conflicting comments from Five Star and League politicians during the day. The option for a technocratic government seems to be on hold for now, after PM-designate Cottarelli is awaiting the possibility of a political government between Five Star/League/Forza Italia and other political parties emerging. A renewed Five Star/League push to form a government remains an option, but both parties have also repeated their call for new elections, raising the threshold for a compromise on any deal. We expect the Italy theme to stay with us in the next weeks and months and market sentiment to remain very volatile in the near term.

China is apparently getting ready to take the next step in the ongoing trade war against the US. It was said yesterday to be contemplating lining up European and Asian countries in the rift with the US.

Oil prices recovered yesterday, with Brent moving back above USD77/bbl. The move came on the back of news that Iran's exports are starting to be affected by new US sanctions and rumours that OPEC might keep production cuts in place until the end of the year rather than start raising output already from H2.

For the 24 hours to 23:00 GMT, the EUR rose 1.07% against the USD and closed at 1.1664, as renewed efforts to form a coalition government in Italy reduced fears of an early election.

On the economic front, data showed that the Euro-zone’s final consumer confidence index eased as initially estimated to a level of 0.2 in May, after recording a revised level of 0.3 in the previous month.

Separately, Germany’s flash consumer price index (CPI) advanced more-than-estimated by 2.2% on an annual basis in May, rising by the most since February 2017, amid a surge in energy prices. Market participants had expected the CPI to rise 1.9%, after registering a gain of 1.6% in the previous month. Moreover, the nation’s seasonally adjusted unemployment rate surprisingly fell to 5.2% in May, thus boosting optimism over the health of the nation’s labour market. Unemployment rate had registered a reading of 5.3% in the prior month, while markets had expected for a steady reading.

Separately, the Organisation for Economic Cooperation and Development (OECD), in its biannual economic outlook, forecasted that economic growth in the Euro-zone would hit 2.2% this year and 2.1% in 2019. Additionally, the organisation estimated that global economy would expand by 3.8% this year and by 3.9% in 2019, up from an initial forecast of 3.7% and 3.6% respectively, amid a rebound in global trade and a favourable fiscal policy. However, it also warned that prospects of a global trade war pose significant risks to global growth outlook.

The US Dollar declined against a basket of major currencies, after second estimate of the US annualised gross domestic product (GDP) was revised lower to 2.2% on a quarterly basis in the first three months of 2018, while the preliminary print had indicated a rise of 2.3%. The GDP had recorded an advance of 2.9% in the previous quarter.

In other economic news, the nation’s advance goods trade deficit narrowed to $68.2 billion in April, dropping to its lowest level in 6 months. The nation had registered a revised trade deficit of $68.6 billion in the prior month, while market participants had envisaged the deficit to widen to $71.0 billion. On the other hand, the nation’s ADP private sector employment climbed by 178.0K in May, undershooting market expectations for a rise of 190.0K. Private sector employment had registered a revised gain of 163.0K in the prior month.

Separately, according to the Federal Reserve’s (Fed) Beige Book report, the US economy expanded moderately from late April to early May. Further, it revealed that most districts reported a pickup in manufacturing activity. However, concerns over the Trump administration’s trade policies clouded the business outlook.

In the Asian session, at GMT0300, the pair is trading at 1.1662, with the EUR trading slightly lower against the USD from yesterday’s close.

The pair is expected to find support at 1.1562, and a fall through could take it to the next support level of 1.1462. The pair is expected to find its first resistance at 1.1719, and a rise through could take it to the next resistance level of 1.1776.

Moving ahead, traders would focus on the Euro-zone’s flash inflation figures for May and unemployment rate data for April, slated to release in a few hours. Later today, the US initial jobless claims, followed by pending home sales, personal income and spending data, all for April, will garner significant amount of market attention.

The currency pair is trading above its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the GBP rose 0.20% against the USD and closed at 1.3284.

Yesterday, the Paris based think tank, OECD raised Britain’s growth outlook to 1.4% this year and to 1.3% in 2019, revised up from 1.3% and 1.1% respectively. However, it added that economic expansion would remain modest, in the wake of uncertainty from the Brexit negotiations.

In the Asian session, at GMT0300, the pair is trading at 1.3299, with the GBP trading 0.11% higher against the USD from yesterday’s close.

Overnight data showed that UK’s GfK consumer confidence index improved to a level of -7.0 in May, surging to its highest level since May 2017, compared to a level of -9.0 in the previous month. Market participants had expected the index to climb to a level of -8.0. Additionally, the nation’s Lloyds business barometer rose to 35.0 in May, after registering a reading of 32.0 in the prior month.

The pair is expected to find support at 1.3258, and a fall through could take it to the next support level of 1.3218. The pair is expected to find its first resistance at 1.3323, and a rise through could take it to the next resistance level of 1.3348.

Going ahead, investors will keep a watch on UK’s Nationwide house price index for May as well as net consumer credit and mortgage approvals data, both for April, slated to release in a few hours.

The currency pair is trading above its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the USD rose 0.22% against the JPY and closed at 108.82.

On the data front, Japan's consumer confidence index slightly increased to a level of 43.8 in May, compared to market expectations for a rise to a level of 43.9. The index had registered a level of 43.6 in the prior month.

In the Asian session, at GMT0300, the pair is trading at 108.67, with the USD trading 0.14% lower against the JPY from yesterday's close.

Overnight data indicated that the nation's flash industrial production climbed 0.3% MoM in April, undershooting market expectations for a rise of 1.4%. In the previous month, industrial production had climbed 1.4%.

The pair is expected to find support at 108.4, and a fall through could take it to the next support level of 108.14. The pair is expected to find its first resistance at 109, and a rise through could take it to the next resistance level of 109.34.

Looking forward, Japan's final Nikkei manufacturing PMI for May, set to release overnight, will be on investors' radar.

The currency pair is trading below its 20 Hr and 50 Hr moving averages.

Daily Pivots: (S1) 1.2977; (P) 1.3013; (R1) 1.3056; More.....

USD/CAD's sharp decline overnight dampened out bullish view. Intraday bias remains mildly on the downside for 1.2728 support. Break there will indicate completion of the rebound from 1.2526 at 1.3046. And in that case, deeper fall would be seen back to 1.2526 and below. Nonetheless, strong rebound from 1.2728 will put focus back to 1.3046 resistance first. Break there will revive the bullish case of trend reversal.

In the bigger picture, we're favoring the case that that rebound from 1.2061 has not completed yet. But there is no follow through upside momentum so far. Focus remains on 38.2% retracement of 1.4689 to 1.2061 at 1.3065. Sustained trading above there will confirm medium term bullish reversal. That is, down trend from 1.4689 has completed at 1.2061 already. In that case, next target will be 61.8% retracement at 1.3685. However, break of 1.2526 support will dampen this bullish view again. And, focus will be back on 1.2061 key support level, which is close to 50% retracement of 0.9406 (2011 low) to 1.4689 (2015 high) at 1.2048.

The forex markets are mixed today so far. Easing concerns over Italy political turmoil calmed markets temporarily. But the situation is not solve yet. Meanwhile, the upcoming decision on US steel tariff temporary exemption could turn sentiments around again. For now, Commodity currencies are generally higher with the help of receding risk aversion. Canadian is the second strongest for the week as lifted by more hawkish than expected BoC statement yesterday. But Yen is still following as the third strongest. Dollar, on the other hand, is the weakest one for the week.

Technically, Euro have formed temporary bottom against Dollar, Yen, Sterling and Aussie. More consolidation would be seen as markets await the development in Italy. But there could be some upside potential as Eurozone CPI might beat market expectation.

Italy worries temporarily eased

The turning point in Italy turmoil was anti-establishment Five Star Movement leader Luigi Di Maio's willingness to find someone other than eurosceptic Paolo Savona as economy minister. Savona was vetoed by President Sergio Mattarella who emphasized that "the adhesion to the euro is a choice of fundamental importance". For now, Savona is seen as a sticky point. Senior Five Star lawmaker Laura Castelli was quoted saying "it's astounding that Paolo Savona, a person of great culture and political awareness, has not yet decided to take a step back."

The political turmoil is far from being resolved yet. But at least for now, the risk of another election, which could be framed by the far-right League as referendum on Euro, appears to be lower. German 10 year bund yield closed at 0.376 yesterday. Italian 10 year bond year closed at 2.903. That is, the spread was still wider than 250.

Temporary exemptions to US steel tariffs to end tomorrow

The temporary exemptions from the US steel and aluminum tariffs are set to expire tomorrow. And it's so far uncertain what will happen next. It's widely reported Trump will start imposing the tariffs on EU. The decisions on Mexico and Canada are less certain as NAFTA negotiations continued to drag on. But there are reports that Trump will just go ahead with the tariffs too. Announcement could be made as soon as today.

It's clear that EU, Canada and Mexico are prepared for retaliation. And the US announcement today could finally, formally, starts global trade wars between US and the world. The section 232 national security probe on automobile imports is also waiting on the line. The commerce department has announced to hold two days of public hearing in July for the probe.

The US Chamber of Commerce already criticized the probe and warned that tariffs "would deal a staggering blow to the very industry it purports to protect and would threaten to ignite a global trade war."

Canadian Dollar jumped on hawkish BoC

Yesterday, Canadian dollar recorded the biggest one-day rally in two months after BOC's more hawkish- than- expected statement. Policymakers turned less concerned over the economic outlook. As such, they dropped the words "cautious" and "over time" in the accompanying statement, a sign interpreted by the market as supportive for a rate hike in the near-term.

Bets of a rate July rate hike jumped to 65% after the announcement, from less than 50% before that. In our opinion, it might be premature to associate removal of "cautious" at the May meeting to "rate hike coming soon". Intermeeting dataflow should be the key. More in BOC Removes "Cautious" Reference, But 2H17 Rate Hikes Experience Suggests Members Can Make Over-Aggressive Judgements

ANZ business confidence: Fairly uninspiring reading

New Zealand ANZ business confidence dropped to -27.2 in May, down from -23.4. That is, a net 27% of businesses are pessimistic about the year ahead. Views on their "own activity" also dipped from 18 to 14. ANZ noted in the release that "the survey made for fairly uninspiring reading this month, with all aggregate activity indicators flat to falling. The economy still has good tailwinds in the form of fiscal stimulus and the record-high terms of trade, but may be tiring nonetheless." Meanwhile, ANZ's composite growth indicator, a combination of business and consumer confidence, is consistent with around 2% y/y growth.

Released from Australia, private sector credit rose 0.4% mom in April as expected.

China official PMI manufacturing rose to 51.9 as part of short-term fluctuation

The China official PMI manufacturing rose to 51.9 in May, up from 51.4, and beat expectation of 51.4. PMI non-manufacturing rose to 54.9, up from 54.8 and beat expectation of 54.8. In the release, contributing analyst Zhang Liqun noted that the slight increase in PMI was just "short-term fluctuation" and carries "no trend significance". The rise in export orders showed there is no chance in the growing trend. Rise in purchase prices and ex-factory prices suggested that the decline in PPI could be coming to an end. In short, the data suggested that the economy continued to grow steadily in May.

Released from Japan, industrial production rose less than expected by 0.3% mom in April. Housing starts rose 0.3% yoy.

Looking ahead

Inflation data will be the key today. Eurozone will release May flash CPI. After the much stronger than expected German CPI data, there is prospect of an upside surprise today. Eurozone will also release unemployment rate. UK will release mortgage approvals in and M4. Swiss GDP rose more than expected by 0.6% qoq in Q1 and it will release retail sales too.

Later in the data, Canada will release GDP. US personal income and spending will be featured. PCE core is expected to slow slightly to 1.8% yoy in April. US will also release jobless claims, Chicago PMI and pending home sales.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.2977; (P) 1.3013; (R1) 1.3056; More.....

USD/CAD's sharp decline overnight dampened out bullish view. Intraday bias remains mildly on the downside for 1.2728 support. Break there will indicate completion of the rebound from 1.2526 at 1.3046. And in that case, deeper fall would be seen back to 1.2526 and below. Nonetheless, strong rebound from 1.2728 will put focus back to 1.3046 resistance first. Break there will revive the bullish case of trend reversal.

In the bigger picture, we're favoring the case that that rebound from 1.2061 has not completed yet. But there is no follow through upside momentum so far. Focus remains on 38.2% retracement of 1.4689 to 1.2061 at 1.3065. Sustained trading above there will confirm medium term bullish reversal. That is, down trend from 1.4689 has completed at 1.2061 already. In that case, next target will be 61.8% retracement at 1.3685. However, break of 1.2526 support will dampen this bullish view again. And, focus will be back on 1.2061 key support level, which is close to 50% retracement of 0.9406 (2011 low) to 1.4689 (2015 high) at 1.2048.

Economic Indicators Update

For the 24 hours to 23:00 GMT, the USD declined 0.22% against the CHF and closed at 0.9888.

On the data front, Switzerland's ZEW economic expectations index rose to a level of 28.0 in May, after registering a level of 7.2 in the prior month. On the other hand, the nation's KOF leading indicator surprisingly declined to a level of 100.0 in May, defying market consensus for a rise to a level of 104.7. The index had recorded a revised level of 103.3 in the prior month.

In the Asian session, at GMT0300, the pair is trading at 0.9883, with the USD trading 0.05% lower against the CHF from yesterday's close.

The pair is expected to find support at 0.9863, and a fall through could take it to the next support level of 0.9843. The pair is expected to find its first resistance at 0.9919, and a rise through could take it to the next resistance level of 0.9955.

Going ahead, investors will closely monitor Switzerland's 1Q GDP and real retail sales data for April, both set to release in a few hours.

The currency pair is trading below its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the USD declined 1.0% against the CAD and closed at 1.2890.

The Canadian Dollar advanced against the USD, after the Bank of Canada (BoC), at its May monetary policy meeting, hinted that an interest rate hike is around the corner.

The BoC opted to keep the benchmark interest rate steady at 1.25%, as widely expected. Further, the central bank expressed optimism over the Canadian economy on the back of upbeat economic data and added that an interest rate hike would be warranted in the near term in order to keep a lid on soaring inflation.

In the Asian session, at GMT0300, the pair is trading at 1.2874, with the USD trading 0.12% lower against the CAD from yesterday’s close.

The pair is expected to find support at 1.2793, and a fall through could take it to the next support level of 1.2713. The pair is expected to find its first resistance at 1.2997, and a rise through could take it to the next resistance level of 1.3121.

Trading trend in loonie is expected to be determined by the release of Canada’s crucial GDP numbers for March, due to be released later in the day.

The currency pair is trading below its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the AUD rose 0.95% against the USD and closed at 0.7573.

Yesterday, the OECD stated that it expects Australia’s economic growth to accelerate by 2.9% in 2018 and by 3.0% next year. Further, the organisation predicted that the Reserve Bank of Australia (RBA) is likely to start lifting interest rates by the end of 2018.

LME Copper prices declined 0.46% or $31.5/MT to $6810.0/MT. Aluminium prices rose 0.24% or $5.5/MT to $2265.5/MT.

In the Asian session, at GMT0300, the pair is trading at 0.7559, with the AUD trading 0.18% lower against the USD from yesterday’s close.

Early morning data revealed that Australia’s private sector credit climbed 0.4% on a monthly basis in April, meeting market expectations and compared to a rise of 0.5% in the prior month.

Elsewhere in China, Australia’s largest trading partner, the NBS manufacturing PMI surprisingly advanced to a level of 51.9 in May, notching its highest level since October 2017. Market participants had expected the PMI to remain steady at a level of 51.4. On the other hand, the nation’s NBS non-manufacturing PMI recorded an unexpected rise to a level of 54.9 in May, defying market consensus for the PMI to remain steady at a reading of 54.8 in the prior month.

The pair is expected to find support at 0.7500, and a fall through could take it to the next support level of 0.7441. The pair is expected to find its first resistance at 0.7601, and a rise through could take it to the next resistance level of 0.7643.

Going ahead, traders would look forward to Australia’s AiG performance of manufacturing index for May, slated to release overnight.

The currency pair is showing convergence with its 20 Hr moving average and trading above its 50 Hr moving average.

For the 24 hours to 23:00 GMT, Gold marginally rose against the USD and closed at USD1306.10 per ounce, amid weakness in US Dollar.

In the Asian session, at GMT0300, the pair is trading at 1306.60, with gold trading slightly higher against the USD from yesterday’s close.

The pair is expected to find support at 1301.10, and a fall through could take it to the next support level of 1295.60. The pair is expected to find its first resistance at 1311.00, and a rise through could take it to the next resistance level of 1315.40.

The yellow metal is trading above its 20 Hr and 50 Hr moving averages.