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HIGHLIGHTS OF THE WEEK

United States

• The past week was action packed with economic data and events in Washington. Data largely supported the view that the U.S. economy will bounce back from its winter weakness.
• The job market sprang back into action in April, enabling investors to heave a sigh of relief that the fundamentals remain in place for a Q2 rebound. The Fed expressed its confidence in the economy in its statement accompanying its stand pat rate decision.
• Still, weak auto sales and a recent loss in inflation momentum suggest the U.S. economy is not entirely out of the woods. The Fed will be watching the data closely in the coming weeks before the case for a June hike is cemented.

Canada

• An 8% drop in crude oil prices led the S&P/TSX to a 6-week low and took the loonie below 73 US cents for the first time in over a year.
• The Canadian economy added just 3k jobs in April. The unemployment rate fell to 6.5% as 45k people left the workforce. Wage growth slowed to a record low of just 0.5% y/y.
• Auto sales slipped 1.6% y/y in April, but this follows a record breaking quarter. Sales remain quite elevated relative to historical norms.
• Exports bounced back in March, helping to narrow Canada's trade deficit. However, net trade will still be a drag on growth during the first quarter.

UNITED STATES - ECONOMY SHOWING SIGNS OF SPRING THAW

From Washington to Wall street, there was no shortage of news for investors to digest this week. Data largely supported the view that the U.S. economy is bouncing back from its winter weakness. Markets have one eye turned on policy shifts in Washington too, where the GOP took baby steps towards repealing and replacing Obamacare (ACA). The revised American Health Care Act (AHCA) passed the House by a very narrow margin, but faces a bigger challenge in the Senate.

Investors heaved a sigh of relief on Friday as the job market bounced back in April, bearing out the Fed's confidence in the economy expressed in Wednesday's rate announcement. Payrolls advanced 211k jobs in April and the unemployment rate fell to 4.4% - the lowest level since 2007. Broader measures of labor market slack also declined, with the broadest U6 measure (including discouraged workers and involuntary part-timers) falling to 8.6%, just 0.2 percentage points off its pre-recession level (Chart 1). Average hourly earnings rose 0.3%, as expected in April. That left wages up 2.5% over a year ago, not yet flashing red, but is still sufficient to provide real gains in purchasing power (Chart 2). This should flow through to consumer spending in the months ahead, providing the impetus for stronger economic growth.

As expected, the Fed kept interest rates unchanged on Wednesday and issued a largely status quo statement. It pointed to continued improvement in the labor market, while seeing through disappointing economic growth in the first quarter. The weakness in inflation in March was noted, but one-month's result is unlikely to sway the Fed. As Yellen has continually emphasized, the Fed's path is data dependent. So, members will be watching the data closely over the next few weeks as indicators for the second quarter are released. If the numbers confirm that a second quarter rebound is underway, and that the slowdown in inflation has not become more entrenched, we would expect the Fed to take rates higher in June.

So far this year, measures of sentiment have been more ebullient than the "hard" economic data. Not surprisingly, the ISM Manufacturing index did lose of bit of its postelection optimism in April. We have raised concerns that markets might have been a bit overconfident that Washington could easily implement highly stimulative fiscal policy. While this week, the House finally passed a bill to repeal and replace the ACA, this is only the first step in an ongoing process. Passage in the Senate where the Republican majority is even slimmer, will prove much more difficult.

Passing healthcare reform into law is arguably a necessary pre-condition to making further changes to the tax code. This is because the savings achieved leave room to cut taxes without expanding the deficit. The Congressional Budget Office has not yet scored the new bill, but the previous bill reduced the deficit by over $330 billion over the next decade. This is only about one-tenth of what is necessary to pay for Trump's proposed tax cuts, but it might allow for some reduction in the corporate tax rate. In any case, there is a long road ahead on forging consensus on both the AHCA and eventually tax reform, leaving the potential for further sentiment disappointments in the months ahead.

CANADA - PLUNGING OIL PRICES WEIGH ON FINANCIAL MARKETS

It was a rough week for Canadian financial markets, as the S&P/TSX index and the Canadian dollar were pulled down by an 8% plunge in crude oil prices to US$45 per barrel. The equity market hit a 6-week low, while the loonie fell below 73 US cents for the first time in over a year.

Oil prices have now fallen by 15% in just three weeks, reaching the lowest level seen since November 2016 - right before OPEC members agreed on production cuts. The drop stemmed from concerns surrounding the global supply glut, as efforts by OPEC and a group of non-OPEC countries to scale back production have yet to put a meaningful dent in global stocks. Meanwhile, production elsewhere - particularly in the U.S. - has been on the rise. Indeed, U.S. oil production continues to expand, now sitting at 9.3 million barrels per day - a level not seen August 2015. OPEC will meet on May 25th to determine whether production quotas will be extended past June. Indications from the cartel suggest that they will, however, it appears as though markets are starting to think that bigger cuts will be necessary to bring the market back into balance. Volatility in oil prices is likely to continue as the meeting approaches, moving in response to rhetoric coming from OPEC and U.S. production and inventory data.

On the economic front, data out this week was mixed. The Canadian economy added just 3k jobs in April, all part-time, and wage growth slowed to 0.5% y/y - half of its first-quarter pace and the slowest pace on record. While a disappointing report, it does follow several months of strong job creation.

Auto sales were down 1.6% versus year-ago levels, but the drop comes on the heels of a record-breaking first quarter and is contending with last year's stellar performance when sales topped 200,000 units for the first time in a single month. Needless to say, even with a slight pullback in April, auto sales remain quite elevated. That said, given the remarkable strength seen in recent years, it would not be surprising to see auto sales lose some steam in the coming months.

International trade data showed a bounce back in export volumes in March, while imports edged down slightly. This won't be enough to prevent net trade from weighing on economic growth during the first quarter - thanks to rebounding imports - but it does provide a solid hand off for Q2. Moreover, momentum in exports should continue going forward, as the Canadian dollar remains under pressure and economic activity in the U.S. is set to pick up after a slow start to the year.

This will help underpin the rotation in Canadian growth drivers away from stretched consumers and housing, toward a more balanced growth path. In a report released this week, we noted that stabilization in non-residential investment and a modest improvement in other business investment, combined with a better net trade performance should offset expected declines in housing activity over the remainder of this year, keeping the economy advancing at a decent clip of just under 2%. The Bank of Canada will be looking for such signs of a more sustainable growth path before moving off the sidelines.

US retail sales and inflation next up for the USD

The US dollar did not have a strong finish for the week despite employment rising by more than expected with a 211,000 jobs gain in April. The unemployment rate fell to 4.4 percent (the lowest since 2007) but wage growth remains tepid with a 0.3 percent monthly gain. Economists are confident that the reduction in the labor market slack will ultimately result in higher wages. The lack of inflationary pressures in the jobs report will not be enough to derail the June interest rate hike by the Fed.

The US Bureau of Labor Statistics will release the consumer price index (CPI) on Friday, May 12 at 8:30 am EDT. The inflation gauge is expected to expand by 0.2 percent after last month's contraction. The metric preferred by U.S. Federal Reserve officials is the core CPI with a 0.2 percent gain forecast excludes food and energy products. US retail sales will be published by the Census Bureau and big gains are anticipated as warmer weather is expected to have boosted consumption. Last month core retail sales was flat, while the headline figure contracted by 0.2 percent. In April there is a 0.5 percent gain for core and 0.6 percent for retail sales forecasted.

The central banks of New Zealand and England will issue rate statements next week. The Reserve Bank of New Zealand (RBNZ) will deliver its rate statement on Wednesday, May 10 at 5:00 pm EDT and the Bank of England (BoE) will kick off its super Thursday on May 11 at 7:00 am. The two central banks are expected to hold but the market will look to their press conferences to more insights on their monetary policy plans. Italy will host the upcoming G7 Finance Ministers and Central Bank Govenors meeting in Bari from May 11 to 13. While Syria was the main talking point during the meeting between foreign ministers the Finance summit will likely touch on trade with the Brexit process is under way and concerns rising about NAFTA renegotiation between the US and Canada.

The EUR/USD gained 0.777 percent during the week. The single currency is trading at 1.0987 after a period that was high on political risk with the French presidential elections entering their final stretch. The televised debate between the two candidates was an entertaining affair but failed to change the odds by much. Emmanuel Macron is still favoured to win with a 62 percent of the vote going his way according to the polls. The lessons from the Brexit and Donald Trump results are still fresh in the minds of investors. Trust in pollsters is still low, regardless of the good results in the Dutch election.

Oil managed to advance 1.081 percent on Friday, but is still down 6.299 percent on a weekly basis. The West Texas Intermediate is trading at $45.83 after starting eh week near $50. The lack of demand for crude and distillates has created a glut of supply despite the efforts of the Organization of the Petroleum Exporting Countries (OPEC). The organization has worked toward reaching a new agreement to extend the production cut deal that stabilized prices, but with US producers increasing activity it is questionable that even that could boost prices as the all important demand remains weak.

Gold continues to slide downward on Friday. The yellow metal is down 0.105 percent on the final day of the trading week. It is trading at $1,227.84. The precious metal lost 3.09 in the last five days as political risk was downgraded after the French presidential debate solidified the lead of Emmanuel Macron ahead of Sunday's vote. The appetite for safety has been reduced putting pressure on gold.

Market events to watch this week:

Monday, May 8

• 9:30pm AUD Retail Sales m/m

Tuesday, May 9

• 5:30am AUD Annual Budget Release

Wednesday, May 10

• 10:30am USD Crude Oil Inventories
• 5:00pm NZD Official Cash Rate
• 5:00pm NZD RBNZ Rate Statement
• 6:00pm NZD RBNZ Press Conference
• 9:10pm NZD RBNZ Gov Wheeler Speaks

Thursday, May 11

• 4:30am GBP Manufacturing Production m/m
• 7:00am GBP BOE Inflation Report
• 7:00am GBP MPC Official Bank Rate Votes
• 7:00am GBP Monetary Policy Summary
• 7:00am GBP Official Bank Rate
• 8:30am USD PPI m/m
• 8:30am USD Unemployment Claims

Friday, May 12

• All day G7 Meetings
• 8:30am USD CPI m/m
• 8:30am USD Core Retail Sales m/m
• 8:30am USD Retail Sales m/m
• 10:00am USD Prelim UoM Consumer Sentiment
• Saturday, May 13
• All day G7 Meetings

*All times EDT

USD/CHF - 0.9873

Most recent candlesticks pattern : N/A

Trend                                    : Near term down

Tenkan-Sen level                  : 0.9886

Kijun-Sen level                    : 0.9890

Ichimoku cloud top                 : 0.9928

Ichimoku cloud bottom              : 0.9924

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Yesterday’s selloff after meeting renewed selling interest at 0.9957 together with the breach of support at 0.9891-93 confirm recent decline from 1.0108 top has resumed and bearishness remains for further weakness to support at 0.9831 and possibly towards 0.9800, however, near term oversold condition should prevent sharp fall below 0.9770, risk from there is seen for a rebound later.

In view of this, would not chase this fall here and would be prudent to stand aside in the meantime. Above 0.9905-10 would bring recovery to 0.9925-30 but price should falter well below said resistance at 0.9957, bring another decline later. Only break of 0.9966-69 resistance would signal low is formed instead, bring subsequent bounce to 1.0000-08 later.

GBP/USD - 1.2959

Most recent candlesticks pattern   : N/A

Trend                                 : Near term up

Tenkan-Sen level                 : 1.2944

Kijun-Sen level                    : 1.2931

Ichimoku cloud top              : 1.2890

Ichimoku cloud bottom        : 1.2877

Original strategy :

Buy at 1.2885, Target: 1.2985, Stop: 1.2850

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.2885, Target: 1.2985, Stop: 1.2850

Position : -

Target :  -

Stop : -

As cable has staged a strong rebound after finding support at 1.2831 yesterday, signaling the pullback from 1.2965 has ended at 1.2831 and retest of 1.2965 is likely, once this level is penetrated, this would confirm recent upmove has resumed and extend further gain to 1.2990-00 (1.236 times projection of 1.2109-1.2616 measuring from 1.2365 and psychological resistance), then towards 1.3040-50 which is likely to hold from here. 

In view of this, would not chase this rise here and would be prudent to buy cable on pullback as 1.2880-85 should limit downside and bring another rise later. Only break of said support at 1.0831 would abort and signal a temporary top has been formed, bring retracement of recent upmove to 1.2790-95 (38.2% Fibonacci retracement of 1.2515-1.2965) but support at 1.2740-50 (50% Fibonacci retracement) should hold.

EUR/USD - 1.0990

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 1.0971

Kijun-Sen level                  : 1.0962

Ichimoku cloud top             : 1.0908

Ichimoku cloud bottom      : 1.0908

Original strategy  :

Buy at 1.0920, Target: 1.1020, Stop: 1.0885

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.0920, Target: 1.1020, Stop: 1.0885

Position : -

Target :  -

Stop : -

Euro finally broke above indicated resistance at 1.0951 (last week’s high), confirming our view that recent upmove from 1.0340 low has resumed and bullishness remains for this move to extend further gain to 1.1000, then towards 1.1025 (50% projection of 1.0602-1.0951 measuring from 1.0851) but reckon upside would be limited to 1.0050-60, risk from there is seen for a retreat later.

In view of this, would not chase this move here and would be prudent to buy euro on subsequent pullback as 1.0915-20 should limit downside. Only below support at 1.0875 (yesterday’s low) would abort and signal top is formed instead, bring correction to support at 1.0851 but price should stay above 1.0821 support, bring another rise later.

• Long EM Asia - Peter Rosenstreich
• AUD In The Doldrums As Commodities Slide - Arnaud Masset
• Markets Are Very Confident About A Fed Rate Hike In June - Yann Quelenn
• Weed

Economics - Long EM Asia

Asia emerging markets asset have been benefiting from continual improvement of risk appetite and solid external and domestic fundamental data. Last week marginal correct was due to uncertainty around the French elections, weaknesses in commodity prices as China further tightening financial conditions. In addition the specter of seasonal selling in May weigh on investors mind. However, we suspect these issues are transitional and should fade in investors' minds as conditions stabilize favorably. EM Asia should return to positive performance especially against the JPY which is challenged to hold investors' attention as US interest rate rise.

KRW has borne the brunt of much external noise selling. Rising tension with North Korea, political scandal, fear of restrict trade policy, worries that relative growth rates would decline sent KRW lower. On 9th May South Korea is scheduled to holds its Presidential elections. Since there is no transition between governments, this will lower the current period of political uncertainty. The polls indicate that Moon Jae-in would bring the liberal party back into power after 10 years. A smooth political process will help regain confidence and support KRW moving forward.

Indonesia GDP growth improved marginally in 1Q 2017 rising to 5.01% y/y from 4.9% in 4Q, yet the read was slightly weaker than expected (5.1%). Despite solid export performance and government consumption growth remains sluggish. However, Bank of Indonesia provided some hawkish commentary, the outlook for tighter monetary policy seem unlikely. We anticipate the BI will continue to focus on supporting growth, capping inflations and managing IDR volatility.

While we don't expected any proactive hikes, as growth remains suboptimal (yet sudden pickup could easily trigger a reexamination of this view), the threat of higher interest rate should provide IDR with additional fundamentals support.

Finally, in the Philippines headline inflations rise 3.4% in April (in-line with Bangko Sentrals current 2017 forecasts). Food inflations remained elevated at 4-2% from 4.0% in March. We remain focused on the potential upside in inflations especially form government promoted tax reforms. With growth and inflation trending positively we could see the BSP starting increase rates before EM Asia hiking cycle really kicks off. A strong reason to position yourself long PHP.

Economics - AUD In The Doldrums As Commodities Slide

The Australian dollar has been, by far, the worst performer last week among the G10 complex. The Aussie collapsed to 0.7368 against the greenback, the lowest level since January 11th. The free-fall of the Aussie is due to the combination of several factors ranging from disappointing economic data, central bank announcement to falling commodity prices.

Last Tuesday, the Reserve Bank of Australia held unchanged the official cash rate target at record low 1.50%. The decision was broadly anticipated by market participants. Therefore they focused on the tone of the statement as they tried to get some hint about the institution's next move. The tone was slightly more positive than a month ago as Governor Lowe highlighted the positive trend in employment growth. However, the central bank reiterated its cautious stance as core inflation is still running low and has shown little sign of improvement recently: core gauge printed at 1.5% y/y versus 1.3% in the previous quarter, while headline inflation reached 2.1% y/y compared to 1.5% in the previous quarter. All in all, the RBA wants to avoid as much as possible to appear hawkish - mostly to prevent a sharp appreciation of the Aussie - even though it cannot turn a blind eye to the recent improvements, even minor ones

Secondly, the broad debasement of commodity prices - mostly crude oil and iron ore prices - weighted on exporters such as Australia. This move has to be seen within the context of tightening financial conditions in China amid a tougher bond market regulation. In China, the price of iron ore fell 14% over the last five days, amid concerns over weak demand. Iron ore futures for delivery in September on the Dalian Commodity Exchange ended the week at CNY 461.5 a metric ton.

Finally, the market is heavily positioned on the bullish side as net noncommercial positioning, reported by the CFTC, stands at around 39% of total open interest (as of April 25th). An unwinding of those long positions - which already started - may accelerated the Aussie's debasement. AUD/USD has already broke all of its short-term supports as the market is trying to determine a bottom in the currency pair. The next key support can be found at 0.7145 (low from May 24th last year).

Title - Markets Are Confident About A Fed Rate Hike In June

The FOMC meeting was clearly the key FX event last Wednesday. The market got it right and priced in a no-rate hike. Markets already feel more confident for a rate increase at the next meeting in June. Markets' estimates are around 100% at the moment. When looking carefully at the Fed meeting statement, we can notice that the US central bank is worried about the slowing in growth but believe it is going to be transitory.

If we assess more closely the data of the US economy, the jobs report were, in average, much better. Last Friday's NFP printed above the consensus (211k vs 190k). It is nonetheless important to notice that March figure has been revised down to 79k from 98k. Other recent data were lacklustre (GDP and personal consumption in particular). The inflation target of 2% was beaten in February before falling again below this level. In March, industrial production also saw its biggest decline for the last two years.

We remain suspicious on Fed rate path tightening for this year as we believe that the state the US economy is overestimated. A few elements allow us to say so. For example, the number of bankruptcies in the US in 2017 is already higher than all bankruptcies in 2016. On top of that, the second-hand car market is collapsing as the losses on auto credit subprime have reached their highest level. Last but not least, 60% of Americans - according to a CNN poll - do not have a $500 emergency fund.

Out of this is why we maintain our bullish position on the EURUSD, despite political uncertainties in Europe. This should continue in our view as the Trump's spending plans, tax reforms are going to cost a lot and the Federal government current interest payments have never been so high. Above 508 billion dollars for the first quarter of the year.

Themes Trading - Weed

Marijuana

Yes, we all know the jokes, but marijuana is big business in North America. US comedian Jimmy Kimmel stated that Colorado's new state slogan is "Come for the legal marijuana, stay because you forgot to leave."

The North American market for weed is estimated to have grown to $53 billion in 2016. This includes legal recreational use, medical markets and the illegal trade. The legal North American marijuana market generated 2016 revenues of $6.9 billion, 34% higher than the 2015 total, largely as a result of explosive growth in adult consumer sales. There are currently 26 states plus the District of Columbia with laws broadly legalizing marijuana in some form (8 with legalization for recreational use), together with other states preparing to introduce legislation permitting marijuana use.

As of now, under federal law cannabis remains a controlled substance and illegal. For the time being, companies whose business is marijuana must obtain individual state licenses to operate and sell. This makes the evolution from small to medium-sized company and then national brand, which is critical for public listing, a challenge. However, there is a growing group of small cap stocks that have led the charge in this booming industry. To build a comprehensive, diversified portfolio, we have added cannabis producers and growers as well as biotechnology companies that have high profit potential (no pun intended) thanks to the legalization of marijuana. Please note that many of these stocks are high-risk and should be traded with caution due to illiquidity, low stock prices and a history of sharp reactions to news.

USD/JPY - 112.68

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 112.46

Kijun-Sen level                  : 112.46

Ichimoku cloud top             : 112.71

Ichimoku cloud bottom      : 112.51

New strategy  :

Stand aside

Position :  -

Target :  -

Stop : -

Although the greenback has rebounded after finding support at 112.09 and gain towards 112.90-00 cannot be ruled out, break of yesterday’s high at 113.05 is needed to confirm recent upmove has resumed and extend gain to 113.10-15 (61.8% projection of 108.13-111.78 measuring from 110.87) but reckon upside would be limited to previous resistance at 113.54 and price should falter well below 113.90-00.

In view of this, would not chase this rise here and would be prudent to stand aside for now. Below 112.09 support would bring test of 111.96 but break of this level is needed to signal a temporary top has been formed at 113.05, bring correction to 111.73-78 (38.2% Fibonacci retracement of 109.59-113.05 and previous resistance), however, reckon 111.21-32 (previous support and 50% Fibonacci retracement) would contain weakness.

Next week's market movers

• In France, voters will head to the polls once again. Macron is widely anticipated to win and as such, we think that the risks surrounding the euro's reaction from this event are asymmetrical.
• The Bank of England is likely to stand pat. We see the case for officials to shift to a somewhat more concerned tone than previously following the latest slowdown in economic growth.
• In New Zealand, we expect the RBNZ to stay on hold as well, and could even keep the door for further easing open, despite the latest improvement in economic data.
• We also get key economic data from the US and China.

Important events begin early next week. On Sunday, French citizens will head to the polls for the second and final round of their Presidential election. The two candidates are Emmanuel Macron and Marine Le Pen. Given the massive market reaction after the first round, when both the euro and European stock indices surged, we think that much of the "Frexit" risk has been already priced out of European assets. This is evident by the narrowing spread between the yields of French and German 10-year bonds. As such, we view the risks surrounding the euro's reaction from the second round as asymmetrical, and tilted to the downside. A win by Macron is already largely expected and thus, any further upside in EUR in this case may be relatively modest. On the other hand, a potential Le Pen victory would come as a major surprise for markets, and is likely to lead to significant downside in EUR.

On Monday, during the Asian day, we get China's trade data for April. The forecast is for both exports and imports to have risen again, though at a slower pace than previously. The exports forecast is supported by the nation's official and Caixin manufacturing PMIs for the month, which showed that although new orders from abroad continued to rise, their growth rate slowed. As for imports, the aforementioned surveys support a slowdown here as well. In addition, recent media reports that the nation's iron ore imports slowed notably in April add further validity to this prospect.

On Tuesday, we have no major events or indicators on the economic agenda.

On Wednesday, during the Asian morning, China's PPI and CPI data for April are due out. Expectations are mixed, with the CPI rate anticipated to have risen somewhat, while the PPI rate is forecast to have declined, though such a drop would still leave it at a very elevated level. We see the risks surrounding the CPI forecast as tilted somewhat to the downside, considering that the Caixin manufacturing PMI showed that both input inflation and final product inflation eased to multi-month lows in April.

On Thursday, the RBNZ will announce its rate decision in early Asian time. In the absence of a forecast, we see the case for the officials to take no action again. The Bank kept the door for further easing wide open when it last met, indicating that numerous uncertainties persist, particularly in the global outlook, and that policy may need to adjust accordingly. As for inflation, the RBNZ noted that it expects it to reach the midpoint of the target over the "medium-term". Nevertheless, inflation data for Q1 released shortly after that meeting were particularly strong, showing that CPI inflation is already above the midpoint of that range, and much higher than what the RBNZ expected in its own forecasts. Perhaps more importantly, 2-year inflation expectations rose further, and also lie safely above the midpoint of the range. Meanwhile, the labor market continued to tighten in Q1.

Even though all of these encouraging domestic developments should normally see the RBNZ shift to a somewhat more upbeat tune, we think that any optimistic message will be moderate, trying not to tip the scale too much. The Bank could keep the prospect of further easing on the table, and continue to quote global uncertainties as the reason. Concerns over global trade remain elevated, as we were reminded of recently by the US imposing tariffs on Canada. In addition, we believe that the Bank will not want to risk a speculative surge in NZD by appearing too optimistic, as that could offset some of the economic progress achieved so far.

Later, during the European day, the Bank of England policy decision will be in the spotlight. This will be a "Super Thursday" meeting, meaning that besides the rate announcement and meeting minutes, we will also get the quarterly Inflation Report with updated economic forecasts for the UK economy. Governor Carney will present the report at a press conference after the gathering. The BoE added a hawkish touch the last time it met. Kristin Forbes dissented the decision to remain on hold, favoring an immediate rate hike instead. On top of that, the meeting minutes showed that "some members" would consider a reduction in monetary stimulus, should there be any further upside news on the prospects for growth or inflation. Since that gathering, data on these two fronts have been mixed. The core CPI rate rose further, but GDP growth slowed notably in the first quarter of the year.

Therefore, the Bank now has a choice to make. Maintain the hawkish touch it added last time and attribute it to rising inflation, or shift to a more cautious stance and place more emphasis on supporting economic activity. We believe that the Bank is likely to choose the second path, which is in line with its view that above-target inflation entirely reflects the drop in sterling and is thus transitory. As such, even though Forbes could be the lone dissenter again, we think that the overall tone of the Committee may be somewhat more concerned than previously.

On Friday, we get US retail sales and CPI data, both for April. Kicking off with retail sales, both the headline and core rates are expected to have risen notably in monthly terms. Following two consecutive months of soft prints, we think that a rebound would be encouraging news for FOMC policymakers, who at their latest policy gathering noted they expect GDP growth to pick up speed in Q2. Strong retail sales could be a sign the US economy entered Q2 on a solid footing, and may thereby amplify speculation regarding a June rate hike even more.

As for the CPI data, no forecast is available. Our own view is that both the headline and the core rates may have remained unchanged, with risks skewed to the downside. We base that view on the nation's Markit services PMIs for the month. Even though the manufacturing index showed that manufacturers raised the prices of final products at the fastest pace for almost two-and-a-half years, the report of the service sector, which accounts for a far larger percentage of the economy, indicated that providers raised their own charges at the slowest rate for five months.

As the French once again head to the voting booths this Sunday to cast their vote in the second and final round of the French elections, investors appear to be in a cautiously optimistic mood despite there being the potential for chaos when the market reopens next week.

The first round of voting on 23 April saw two very different candidates progress to the second round to stake their claim for the Presidency, Emmanuel Macron and Marine Le Pen. The former - a centre ground pro-European who last year established his own party En Marche! (On the Move) - represents a more business friendly version of the status quo while the latter - a right wing eurosceptic who wants to pull France out of the eurozone - is generally viewed with fear by markets in a similar way that Brexit was. The reason for this is quite clear, Brexit was a very undesirable event for the European Union, Frexit could be the end of it, or so many people believe.

Markets appear quite relaxed about the election, why is this?

I wouldn't say they are relaxed but under the circumstances, they don't appear particularly concerned about the vote and I think there is a number of reasons for this.

1. The polls

The polls haven't been overly reliable in recent years - UK 2015 election, EU referendum, US Presidential election - which has led people to doubt the accuracy of them. Still, even with this larger than normal margin for error, Macron has had a 24 point lead over Le Pen for some time and should this be overturned, it would undoubtedly be the greatest shock of them all.

Source - BBC

The polling average line looks at the five most recent national polls and takes the median value, ie, the value between the two figures that are higher and two figures that are lower.

2. First round

For a long time, Le Pen was leading in the polls and even then, Macron was seen as the runaway favourite in the second round. As election day neared, her lead slipped and Macron crept into the lead before taking 24.01% of the vote to Le Pen's 21.3%. If the majority of those who voted for the fallen candidates were already expected to vote Macron or abstain, this result doesn't bode well for Le Pen.

Source - BBC

3. TV Debate

This was seen as Marine Le Pen's time to shine, an opportunity to capitalise on her political experience, expose Macron's weaknesses and appeal to the roughly 17% of still undecided voters. Success here may have closed the gap and given Le Pen some momentum in the final days leading up to the vote. Instead, polls conducted after the event suggested it was the inexperienced Macron that stole the show and by a relatively large margin, not too dissimilar to that which the polls suggest we'll see on Sunday.

4. Referendum

Unlike the EU referendum in the UK, a Le Pen victory would take France closer to the exit door but not yet through it. Le Pen has vowed to hold a referendum on its membership of the eurozone and it's far from clear that the country would vote to leave.

What can we expect on Sunday?

Scenario 1: Macron Victory

As I stated earlier, investors appear cautiously optimistic about this outcome and as a result, I don't believe there is much risk premium being priced into the markets. That in itself shouldn't be taken as a sign of voting intentions though, as we learned on 23 June last year (Brexit). The euro is trading at a six month high against the dollar, the CAC (French index) at its highest in more than nine years and the spread between French and German 10-year yields (a barometer of French risk) is back within the range it traded in prior to the spike in November.

Source - OANDA fxTrade Advanced Charting Platform

Source - Thomson Reuters Eikon

What this does mean is that there appears little room for a significant and sustainable bounce. That may not stop markets engaging in a relief rally at the start of the week - it doesn't guarantee it either - but I don't believe we'll see anything like the kind of moves that would come in the alternative scenario.

Scenario 2: Le Pen Victory

The run up to the French election remains me of the days before the UK voted on its membership of the EU with one difference, this time there is good reason to be a little confident (albeit never complacent), the gap in the polls is huge. While people were confident (and wrong) that the UK would vote to remain, the polls were only showing a slim margin, that is not the case here. Most polls give Macron a 24 point lead which will be extraordinarily difficult to overcome.

Should it happen though, the reaction in the market could be very reminiscent to that which followed the UK vote, albeit possibly a little less extreme due to point 4 above (a referendum). Still, with little risk premium being priced in, I would expect some major moves on the open next week and some extreme risk aversion with the flight to safety likely benefiting the traditional safe havens such as Gold and the yen. The euro could suffer quite badly while French yields would likely spike - given how they traded when Le Pen was leading in the polls - and the CAC may take a considerable hit.

It would also be interesting to see how this outcome would also affect sterling, the FTSE and Gilts. Would Le Pen be beneficial for the UK in Brexit negotiations? Would this prove to be a distraction for the EU and a far greater priority meaning negotiations with the UK take a back seat?

French Election Timeline

• May 5 - [from midnight] Poll blackout
• May 7 - Second round of French presidential elections. Last polls close at 19:00 BST / 14:00 EDT, with an exit poll result announced immediately.
• May 11 - Official proclamation of the new President.
• May 14 - [from midnight] End of Francois Hollande's mandate
• June 11 - First round of legislative elections
• June 18 - Second round of legislative elections.

EUR/GBP - 0.8480

 
Recent wave: Major double three (A)-(B)-(C)-(X)-(A)-(B)-(C) is unfolding and 2nd (A) has possibly ended at 0.6936.

Trend: Near term down

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

 
As the single currency edged higher again today, retaining our view that further consolidation would be seen and although marginal gain from here cannot be ruled out, reckon upside would be limited to resistance at 0.8531 and bring retreat later. Only a break of this level would add credence to our view that a temporary low has been formed at 0.8312 and extend the rebound from there for retracement of recent decline to 0.8550, however, reckon resistance at 0.8580 would limit upside and 0.8600-10 would hold from here.

On the downside, whilst pullback to 0.8440-45 cannot be ruled out, reckon 0.8420-25 would limit downside and said support at 0.8405 would remain intact. Only a drop below this level would signal the rebound from 0.8312 has ended, bring further fall to 0.8370-75 but support at 0.8351 should remain intact, bring another rebound later. As near term outlook is mixed, would be prudent to stand aside in the meantime. 

Our preferred count is that, after forming a major top at 0.9805 (wave V), (A)-(B)-(C) correction is unfolding with (A) leg ended at 0.8400 (A: 0.8637, B: 0.9491 and 5-waver C ended at 0.8400. Wave (B) has ended at 0.9413 and impulsive wave (C) has either ended at 0.8067 or may extend one more fall to 0.8000 before prospect of another rally. Current breach of indicated resistance at 0.9043 confirms our view that the (C) leg has ended and bring stronger rebound towards 0.9150/54, then towards 0.9240/50.