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The Asian session saw equities climb to a fresh-two year high early on Tuesday on the back of an overnight rise in Wall Street fueled by reports that President Trump had disclosed classified information with the Russian Foreign Minister without necessary authorization from the source. This re-fueled the continued underlying uncertainties and reinforced doubts surrounding the Administration’s economic agenda. Oil continued extending extended gains following a pledge from the major producers Saudi Arabia and Russia to push for an extension of supply cuts into 2018.

EURUSD has broken the psychological 1.1000 level as a result of the likelihood of a shift in Eurozone economic policy for the second half of 2017. ECB Chief Economist Praet commented 'that the balances of risk would be assessed at the June meeting'. However, he also stated that 'the central bank would need to be very careful over removing policy accommodation'.

The dollar index continued lower trading around 98.55 with May’s low of 98.50 forming a slight support area. Per the latest CME Fedwatch; the expectations of a rate increase in June is now at a 73.8% probability compared to 84% last week.

With a degree of 'risk-on' sentiment gold has seen a slight rise from early May lows of $1214 to trade just above $1234.

Today sees the release of UK CPI at 9:30 BST; forecast at 2.6% from the last release of 2.3% and US Housing Starts at 13:30 BST; expecting a minimal gain from the previous release.

USDCAD made a sharp and swift move to the downside two weeks back after an ending diagonal formation in wave 5) that confirmed a top near 1.3790. A nice drop is now in play, currently in third wave of a decline that can be wave 3 or C, but in both cases there is room for 1.3525.

USDCAD, 4H

GBP/USD – 1.2887

Recent wave: Wave V of larger degree wave (III) has ended at 1.1986 and major correction has commenced from there for gain to 1.3000 and 1.3140-50

Trend: Near term up

New strategy :

Sell at 1.2920, Target: 1.2770, Stop: 1.2970

Position: -
Target:  -
Stop:-

Although cable rebounded briefly to 1.2958, renewed selling interest emerged there and sterling has slipped again, suggesting the rebound from 1.2844 has ended, hence consolidation with downside bias is seen for test of 1.2844, however, break of previous support at 1.2831 is needed to signal temporary top has been formed at 1.2991 earlier, bring retracement of recent upmove to 1.2770-75 but previous support at 1.2757 should hold from here. 

Our preferred count on the daily chart is that cable's rebound from 1.3500 (wave (A) trough) is unfolding as a wave (B) with A ended at 1.7043, followed by triangle wave B and wave C as well as wave (B) has ended at 1.7192, the subsequent selloff is the larger degree wave (C) which is still unfolding with minor wave (III) of larger degree wave 3 ended at 1.1986, hence wave (IV) correction is in progress which could either be a triangle wave (IV) of a complex formation but upside should be limited to 1.3500 and price should falter well below 1.4000, bring another decline in wave (V) of 3 for weakness to 1.1500, then 1.1200.

On the upside, expect recovery to be limited to 1.2920-30 and said resistance at 1.2958 should remain intact, bring another decline later. A firm break of 1.2958 would signal the pullback from 1.2991 has ended, bring retest of 1.2991 later, only above there would revive bullishness and extend recent upmove to 1.3040-50 but overbought condition should limit upside to 1.3075-80 and price should falter below 1.3100. We are keeping our view that the wave c as well as larger degree wave B has ended at 1.2109, hence impulsive wave C has commenced from there with wave i of C ended at 1.2616, follow by a correction to 1.2365 (end of wave ii) and wave iii rally is unfolding.

GBP/JPY - 146.10

Recent wave: Medium term low formed at 120.50 and (A)-(B)-(C) major correction has commenced with (A) leg ended at 148.45, hence wave (B) is unfolding for retreat to 131.00-10.

Trend: Near term up

Original strategy:

Buy at 144.50, Target: 146.70, Stop: 143.90

Position: -
Target: -
Stop: -

New strategy :

Buy at 144.50, Target: 146.70, Stop: 143.90

Position: -
Target:  -
Stop:-

Current retreat after meeting renewed selling interest at 147.10 has retained our view that further consolidation below recent high of 148.10 would be seen and near term downside risk remains for test of 145.70 support, below there would extend the corrective fall from 148.10 top to 145.00-10, however, reckon downside would be limited to 144.50-60 and bring rebound later. Above said resistance at 147.10 would signal the pullback from 148.10 has ended, bring further gain to 147.50-60, then towards said resistance at 148.10, only a break above there would extend recent upmove from 135.60 to previous chart resistance at 148.45 which is likely to hold from here.

In view of this, we are inclined to buy sterling on subsequent pullback as 144.50-60 should limit downside, bring another rise later. Below said support at 144.00-10 would abort and suggest a temporary top is formed instead, bring correction to 143.50-60 but reckon 143.10-15 would hold from here, bring another rise later.

Our preferred count is that larger degree wave V with circle is unfolding from 251.12 with wave (I) 219.34, (II): 241.38 and wave (III) is subdivided into 1: 192.60, 2: 215.89 (23 Jul 2008) and wave 3 ended at 118.87 earlier in 2009. The correction from there to 162.60 is wave 4 which itself is a double three and is labeled as first a-b-c ended at 151.53, followed by wave x at 139.03, 2nd a ended at 162.60, 2nd b at 146.75 and 2nd c leg of wave 4 ended at 163.00. Therefore, the decline from 163.00 to 116.85 is now treated as wave 5 which also marked the end of larger degree wave (III), hence wave (IV) major correction has commenced for retracement of the wave (III) from 241.38 and upside target at 183.95-00 (50% Fibonacci retracement of the wave (II) from 241.38) had been met, a drop below 160.00 would suggest wave (IV) has ended at 195.85, bring decline in wave (V) for initial weakness to 130 (already met) and 120.


The Aussie eases from session high at 0.7433, posted after release of RBA minutes overnight, unable to hold gains and returns to session low at 0.7403.

Fresh weakness generates negative near-term signal, following Monday’s strong upside rejection of three-day recovery at 0.7444, just under falling 20SMA.

Hourly higher base at 0.7403 (reinforced by rising hourly cloud top and Fibo 38.2% of 0.7329/0.7444 recovery leg) is offering solid support, loss of which would signal further easing and generate initial signal of recovery stall.

Bearish acceleration and close below 0.7373 (Fibo 61.8%) is needed to confirm reversal, as negative daily studies support the notion.

Extended consolidation could be expected while 0.7400 support zone is holding, however, lift above falling 20SMA (currently at 0.7452) is required to confirm bullish continuation of recovery leg from 0.7329.

Res: 0.7433, 0.7444, 0.7452, 0.7467
Sup: 0.7400, 0.7385, 0.7373, 0.7356

'We have been expecting some cooling in the manufacturing sector following a solid start to the year, but if the orders index proves to be a reliable forward-looking indicator, the slowdown could be more severe than we had been anticipating.' - Daniel Silver, JP Morgan

Manufacturing activity in the New York state deteriorated unexpectedly in May, falling into the negative territory for the first time since October, official figures revealed. The regional Federal Reserve reported on Monday that its Empire State Manufacturing Index came in at –1.0 in the reported month, following the preceding month's 5.2 points. Meanwhile, market analysts anticipated a climb to 7.2 in May. The drop may be a sign of an activity slowdown in the manufacturing sector. Back in February, the New York Fed Index hit 18.7 points, the highest level since September 2014, boosted by optimism over the US President Donald Trump's pro-growth initiatives. However, the following Trump momentum began to wane, as the White House failed to deliver on key promises. The New Orders Index came in at -4.4, down from April's 7.0 and marking the weakest level since September. The Employment Index declined slightly to 11.9 from 13.9 points registered in the prior month. Indexes assessing the six-month outlook was little changed, falling from 39.9 to 39.13 points in May.

'The Tories (the Conservatives) have spent the last seven years prioritizing the few, opposing Labour's proposals to give workers more rights and overseeing wage stagnation which has left people worse off.' - Andrew Gwynne, Labour Party

On Monday, the British Prime Minister Theresa May, appointed after the country voted to leave the European Union on June 23, promised to extend British workers' rights in both workplace and boardroom. During her visit to the southern part of England, the UK PM said that the Conservative Party would protect workers of internet delivery firms and 'gig' companies, such as Uber. Furthermore, May stated they intended to put employees on company boards. Apart from that, the British Prime Minister promised to increase the national living wage and introduce a new family care leave system. The current national living wage for workers aged 25 and over is 7.50 pounds. Moreover, May said that if the nation votes for the Conservative Party it would also protect people with mental health problems. She also noted that she would use Brexit 'to extend the protections and rights'. Later on the day, the UK PM held her first Facebook Live session, during which the proposed policy was criticised for being unpaid. Moreover, the Liberal Party questioned the Conservatives' intentions and urged Britons not to trust the Tories.

'[The minutes] share the optimistic tone of May's Statement on Monetary Policy, but the more recent data releases suggest that the RBA may have to become a bit more cautious.' - Paul Dales, Capital Economics

At its last meeting the Reserve Bank of Australia expressed concerns over subdued job growth and surging housing prices, the minutes of the Monetary Policy Committee meeting revealed on Monday. The RBA noted that inflation picked up over the past few months; therefore, the Bank projected that the inflation rate would likely hit its 2% target by 2018. Rising commodity prices combined with higher building materials and utilities prices provided a boost to inflation over the last few months. The Central bank also said that data released in April suggested that the economy grew at a moderate pace in the three-month period to March. Nevertheless, policymakers that interest rates and monetary policy would remain unchanged for the rest of this year due to weak job creation and high house prices in Sydney and Melbourne. Nevertheless, figures released by CoreLogic suggested that house prices started to decline slightly. The Bank also pointed to improving industrial output and both business and consumer sentiment. However, after the release, the Australian Dollar dropped to 74.21 against its US counterpart.

Focus on today's UK inflation report

Later this afternoon, the UK will release April's inflation report. Following last week's BoE meeting, investors will undoubtedly react negatively to an upside surprise in inflation. Indeed, Mark Carney warned that UK consumers will be squeezed this year as price pressures pick-up. Headline inflation is expected to come in at 2.6% y/y from 2.3% in the previous month, while the core measure should rise from 1.8% y/y to 2.3%.

The BoE made clear that it won't raise borrowing costs should inflation pressure be fuelled by further GBP weakness, they would only do so if the UK gets a good divorce deal with the European Union. GBP/USD was up 0.40% this morning amid a broad-based USD sell-off. However, the pound lost ground against the single currency amid renewed hopes for a stronger European Union following Emmanuel Macron taking office.

EUR/GBP returned to 0.8537 on Tuesday morning and is currently trying to break its 50dma, which currently stands at 0.8541, to the upside. We maintain our long EUR / short GBP view on the pair, especially since Macron and Angela Merkel seem to want a closer relationship in order to shake up Europe. That does not bode well for the Brexit negotiation as it increases the odds that the EU will take a tougher stance towards the United Kingdom.

US data on deck

The lack of a real driver has created choppy directionless trading. Yet for today, traders' attentions will focus back on the US data for support of the Fed policy path. After yesterday's fall in the Empire State manufacturing headline index, expectations for evidence of economic strengthening will be needed. Much of the optimism around the US economy was driven by sentiment surveys, which in recent reads have declined from the elevated reading that came post-US election. That said, data coming from the US housing sector remains solid as the NAHB housing index rose to 70 in May from 68 in April. Today's Industrial Production should moderate from March's 0.5% rise to 0.4%.

Yet given the volatility in the indicator plus recent deceleration in sentiment, there is room for a downside disappointment. Housing starts with homebuilding activity strong and after a weak read in March, markets expect a recovery of 3.7% m/m.

There is also healthy consumer demand and solid labour markets (which is finally seeing wage gains) and while building permits should weaken slightly after a strong March down 0.2% from 3.6%, there is room yet for a quickening pace as the weather has been unseasonably warm. Weaker US data and domestic political confusion has dimmed expectations both for a faster Fed hiking cycle and faith in the USD (DXY fallen to 98.78 from 99.88).

However, the resilience of US short end yields suggest longer-term support for the USD. We caution investors from becoming too bearish on the USD ahead of 14th June Fed rate decision. The stability in US rates is the primary reason the USDJPY has not corrected further of the 114.38 resistance barrier.

Strong German economy brings optimism

The Eurodollar pair has broken 1.1000 following the French Presidential election. It seems markets are now leaving European political uncertainties behind. Yesterday, new French President Emmanuel Macron met with German Chancellor Angela Merkel and said he is willing to accelerate European construction, in particular the fiscal side.

For financial markets, the demand for euro is growing. In Germany, the ZEW confidence index - a survey of around 300 economists - is set to be issued and the consensus estimates the current situation in Germany is better. The German economy has been strong for the first quarter and investment and retail sales have been the key driver.

It is worth noting that Germany has a massive trading surplus and this is because the euro is way too low, given the strength of the country's economy. We reload our EUR bullish positions for the time being.

The pair stands at the back foot on Tuesday after failing to extend strong rally on Monday which also managed to register marginal close above pivot at 113.75 (broken Fibo 76.4%of 115.49/108.11 descend).

Overall picture remains biased higher for renewed attempts towards recent peaks and upside rejection at 114.36.

Rising daily Tenkan-sen that contained action of yesterday/ today, offers immediate support at 113.21, followed by key near-term support at 112.92 (100SMA) which is expected to hold current corrective phase and keep overall bulls intact.

Otherwise, stronger correction of 108.11/114.36 rally could be anticipated on sustained break below 100SMA pivot.

Res: 113.75, 113.93, 114.36, 114.87
Sup: 113.21, 113.07, 112.92, 112.38