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The Canadian dollar continues to improve and has posted considerable gains in the Thursday session. In the North American session, USD/CAD is trading at 1.2770, down 0.66% on the day. On the release front, the focus is on inflation indicators on both sides of the border. In Canada, the New Housing Price Index improved to 0.0%, matching the forecast. Over in the US, consumer price index indicators remained weak. CPI rebounded with a gain of 0.2%, but this fell short of the estimate of 0.3%. Core CPI edged lower to 0.1%, shy of the forecast of 0.2%. On Friday, Canada releases Employment Change and the unemployment rate. The US will release UoM Consumer Sentiment.

Oil prices remain at their highest level in 3-1/2 years, and this has boosted the Canadian currency, which is at its highest level since late April. President Trump’s bombshell announcement that the US would withdraw from the Iran nuclear deal, as well as increasing tensions in the Middle East have raised concerns of supply disruptions. Brent crude climbed to $77.87 in Thursday’s Asian session after Israel struck dozens of military targets in Syria on Wednesday.

The currency markets have not shown much interest in President Trump’s dramatic speech on Tuesday. Trump announced that the US would withdraw from the Iran nuclear deal. Trump blasted the agreement and said that the US would impose stiff sanctions on Iran. However, Britain, France and Germany have said they plan to remain in the deal, and will be holding a high-level meeting with Iranian leaders on how the agreement can be salvaged. With the US acknowledging that the White House does not have a ‘Plan B’, it’s unclear what happens next. Meanwhile, tensions between Israel and Iran are at a fever pitch after Israel struck dozens of military targets in Syria on Tuesday.

Daily Pivots: (S1) 108.85; (P) 109.10; (R1) 109.38; More...

USD/JPY drops sharply after failing to break through 110.02 short term top. Consolidation from there is extending with another falling leg. Break of 108.64 will bring deeper decline. Still, we'd expect strong support from 38.2% retracement of 104.62 to 110.02 at 107.95 to contain downside and bring rebound. Meanwhile, on the upside, break of 110.02 will resume the rise from 104.62 to 61.8% retracement of 114.73 to 104.62 at 110.86 next.

In the bigger picture, corrective decline from 118.65 (2016 high) has completed with three waves down to 104.62. Rise from 104.62 is possibly resuming the up trend from 98.97 (2016 low). This will be the preferred case as long as 55 day EMA (now at 107.95) holds. Decisive break of 114.73 resistance will confirm our view and target 118.65 and above. However, sustained break of 55 day EMA will dampen this bullish view and turn focus back to 104.62 low instead.

Sterling weakens notably after BoE rate announcement. But loss is relatively limited as it's holding above key near term support level against Dollar, Euro and Yen. On the other hand, Dollar is also suffering some selloff today as core CPI missed market expectation. That's a relive for traders that they could finally take profits from the long stretched Dollar long position. Overall in the forex markets, Aussie and Canadian are the strongest ones today. New Zealand Dollar is the weakest due to dovish RBNZ. Sterling follows as the second while Dollar is the third.

Technically, there are some key levels to watch. Break of 1.1938 in EUR/USD will confirm short term bottoming, and that would add to the case of broad based correction in Dollar. Similarly, corresponding level in 0.9982 in USD/CHF. Meanwhile, 0.8844 in EUR/GBP is another level to watch as break will revive near term bullishness in the cross. And also, 1.3485 in GBP/USD will decide who's the weakest one for today, Dollar or Sterling.

US core CPI failed to accelerate in April.

US headline CPI accelerated to 2.5% yoy in April, up from 2.4% yoy and met expectation. However, core CPI was unchanged at 2.1% yoy, below expectation of 2.2% yoy. Also from US, initial jobless claims was unchanged at 211k in the week ended May 5, sticking to the lowest level in 49 years for the second straight week. Four-week moving average dropped -5.5k to 216k, touching the lowest level since December 1969. Continuing claims rose 3k to 1.79m in the week ended April 28.

BoE strikes the middle ground of hawkishness

BoE left Bank rate unchanged at 0.50% by 7-2 vote as expected. Ian McCafferty and Michael Saunders voted for rate hike again. Asset purchase target was also held at GBP 435B with unanimous vote. Regarding growth, BoE noted in the statement that Q1's slowed down was seen by the MPC as "in part to have reflected adverse weather in late February and early March." And, the " central forecast for economic activity is little changed". BoE revised down four-quarter real GDP growth forecast in Q2 2018 to 1.4%, down from February's 1.8%. Four-quarter GDP real GDP growth forecast in Q2 2019, Q2 2020 are held unchanged at 1.7%.

Regarding inflation, BoE noted that "impact of the past depreciation of sterling on CPI inflation, while remaining significant, is likely to fade a little faster than previously thought." And, inflation is projected to "fall back slightly more quickly than in February", hitting 2% target in two years. Four-quarter inflation rate forecast for Q2 2018 was revised down to 2.4%, down from February's 2.7%. For Q2 2019, inflation forecast was revised down from to 2.1%, from 2.2%. Q2 2020 inflation forecast was revised down to 2.0%, from 2.1%.

Overall, MPC members are not too concerned with Q1 slowdown, and the impact on growth ahead. The faster slowdown in inflation, though, could give BoE less urgency to hike again if the slowdown worsen. But for now, the condition path showed that the projections took one rate hike this year into consideration, unchanged from February. The rate hike is more likely to happen in Q3 than Q4 as implied by forward rates. That is, it could happen in August, and it's earlier November as implied in February's Inflation Report.

In our view, the overall BoE announcement is still considered as "hawkish hold", just less hawkish than some hoped for, but more hawkish than the least hawkish scenario.

Also from UK, visible trade deficit widened to GBP -12.3B in March, from GBP -10.2B versus expectation of GBP -11.4B. Industrial production dropped rose 0.1% mom, 2.9% yoy in March, versus expectation of 0.2% mom, 3.1% yoy. Manufacturing production dropped -0.1% mom, rose 2.9% yoy in March, versus expectation of -0.2% mom, 2.9% yoy. Construction output dropped -2.3% mom in March versus expectation of -2.2% mom. NIESR GDP estimate grew 0.1% in April. RICS house price balance dropped to -8 in April.

French President Macron: Europe at a historic momentum to maintain multilateral order in Middle East

Iran's President Hassan Rouhani talked with French President Emmanuel Macron in a phone call yesterday, as follow up to Trumps' withdrawal from the nuclear deal. Iranian Students' News Agency quoted Rouhnai saying that "under the current conditions, Europe has a very limited opportunity to preserve the nuclear deal, and must, as quickly as possible, clarify its position and specify and announce its intentions with regard to its obligations." Rouhani also added that "despite what Trump thinks, enrichment in Iran has never been for obtaining a nuclear weapon but instead has been for scientific and technical pursuits."

Separately, Macron said in an interview with Germany's Deutsche Welle broadcaster yesterday that "We stand today at a historic moment for Europe – Europe is in charge of guaranteeing the multilateral order that we created at the end of World War II and which today is sometimes being shaken."

China MOFCOM: US must put away its threatening stick

Chinese Vice Premier Liu He will visit Washington next week to resume trade negotiations with the US. Commerce ministry (MOFCOM) spokesman Gao Feng confirmed today during a regular press the officials are preparing for the visit.

But Gao reiterated China's stance in opposing protectionism and unilateralism in trade relations. He warned that "the United States must put away its threatening stick. China's position has not changed and will not change." Gao added that "we hope that China-U.S. trade relations can become a powerful driving force for sustained growth of the global economy."

Separately, GAO also said the bilateral trade between China and Russia expanded quickly in the first four months of 2018. Gao noted "The Russian economy is steadily turning for the better and its market demand is rising, driving China's exports to the country up 21 percent on a yearly basis during the January to April period." According the last data, Sino-Russian trade grew 30% yoy to USD 31.2B between January and April.

Also from China, CPI slowed to 1.8% yoy in April, PPI rose to 3.4% Yoy.

BoJ Kuroda: Inflation expectations may not rise smoothly if there is strong uncertainty

BoJ Governor Haruhiko Kuroda said today that the central could debate stimulus exit if policy makers see increasing chance of hitting the 2% inflation target. He noted that "when the possibility of achieving our price target heightens, conditions of an exit would fall into place. The BOJ's policy board could then discuss conditions for an exit."

However, he emphasized that "With achievement of our price target still distant, it will create market confusion if we explain specific means and timing of an exit (from the easy policy) now." Also, he warned that "if there is strong uncertainty about future growth, firms will hesitate to raise wages." He added that "even if firms' wage- and price-setting stance becomes more proactive, inflation expectations may not rise smoothly."

RBNZ downgraded both GDP growth and inflation forecasts

The overall RBNZ monetary policy decision is rather dovish. OCR is left unchanged at 1.75% for a 19th straight month as widely expected. Governor Adrian Orr noted in the statement that growth and employment remain "robust" and near their "sustainable levels". But CPI remains below the 2% mid-point of target. And, the best way to see inflation moving back to target would be "to keep the OCR [overnight cash rate] at this expansionary level for a considerable period of time". RBNZ is clearly is no rush to raise interest rates.

Adding to that, the GDP growth and inflation forecasts were also downgraded for the period ahead. The downgrade in GDP forecasts were quite significant in 2019 and 2020. CPI is still projected to hit 2.0% target 2021 but is expected to be lower in both 2019 and 2029.

GDP is projected to grow 2.8% (2018), 3.1% (2019), 3.3% (2020), 3.1% (2021). Back in February, GDP projections were 2.9% (2018), 3.3% (2019), 3.5% (2020), 3.1% (2021).

CPI is projected to be at 1.1% (2018, 1.6% (2019), 1.8% (2020), 2.0% (2021). Back in February, CPI projections were 1.1% (2018), 1.7% (2019), 1.8% (2020), 2.0% (2021).

More in RBNZ Turns Dovish, Downgrading Growth and CPI Forecasts

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 108.85; (P) 109.10; (R1) 109.38; More...

USD/JPY drops sharply after failing to break through 110.02 short term top. Consolidation from there is extending with another falling leg. Break of 108.64 will bring deeper decline. Still, we'd expect strong support from 38.2% retracement of 104.62 to 110.02 at 107.95 to contain downside and bring rebound. Meanwhile, on the upside, break of 110.02 will resume the rise from 104.62 to 61.8% retracement of 114.73 to 104.62 at 110.86 next.

In the bigger picture, corrective decline from 118.65 (2016 high) has completed with three waves down to 104.62. Rise from 104.62 is possibly resuming the up trend from 98.97 (2016 low). This will be the preferred case as long as 55 day EMA (now at 107.95) holds. Decisive break of 114.73 resistance will confirm our view and target 118.65 and above. However, sustained break of 55 day EMA will dampen this bullish view and turn focus back to 104.62 low instead.

Economic Indicators Update

The Bank of England monetary policy announcement and press conference went broadly as expected today, with the central bank holding off on raising rates while maintaining that they will rise gradually over the forecast period.

The central bank had previously strongly hinted that base rate would rise today – taking it above 0.5% for the first time since 2009 – but as the economic data took a turn for the worse in February and March, the tone changed. While the central bank maintains that it believes the data deterioration is temporary, it chose to wait for evidence of this before acting causing many to question the reliability of the central bank forecasts and its forward guidance.

Governor Mark Carney was keen to stress in the press conference that, despite today’s decision, policy makers are confident that domestic inflationary pressures are building gradually and appeared relatively comfortable with the expectation of roughly two rate hikes over the next 18 months and three over the next three years. This is unchanged from February and further reiterates the bank’s belief that the timing of the next hike isn’t as important as is suggested.

While the pound remained volatile throughout the press conference, the bulk of the decline after the release – more than 0.5% against the dollar – came in response to the new economic projections which forecast lower growth and inflation over the next three years. Carney may have expressed confidence in the outlook but the forecasts were less convincing. Still, markets continue to price in a rate hike this year – most likely in November – which assuming Brexit negotiations progress as planned, will be far more convenient for the central bank.

Cable fell to 1.35 zone on bearish acceleration from session high at 1.3617, after Bank of England was in neutral hold in May’s meeting.

The central bank kept rates unchanged as expected and previous meeting vote came in line with expectations (7/2) but said that more evidence about growth acceleration are needed after slowdown in the first quarter.

Initial strong expectations about rate hike in May policy meeting diminished in just two weeks, as series of downbeat key UK data cooled down hopes that BoE would raise interest rates.

The price fell to the lower boundary of consolidation range which extends into fifth straight day, after strong acceleration higher earlier today cracked the upper boundary, reinforced by falling 10SMA, but dovish tone from Fed sent pound sharply lower.

Further directionless mode could be expected while the price remains within the range, with focus on today’s close against 200SMA which would give fresh signal. Close below would generate initial negative signal while repeated close above 200SMaA would keep in play existing basing attempts.

Stronger direction signal could be expected on break of either side (1.3486 – range floor or 1.36 - range ceiling / falling 10SMA).

Res: 1.3600; 1.3617; 1.3629; 1.3665
Sup: 1.3500; 1.3484; 1.3442; 1.3400

Dollar drops broadly, except versus pound after inflation data.

Headline CPI accelerated to 2.5% yoy in April, up from 2.4% yoy and met expectation. However, core CPI was unchanged at 2.1% yoy, below expectation of 2.2% yoy.

Also from US, initial jobless claims was unchanged at 211k in the week ended May 5, sticking to the lowest level in 49 years for the second straight week. Four-week moving average dropped -5.5k to 216k, touching the lowest level since December 1969. Continuing claims rose 3k to 1.79m in the week ended April 28.

The momentum in the post data USD selloff argues that traders are finally relieved that can take profits from recent long stretched rally. 1.1938 minor resistance in EUR/USD and 0.9982 minor support in USD/CHF will be the key levels to watch to confirm this case.

The key takeaway from today's BoE announcement are:

• Hawks remained hawks. Ian McCafferty and Michael Saunders voted for rate hikes again.
• Q1's slowed down was seen by the MPC as " in part to have reflected adverse weather in late February and early March."
• "Despite the near-term softness, the MPC's central forecast for economic activity is little changed"
• "Wage growth and domestic cost pressures are firming gradually, broadly as expected."
• "Impact of the past depreciation of sterling on CPI inflation, while remaining significant, is likely to fade a little faster than previously thought."
• "CPI inflation is projected to fall back slightly more quickly than in February, reaching the target in two years."
• "For the majority of members, an increase in Bank Rate was not required at this meeting. All members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent."

Taken into account the revised projections, the MPC members are not too concerned with Q1 slowdown, and the impact on growth ahead. Though, inflation could be slowing down more quickly than originally expected, thus giving BoE more room to keep their hands tight.

The condition path showed that the projections took one rate hike this year into consideration, unchanged from February. But the rate hike is more likely to happen in Q3 than Q4 as implied by forward rates. That is, it could happen in August, and it's earlier November as implied in February's Inflation Report.

So, it's actually still a "hawkish hold", just less hawkish than some hoped for, but more hawkish than the least hawkish scenario.

And, while it seems GBP is under pressure after the release, it's so far, holding above 1.3485 against USD and 147.04 against JPY.

The British pound is currently neutral in the short-term against the U.S dollar, as traders await the Bank of England Interest Rate Decision and Policy Statement. The GBPUSD pair currently trades around the 1.3570 level, after again finding dip-buying interest from the pairs key 200-day moving average earlier today. A decline below the 1.3482 level should support further downside towards the 1.3400 level, while a move above the 1.3606 level may see buyers testing towards the 1.3700 level.

The GBPUSD pair remains bearish while trading below the 1.3592 level. Medium-term support is found at 1.3482 and 1.3400 levels.

If the GBPUSD pair starts to move above the 1.3606 level, key medium-term resistance is found at the 1.3650 and 1.3711 levels.

The U.S dollar is starting to turn lower against the Japanese yen currency, after a second failed attempt at the psychological 110.00 level. The USDJPY pair currently trades around the 109.70 level, after creating a bearish double-top pattern just below the monthly-high, found at the 110.03 level. Traders now await the release of key U.S Consumer Price Index data, a measure of inflation the U.S FED watch closely.

The USDJPY pair is only bullish while trading above the 109.50 level, further upside towards 110.03 and 110.40 still remains possible.

If the USDJPY pair starts to trade below the 109.50 level, key support is found at the 109.39 and 109.00 levels.

Here are the latest developments in global markets:

FOREX: Sterling recovered earlier losses ahead of the BoE rate decision later today, bouncing up to a 1-week high of $1.3616 (+0.46%) despite data on the UK’s industrial production and the trade deficit coming in worse than expected and shedding a dark cloud around the country’s economic outlook. The euro gained some ground, rising to $1.1882 (+0.28%), while the dollar eased to 109.62 (-0.09%) against the yen. However, rising long-term US Treasury yields continued to underpin the greenback at a time of increasing geopolitical risks in the Middle-East. The dollar index was also weaker at 92.82 (-0.23%) before the release of US CPI readings later in the day. Kiwi/dollar was struggling to gain ground after it approached a five-month low of 0.6900 today in the wake of a dovish RBNZ monetary policy statement. The pair was last seen at 0.6926 (-0.84%). Aussie/dollar, on the other hand, rose to 0.7485 (+0.31%). Dollar/loonie changed hands lower at 1.2780 (-0.57%), remaining around the 2 ½ -week lows reached today.
STOCKS: European stocks were on the back foot. The pan-European STOXX 600 was trading lower by 0.27% at 1000 GMT led by losses in telecommunications and utilities. Metal miner Randgold was the index’s worst performer after its Q1 profits disappointed, while the British multinational retailer NEXT was the best performer after it raised its full-year profit forecast. The blue-chip Euro STOXX 50 retreated by 0.40%, the German DAX 30 climbed by 0.27%, while the French CAC 40 slipped by 0.17%. The Italian FTSE MIB tumbled by 1.51% as political risks continued to weigh on the index amid fears that anti-establishment parties could form a government. The British FTSE 100 was also down, loosing 0.34%. Futures tracking US stock indices were flashing green, pointing to a positive open.
COMMODITIES: Fears that the US would impose new stricter sanctions on Iran – OPEC’s third largest member – following the US withdrawal from the 2015 nuclear deal continued to support oil prices, driving WTI crude and Brent to fresh 3 ½-year highs of $71.89 (+0.70%) and $78.00 (+0.60%) per barrel respectively. In precious metals, gold edged up to $1,314.80 per ounce (+0.18%).

Day ahead: BoE decides on interest rates; US CPI attract interest

Thursday will be a busy session for sterling as investors are eagerly waiting for BoE policymakers to keep rates unchanged at 1100 GMT. Around a month ago, the market was almost certain that policymakers would provide a rise in interest rates at this gathering. In the meantime though, a series of disappointing economic data combined with Carney’s dovish remarks prompted market participants to scale back expectations for a hike. Polls suggest a 7-2 vote in favor of rates remaining at current levels. Still, it would be interesting to see whether the MPC voting structure has changed. Should more officials vote in favor of a hike than previously, sterling could get a boost as this could signal that policymakers consider the recent slowdown in economic activity to be a transitory fact. This could also increase the odds for an increase in borrowing costs at the August meeting. On the other hand, if more policymakers take the no-rate hike side, sterling could fall into losses amid speculation that a tighter monetary policy might not be delivered anytime soon. The inflation report accompanying the rate statement and the central bank’s GDP growth and inflation forecasts will be also closely watched.

At 1230 GMT, the US will see the release of inflation figures for the month of April. Headline inflation is forecasted to advance by 0.3% m/m, after a negative reading of 0.1%. Year-on-year CPI is expected to grow by 2.5% from 2.4% in March and core CPI, the measure that excludes volatile food and energy items, is predicted to tick higher by 2.2% versus 2.1% seen in the previous month. In case the data beat expectations, then that could drive the US dollar higher above the 110.00 handle.

US initial and continued jobless claims data for the week ending May 4 are scheduled for release at 1230 GMT. The Department of Labor forecasts 219,000 individuals to have applied for unemployment benefits for the first time compared to 211,000 in the preceding week.

Later in the day, data on the US Federal Budget balance for the month of April will be made public at 1800 GMT.