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GBPUSD had a deep fall during Monday’s trading period as it dropped below the narrow range of 1.3450 to 1.3600, which had been holding over the previous two weeks. The price plunged to a new five-month low of 1.3389, however, price action is at the moment taking place not far above this trough.

In the daily timeframe based on technical indicators, momentum is too weak to provide a sustained move higher. The RSI indicator is flattening in the oversold level near the 30 barrier, while the MACD oscillator is trying to jump above its trigger line to create a bullish cross in the negative territory.

If price action remains below the 1.3450 strong resistance level, there is scope to test the 1.3290 support level. Clearing this key level would see additional losses towards the next barrier of the 50.0% Fibonacci retracement level of the upleg from 1.2100 to 1.4345, around 1.3240. A fall below it would see prices re-testing the 1.3040 hurdle, identified by the November 2017 low.

However, if the 1.3450 resistance fails, then the focus would shift to the upside towards the 38.2% Fibonacci mark of 1.3510, which stands in the middle of the aforementioned narrow range (1.3450 – 1.3600). If this level is breached, it would increase upside pressure and challenge the 1.3600 handle, which holds near the 20-day simple moving average (SMA). Moving higher, immediate resistance could be found at 1.3710, taken from the low on March 1.

To sum up, GBPUSD has been negative since breaking below the sideways channel and is expected to remain as long as price action is taking place below 1.3450.

The British pound remains under heavy selling pressure against the greenback, despite the US dollar index correcting marginally lower. The GBPUSD pair currently trades around the 1.3415 level, with pound sellers looking for further heavy selling below the key 1.3400 level. Sterling traders await the UK Inflation Report Hearing later today, and the next directional move in the US dollar index.

The GBPUSD pair is strongly bearish while trading below the 1.3400 level. Key support is now found at the 1.3492 and 1.3450 levels.

The GBPUSD pair is only intraday bullish above the 1.3450 level, further upside towards 1.3480 and 1.3500 is then possible.

European and Canadian traders coming back from vacation can expect a quiet release schedule on Tuesday. A pair of releases from the United Kingdom and United States will generate the bulk of the headlines.

The first item on the agenda is a speech by the Bank of England's Gertjan Vlieghe at 08:15 GMT. Vlieghe is a member of the Monetary Policy Committee (MPC), which recently voted to keep interest rates on hold.

A report on UK public sector net borrowing is scheduled for release at 08:30 GMT. Public sector debt is forecast to swell to £7 billion in April from negative £0.262 billion the month before.

The UK's Treasury Committee is scheduled to hold the Inflation Report Hearings at 09:00 GMT. The event is of prime interest for traders of the British pound, as it has direct implications on monetary policy.

Rounding out the UK release schedule is a monthly survey of industrial trends courtesy of the Confederation of British Industry (CBI). The CBI report is due at 10:00 GMT.

Shifting gears to North America, the Canadian government will report on wholesale sales at 12:30 GMT. The monthly figure is expected to show 0.6% growth in March following a 0.8% decline the previous month.

In the United States, the Federal Reserve Bank of Richmond will release its monthly manufacturing index at 14:00 GMT. The index is forecast to improve to a reading of plus 9 for May after hitting minus 3 the month before.

Commodity traders will be on high alter for weekly crude inventory data courtesy of the American Petroleum Institute (API). The data is scheduled for release at 20:30 GMT. The official inventory report, courtesy of the US Energy Information Administration (EIA), is due the following morning.

EUR/USD

Europe's common currency enjoyed strong upside on Monday as the dollar backtracked against its peers. However, gains were capped around the psychological 1.1800 level. EUR/USD is currently trading at 1.1782 with strong support located at 1.1717, the low from 21 May. Immediate resistance is seen up ahead at 1.1800.

GBP/USD

The British pound failed to break out on Monday despite a mild correction for the US dollar. Cable reached a high near 1.3440 before backtracking later in the session. At the time of writing, GBP/USD was valued at 1.3420. The pair is likely to run into resistance around 1.3450. Immediate support is located around 1.3400.

USD/JPY

The US dollar lost momentum on Monday as trade tensions between the United States and China faded. As a result, USD/JPY fell from a high near 111.40 all the way back down below 111.00. At the time of writing, the pair was trading at 110.94. Geopolitics and economic data will sway the pair's direction throughout the course of the week.

The USD/JPY continued with the uptrend yesterday and showed another higher high at 111.50. Price is now building a new bearish retracement as price broke below the steep trend line (dotted blue). Price has now more space towards the top of uptrend channel (red) and 50% Fibonacci retracement level which could be a potential bouncing spot as part of a larger WXY (pink) correction within wave D (purple).

The USD/JPY seems to have completed a wave 3 (green) momentum and price could be building a bearish retracement within wave 4 (green). A bullish bounce within wave 4 (green) is likely if price stays above the 61.8% Fibonacci level. A bullish breakout above the bull flag pattern (red lines) could soon start a bullish wave 5 continuation within wave C (blue) towards the Fibonacci targets.

The EUR/USD broke below the 1.1750 support and trend line (dotted blue) and continued with the downtrend. Price however made a strong bullish bounce after hitting the next target at 1.17 which has taken price back to the top of the resistance channel.

The channel could be a key factor because a bearish bounce could see a continuation towards the Fibonacci targets of wave 5 (blue) whereas a bullish break could indicate a larger bullish reversal. The first bullish reversal target could be aimed at around 1.19-1.1925, which could be part of a larger wave 4 (pink) correction.

The EUR/USD downtrend could have completed the wave 5 of wave 3 (pink) at 1.17 but price will need to break above the downtrend channel to confirm that reversal potential.A break above the resistance (red) could see a bullish breakout take price up to the Fibs of wave 4 whereas a break below the support (blue) could see price test the Fib target of wave 3 and wave 5.

USDCAD short-term Elliott Wave view suggests that the bounce to 1.2998 on 5/08 high ended primary wave ((2)). Below from there, primary wave ((3)) remains in progress as an Impulse Elliott Wave structure looking for more downside extension. In Impulse wave, the subdivision of wave 1, 3, and 5 is also an impulse structure of a lesser degree. On the other hand, wave 2 & 4 are corrective in nature i.e double, triple three, Flat etc. In the case of USDCAD, Intermediate wave 1, 3 and 5 are impulse with sub-division of 1, 2, 3, 4 & 5 in Minor degree.

Down from 1.2998 high, the pair ended intermediate wave (1) in 5 waves at 1.2725 low. Then the bounce to 1.2924 high ended intermediate wave (2) as zigzag and the correction against 5/08 high (1.2998). Below from there, Intermediate wave (3) of ((3)) is in progress looking for more downside extension as an impulse. Minor degree wave 1 of (3) ended in 5 waves at 1.2745 low and the bounce to 1.2911 high ended Minor wave 2 of (3) as a zigzag correction. Near-term focus remains towards 1.2733-1.2691, 100%-123.6% Fibonacci extension area of wave 1 & 2, to end the Minute degree wave ((i)) of 3 lower. Afterwards, the pair should bounce in Minute wave ((ii)) to correct the cycle from 1.2911 high before further decline resumes. We don’t like buying the proposed bounces.

USDCAD 1 Hour Elliott Wave Chart

Market movers today

No global market movers are being released today, but developments in the (geo)political sphere will remain of market interest, not least Italy.

Brexit negotiations will resume in Brussels today and South Korea's President will visit Washington to discuss North Korea ahead of the upcoming meeting in June between US President Donald Trump and North Korean leader Kim Jong-un.

The Hungarian central bank is announcing its rate decision today. With headline inflation still remaining below the central bank's 3.0% target, we do not see any imminent changes in its dovish stance, but we believe the strong economic growth will eventually drive up inflation, leading to a change in policy by the central bank at some point in late 2018.

In the Scandi markets, Danish and Swedish labour market data is due out (see next page).

Selected market news

US equity index futures were flat after S&P 500 rose by 0.7% on Monday, while European shares gained amid diminishing US-China trade war tensions. EUR/USD was steady around the 1.178 level, while Brent edged up to over 79 USD/bbl.

Italian stocks bonds declined and bond yields soared due to growing concerns of the coalition's fiscal plans. Giuseppe Conte, a law professor with no political experience, has been chosen as prime minister to head the new an Italian Five Star-League coalition government. He will have a tough job in managing the fractious coalition with a razor-thin majority in the Senate. His first task will be to assemble a cabinet, likely including Five Stars' Luigi Di Maio as Minister of Labour and Economic Development and Matteo Salvini of the League as Interior Minister. The new cabinet will still require approval by President Mattarella, but in the absence of further hurdles, a new government could go before parliament for a vote of confidence by early next week (see also our take here Italian Election monitor: Stand-off between EU and new Italian government looming, 18 May). Rating agency Fitch already warned on Monday that the populist coalition posed a risk to Italy's credit profile. President Mattarella also expressed concerns about state finances and Italians' savings, calling for a meeting with parliament leaders today.

US State Secretary Mike Pompeo laid out 12 'basic requirements' to Iran for sanctions relief, including a halt to all uranium enrichment and its ballistic missile programme. The demands drew swift rebuff from Iran's president Rouhani and the EU's foreign policy chief, indicating the lingering tensions about the future of the Iran nuclear deal.

General Trend:

• Asian equity markets trade generally lower amid holidays (South Korea and Hong Kong) and lack of economic data
• Shanghai Property index declines by over 1.5%
• Baby-related Chinese stocks trade higher: China said to consider ending birth limits
• North America-focused building materials firm James Hardie rises after Q4 earnings
• US and China said to reach ‘outline’ of agreement related to telecom ZTE
• PBoC continues to fix yuan (CNY) below market expectations
• Bank of Japan (BoJ) Gov Kuroda said low rates can both weigh on and boost consumption, sees Japan’s natural rate of interest likely around 0%
• Indonesia Rupiah (IDR) and Malaysia Ringgit (MYR) gain after decline in US Treasury yields
• Still, Indonesia 10-year bond yields continue to move higher

Headlines/Economic Data

Japan

• Nikkei 225 opened +0.1%; closed -0.2%
• TOPIX Retail Trade index -0.5%, Iron & Steel -0.4%, Securities -0.4%
• (JP) Japan Council on Economic and Fiscal Policy: sees social spending ballooning to 60% by 2040 - Nikkei
• Sony, 6758.JP Announces FY2018-2020 Medium- Term Plan: Targets at least 10% ROE
• (JP) BoJ Gov Kuroda: Reiterates domestic economy expanding moderately; No particular limit in expanding monetary base - parliament
• Softbank, 9984.JP Said to have reached an agreement to sell its 21% stake in Flipkart to Walmart; no terms disclosed - India press
• (JP) BoJ Dep Gov Wakatabe: Can meet price target with current policy; may need to shift policy if changes in economic conditions make current policy inappropriate
• (JP) Japan MoF sells ¥1.0T v ¥1.0T indicated in 0.5% (prior 0.50%) 20-yr bonds; avg yield 0.5320% v 0.5000% prior; bid to cover 4.12x v 3.69x prior

Korea

• Kospi closed
• Hyundai Motors, 005380.KR Retracted its spinoff merger plan for Hyundai Mobis and Hyundai Glovis on Monday due to negative market and shareholder view - Korean press

China/Hong Kong

• Hang Seng closed, Shanghai Composite -0.1%
• (CN) Former PBoC Gov Zhou Xiaochuan said over the weekend to keep a close eye on what will happen next if the US 10-year Treasury yields continue to rise and the dollar strength ‘wanes’ – Chinese Press
• (CN) China PBoC sets yuan reference rate at 6.3799 v 6.3852 prior
• (CN) China PBoC Open Market Operation (OMO): Injects CNY100B in 7-day and 14-day reverse repos v skips prior; Net: CNY0B injection v CNY0B injection prior
• (CN) Former China State Administration of Foreign Exchange (SAFE) official Guan Tao reiterated yuan currency (CNY) expected to follow ‘two-way’ fluctuation path in 2018 – Chinese Press
• (CN) Experts say China’s foreign exchange reserves may decline further amid capital outflows pressure, stronger US dollar and Fed rate hike – China Daily
• 763.HK US and China govts said to have reached a broad outline to settle ZTE issue, including listing export ban - US financial press

Australia/New Zealand

• ASX 200 opened 0.0%, closed -0.8%
• ASX 200 Telecom index -2%, Financials -0.9%, Utilities -0.7%
• Ht&e, HT1.AU APN made ~A$500M offer for Adshel
• James Hardie, [+2%], JHX.AU Reports FY17 Net $146.1M v $276M y/y; Rev $2.05B v $1.92B y/y
• (AU) Australia sells A$150M v A$150M indicated in Nov 2027 indexed bonds, avg yield 0.8822%, bid to cover 3.2x

Other Asia

• (TW) Chipmakers expected to raise prices for 8NM process - Digitimes

North America

• US equity markets ended higher: Dow +1.2%, S&P500 +0.7%, Nasdaq +0.5%, Russell 2000 +0.7%
• S&P500 Industrials +1.5%, Energy +1%, Real Estate +1%
• (US) Fed's Kashkari (non-voter, dove): Wage growth hasn’t picked up; may still be slack in labor market

Europe

• (DE) Germany May Finance Ministry Monthly Report: Domestic economy is in strong upturn, even if special factors meant growth in Q1 was less dynamic than in late 2017
• (IT) Italy Five-Star and League nominate Giuseppe Conte as prime minister - FT

Levels as of 02:00ET

• Hang Seng +0.6%; Shanghai Composite -0.5%; Kospi +0.2%
• Equity Futures: S&P500 +0.1%; Nasdaq100 +0.0%, Dax +0.5%; FTSE100 -0.1%
• EUR 1.1797-1.1773; JPY 111.05-110.84; AUD 0.7593-0.7573;NZD 0.6958-0.6941
• Jun Gold -0.1% at $1,289/oz; Jul Crude Oil +0.3% at $72.56/brl; Jul Copper -0.3% at $3.09/lb

Daily Pivots: (S1) 0.7527; (P) 0.7558; (R1) 0.7612; More...

AUD/USD's rebound from 0.7411 resumed by breaking 0.7566 and reaches as high as 0.7592 so far. Intraday bias is mildly on the upside for further rise, possibly to 55 day EMA (now at 0.7633). But strong resistance should be seen at 38.2% retracement of 0.8135 to 0.7144 at 0.7688 to limit upside and bring decline resumption eventually. On the downside, below 0.7502 minor support will turn intraday bias back to the downside for 0.7411 short term bottom first. Break will resume the fall from 0.8135 and target cluster support at 0.7328 (61.8% retracement of 0.6826 to 0.8135 at 0.7326).

In the bigger picture, medium term rebound from 0.6826 is seen as a corrective move. Break of 0.7500 key support suggests that such correction is completed at 0.8135. Deeper decline would be seen back to retest 0.6826 low. In case of another rise, we'd expect strong resistance from 38.2% retracement of 1.1079 to 0.6826 at 0.8451 to limit upside to bring long term down trend resumption eventually.

Global markets are blessed by strong risk appetite this week so far. DOW closed up 298.2 pts or 1.21% at 25013.29. S&P 500 also gained 0.74% while NASDAQ jumped 0.54%. FTSE jumped to record high at 7859.17 while CAC 40 also extended recent up trend to 5637.5. These were in response to positive developments out of US-China trade talks. Though, risk appetite eased a bit in Asian session as Nikkei is trading slightly in red, down -0.13% at the time of writing. In other markets, US 10 year yield dipped mildly overnight to close down -0.002 at 3.065. WTI crude oil extended recent rise and closed at 72.24. Meanwhile, gold is trying to draw support from 1280 but failed to grab 1290 again.

In the currency markets, Yen recovers mildly today as risk appetite eased. But it's staying as the second weakest one for the week, next to Sterling. Commodity currencies are generally strong, with Australian Dollar leading the way up, followed by Canadian Dollar and New Zealand Dollar.

Technically, EUR/USD is trying to draw support from key fibonacci level at 1.1708. But it will have to overcome 1.1821 minor resistance to form a short term bottom first. USD/CHF's corrective move from 1.0056 is set to extend and could gyrate lower. AUD/USD's break of 0.7566 minor resistance suggests that corrective rebound from 0.7411 is extending. GBP/USD is staying bearish with downside bias.

Philadelphia Fed Harker: Appropriate to continue rate hikes judiciously

Philadelphia Fed President Patrick Harker said yesterday that he sees two more rate hike this year. He noted it's "prudent to continue to move away from the zero lower bound". And Inflation "does seem to be moving toward 2%". He added that there is "not much slack in the labor markets". Hence, it's appropriate to continue rate hikes "judiciously".

And if there is an "acceleration of inflation", then he "supportive of a third". Though, he is not yet seeing a "rapid acceleration" in inflation yet.

Minneapolis Fed Kashkari: Fed should hike only to neutral policy stance

Minneapolis Fed President Neel Kashkari said in a article that "inflation and wage growth have been surprisingly low" despite tight job market. Now, wages is only growing at 2.7% annually, comparing to 3.5% before the financial crisis.

He pointed out that the headline unemployment rate in the US "captures" only those who are actively looking for jobs. Therefore, the 3.9% unemployment rate may not "capture the true slack" in the market. And "hidden slack" could explain the modest wage growth.

And Kashkari concluded that Fed should hike "only to a neutral policy stance, and not move too quickly". And that's until there are more evidence of wage growth and the US is "really" at maximum employment.

US Pompeo outlined steep demand for Iran, or the strongest sanctions in history

US Secretary of State Mike Pompeo outlined a list of demand for Iran to comply to, and threatened the country with "the strongest sanctions in history" if Iran doesn't change course. Some of the demand include stopping enrichment of uranium, allowing unqualified access to all sites throughout the country, declare all previous nuclear weapon efforts, end support for Shiite Houthi rebels in Yemn, withdraw all forces from Syria, etc.

Pompeo also added that "I know our allies in Europe may try to keep the old nuclear deal going with Tehran. That is their decision to make." But, 'they know where we stand." It's seen that Iran is highly unlikely to meet these demands. Meanwhile, EU is expected to keep their pledge to retain the current JCoPA Iran. Comments from EU officials would be noted in the coming days.

Italian President Mattarella called meeting of political leaders after getting Prime Minster nomination

Italian President Sergio Mattarella called the leaders of the lower and upper houses of the parliament for a meeting today. That came after meeting with anti-establishment 5-Star Movement and far-right League, who have agreed on a deal to form a coalition government.

5-Star leader Luigi Di Maio said after meeting with Mattarella that Giuseppe Conte, a law professor but a political novice, "will be the prime minister of a political government". Maio hailed that Conte is "a person that can carry out the government contract" and he's "proud" of this choice. Leader of the League Matto Salvini also confirmed the name.

For now, it's uncertain whether Mattarella will appoint Conte as the Prime Minister, or he'd prefer a more high-profile figure.

BoJ Kuroda to patiently pursue powerful monetary easing

BoJ Governor Haruhiko Kuroda reiterated to the parliament today that the central bank "won't end the ultra-easy policy before inflation reaches 2 percent". And BoJ will "patiently pursue powerful monetary easing". Though, Kuroda also noted policymakers will take into account the "side effects" such as the "impact of financial institutions, particularly regional banks".

Regarding the economy, Kuroda said it's expanding moderately, with consumption helped by loose monetary policy. While there is sustaining momentum in growth, prices lack so. And there is still some distance to inflation target. BoJ will remain mindful of uncertainties on economic and price outlook.

Deputy Governor Masazumi Wakatabe said that BoJ can achieve the inflation target "with the current policy". Though, "if conditions change and our current policy becomes inappropriate, we may need to change policy."

Light economic calendar with BoE inflation report hearing

Looking ahead, the economic calendar remains rather light today. UK will release public sector net borrowing and CBI trends total orders. Canada will release Wholesale trade sales. Though, a major focus will be on BoE inflation report hearing.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.7527; (P) 0.7558; (R1) 0.7612; More...

AUD/USD's rebound from 0.7411 resumed by breaking 0.7566 and reaches as high as 0.7592 so far. Intraday bias is mildly on the upside for further rise, possibly to 55 day EMA (now at 0.7633). But strong resistance should be seen at 38.2% retracement of 0.8135 to 0.7144 at 0.7688 to limit upside and bring decline resumption eventually. On the downside, below 0.7502 minor support will turn intraday bias back to the downside for 0.7411 short term bottom first. Break will resume the fall from 0.8135 and target cluster support at 0.7328 (61.8% retracement of 0.6826 to 0.8135 at 0.7326).

In the bigger picture, medium term rebound from 0.6826 is seen as a corrective move. Break of 0.7500 key support suggests that such correction is completed at 0.8135. Deeper decline would be seen back to retest 0.6826 low. In case of another rise, we'd expect strong resistance from 38.2% retracement of 1.1079 to 0.6826 at 0.8451 to limit upside to bring long term down trend resumption eventually.

Economic Indicators Update