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Daily Pivots: (S1) 0.8968; (P) 0.8979; (R1) 0.9000; More…

Intraday bias in USD/CHF remains mildly on the upside at this point. Fall from 0.9223 could have completed a three-wave corrective move to 0.8825. Intraday bias is back on the upside for channel resistance (now at 0.9039). Firm break there will target 0.9157 resistance next. On the downside, below 0.8956 minor support will turn intraday bias neutral gain first.

In the bigger picture, price actions from 0.8332 medium term bottom are seen as developing into a corrective pattern to the down trend from 1.0146 (2022 high). Rejection by 0.9243 resistance affirms this case, and maintains medium term bearishness. While more range trading could be seen between 0.8332/0.9243 first, downside break out is mildly in favor at a later stage.

The Canadian economy bounced back in April, up 0.3% month-on-month (m/m). This print landed in line with Statistics Canada's advanced guidance and market expectations. The flash estimate for May points to a slight advance of 0.1% m/m.

April's reading was broad-based, with output expanding in 15 of 20 industries. The gain was evenly split between goods and services sectors, both expanding by 0.3% m/m.

Wholesale trade contributed most on the services side, growing by 2.0% m/m, the fastest pace since May 2023. Growth in accommodation and food services (1.9% m/m) and finance and insurance (0.4% m/m) also provided an assist.

On the goods side, support activities for mining and oil and gas extraction helped the overall sector grow by 1.8% m/m in April. The manufacturing sector also expanded by 0.4% m/m after contracting for two consecutive months. A small pullback in the construction sector (-0.4% m/m) offset some of the growth on the goods side.

The advanced reading for 0.1% growth in May is being driven by gains in the manufacturing, real estate and finance sectors, with retail and wholesale trade acting as a headwind.

Key Implications

GDP data for April came in bang on with expectations, which has kept growth tracking for the second quarter steady. The Canadian economy indeed started  Q2 on solid footing, with early tracking suggesting trend-like growth for the quarter. This would roughly match growth in the first-quarter, which came in at 1.7% quarter-on-quarter annualized.

The Bank of Canada is likely satisfied with today's report. On one hand, there doesn't appear to be signs of a reacceleration in growth. On the other, the Bank should take comfort that its Q2 growth forecast is materializing so far. The stability in the GDP reading will allow the Bank of Canada to keep its focus more squarely on the evolution of inflation, especially with the start of its interest rate easing cycle underway. We believe that the Bank of Canada will hold off on another interest rate cut next meeting, opting instead to move rates lower in September, which will allow them to assess both inflation (and growth) dynamics until then.

Daily Pivots: (S1) 160.43; (P) 160.63; (R1) 160.98; More...

Intraday bias in USD/JPY is turned neutral again with current retreat. Some consolidations could be seen first and deeper pullback cannot be ruled out. But near term outlook will remain bullish as long as 157.70 resistance turned support holds. break of 161.27 will resume larger up trend to 161.8% projection of 151.86 to 157.70 from 154.53 at 163.97.

In the bigger picture, there is no sign of long term trend reversal yet. Further rally is expected as long as 151.86 support holds. Decisive break of 160.02 will target 100% projection of 127.20 to 151.89 from 140.25 at 164.94.

Dollar dips slightly in early US session, following the release of May's PCE core inflation data. This Fed's preferred measure of inflation indicated a continued, though modest, progress in disinflation. However, the financial market's response to the report was overall relatively muted, as the figures aligned closely with expectations.

While the data is encourage, it is unlikely to prompt rate cuts from Fed yet. Fed officials have indicated that they require more consistent data over several months to justify such a move. Moreover, they emphasize the need for widespread disinflation. With services price growth still running at an annual rate of 3.9%, there remains significant ground to cover before Fed would feel comfortable easing monetary policy.

In the broader currency markets, Australian Dollar emerged as the strongest performer for the week, bolstered by today's rebound. It was followed by Euro and British Pound. On the other end of the spectrum, Swiss Franc was the weakest performer, followed by New Zealand Dollar and Japanese Yen. Both US Dollar and the Canadian Dollar were positioned in the middle, with the latter showing little reaction to Canada's GDP data.

In Europe, at the time of writing, FTSE is up 0.19%. DAX is up 0.15%. CAC is down -0.83%. UK 10-year yield is down -0.006 at 4.123. Germany 10-year yield is down -0.002 at 2.452. Earlier in Asia, Nikkei rose 0.61%. Hong Kong HSI rose 0.01%. China Shanghai SSE rose 0.73%. Japan 10-year JGB yield fell -0.0254 to 1.048.

US PCE core inflation slows to 2.6% as expected in May

In May, US PCE price index was flat mom, matched expectations. PCE core price index (excluding food and energy) rose 0.1% mom. Both matched expectations. Prices for goods fell -0.4% mom while prices for services rose 0.2% mom. Food prices rose 0.1% mom while energy prices fell -2.1% mom.

From the same month one year ago, headline PCE price index slowed from 2.7% yoy to 2.6% yoy. PCE core price index slowed from 2.8% yoy to 2.6% yoy. Both matched expectations. Goods prices were down -0.1% yoy while services prices were up 3.9% yoy. Food prices were up 1.2% mom and energy prices were up 4.8% yoy.

Also, personal income rose 0.5% mom or USD 114.1B, above expectation of 0.4% mom. Personal spending rose 0.2% mom or USD 47.8B, below expectation of 0.3% mom.

Fed's Barkin: Economy not ready for rate cuts despite expectations

Richmond Fed President Thomas Barkin highlighted the divergence between expectations and reality of US monetary in a speech today. He noted, "Most anticipated we would be cutting rates by now, either because we returned inflation to target, or perhaps because the economy took a turn for the worse. Yet, in contrast to the European Central Bank, that has not yet been the case."

Barkin elaborated on the unique challenges facing the US economy, emphasizing that monetary policy operates with "long and variable lags." He suggested that these lags might be longer than expected due to factors such as labor hoarding, excess savings, delayed exposure to interest rate hikes, and newfound pricing power among businesses.

Furthermore, Barkin raised the possibility that the Fed's rate hikes might not be constraining the economy as much as anticipated. He pointed to the concept of r-star, the neutral real rate of interest, suggesting it might have shifted to a higher level. "It is too soon to tell, but there's one way to find out: Proceed deliberately while keeping a close eye on the real economy. And that's what I am doing," Barkin stated.

Canada's GDP grows 0.3% mom in Apr, matches expectations

Canada's GDP grew 0.3% mom in April, matched expectations. Both goods-producing (+0.3%) and services-producing (+0.3%) industries contributed to the growth with 15 of 20 sectors increasing in the month.

Advance information indicates that real GDP rose 0.1% mom in May. Increases in manufacturing, real estate and rental and leasing and finance and insurance were partially offset by decreases in retail trade and wholesale trade.

ECB's Villeroy: Confidence grows in inflation forecasts as data surprises diminish

ECB Governing Council member François Villeroy de Galhau expressed increased confidence in the inflation forecast today, noting that the frequency of data surprises has diminished.

"As data surprises are now smaller and revisions to the current assessment more minor compared to two years ago, we are gaining more confidence in the forecast and more scope to disregard smaller bumps in the disinflation process," he said.

ECB projects inflation to remain above its 2% target for the rest of this year. However, it anticipates that inflation will start easing next year and reach the 2% target by the end of 2025.

Swiss KOF rises slightly to 102.7, gradual recovery continues

Swiss KOF Economic Barometer rose from 102.2 to 102.7 in June, surpassing expectations of 100.5. According to KOF, the Swiss economy is projected to "continue to recover little by little over the coming months."

This increase is largely driven by a more favorable outlook for foreign demand. Additionally, the hospitality industry is expected to see stronger benefits. The indicators for manufacturing, construction, and private consumption remained virtually unchanged in June. However, the outlook for financial and insurance services, along with other service sectors, has slightly dimmed.

Tokyo CPI surpasses expectations, Japan's industrial output rebounds

Japan's Tokyo CPI core (excluding food) rose to 2.1% yoy in June, beating expectations of 2.0% yoy and up from May's 1.9% yoy. CPI core-core (excluding food and energy) increased from 1.7% yoy to 1.8% yoy. Headline CPI also ticked up from 2.2% to 2.3% year-on-year. Monthly figures showed Tokyo's CPI core rose by 0.4% mom, core-core by 0.3% mom, and headline CPI by 0.3% mom.

In addition, Japan's industrial production saw a significant boost in May, rising 2.8% mom, surpassing the forecasted 2.0%. Of the 15 industrial sectors covered, 13 reported higher output while only two experienced declines.

A Ministry of Economy, Trade and Industry official noted, "The private sector's sentiment toward output is improving as auto production started to pick up." Despite this, the ministry maintained its previous assessment that industrial production "showed weakness while fluctuating indecisively." According to a poll of manufacturers, output is expected to decrease by -4.8% in June but increase by 3.6% in July.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 160.43; (P) 160.63; (R1) 160.98; More...

Intraday bias in USD/JPY is turned neutral again with current retreat. Some consolidations could be seen first and deeper pullback cannot be ruled out. But near term outlook will remain bullish as long as 157.70 resistance turned support holds. break of 161.27 will resume larger up trend to 161.8% projection of 151.86 to 157.70 from 154.53 at 163.97.

In the bigger picture, there is no sign of long term trend reversal yet. Further rally is expected as long as 151.86 support holds. Decisive break of 160.02 will target 100% projection of 127.20 to 151.89 from 140.25 at 164.94.

Economic Indicators Update

Canada's GDP grew 0.3% mom in April, matched expectations. Both goods-producing (+0.3%) and services-producing (+0.3%) industries contributed to the growth with 15 of 20 sectors increasing in the month.

Advance information indicates that real GDP rose 0.1% mom in May. Increases in manufacturing, real estate and rental and leasing and finance and insurance were partially offset by decreases in retail trade and wholesale trade.

Full Canada GDP release here.

In May, US PCE price index was flat mom, matched expectations. PCE core price index (excluding food and energy) rose 0.1% mom. Both matched expectations. Prices for goods fell -0.4% mom while prices for services rose 0.2% mom. Food prices rose 0.1% mom while energy prices fell -2.1% mom.

From the same month one year ago, headline PCE price index slowed from 2.7% yoy to 2.6% yoy. PCE core price index slowed from 2.8% yoy to 2.6% yoy. Both matched expectations. Goods prices were down -0.1% yoy while services prices were up 3.9% yoy. Food prices were up 1.2% mom and energy prices were up 4.8% yoy.

Also, personal income rose 0.5% mom or USD 114.1B, above expectation of 0.4% mom. Personal spending rose 0.2% mom or USD 47.8B, below expectation of 0.3% mom.

Full US Personal Income and Outlays release here.

ECB Governing Council member François Villeroy de Galhau expressed increased confidence in the inflation forecast today, noting that the frequency of data surprises has diminished.

"As data surprises are now smaller and revisions to the current assessment more minor compared to two years ago, we are gaining more confidence in the forecast and more scope to disregard smaller bumps in the disinflation process," he said.

ECB projects inflation to remain above its 2% target for the rest of this year. However, it anticipates that inflation will start easing next year and reach the 2% target by the end of 2025.

Japanese yen pushes above 161

The Japanese yen is unchanged on Friday, but has managed to set a new low against the US dollar. The yen is trading at 160.72 in the European session and fell as low as 161.28 earlier, its lowest level since 1986.

Tokyo Core CPI accelerates to 2.1%

Tokyo core CPI, which excludes fresh food and is closely monitored by the Bank of Japan, climbed to 2.1% y/y in June, up from 1.9% in May and above the market estimate of 2%. The increase in inflation was driven by higher prices for electricity and natural gas. Headline CPI rose to 2.3%, up from 2.2% in April.

The inflation report keeps the pressure on the Bank of Japan to raise interest rates, but the central bank has been hesitant to make the move and the markets aren’t expecting a rate hike at the July meeting. Bank policy makers have been focused on demand-driven inflation and want further evidence that inflation is sustainable at 2% before raising rates.

What may prod the BoJ to raise rates in the near term is the slide of the Japanese yen. The yen is at a 38-year low against the greenback and has plunged about 14% this year. The BoJ intervened twice in the currency market recently and purchased some $61 billion worth of yen but that has failed to stem the bleeding.

Verbal intervention hasn’t had much effect and Japan’s top currency diplomat, Masato Kanda, was replaced by Atsushi Mimura on Friday. Kanda was considered aggressive with his jawboning and we’ll have to see if Mimura has any more success in defending the yen against speculators.

USD/JPY Technical

• USD/JPY pushed above resistance at 160.90 and 161.18 earlier. The next resistance line is 161.53
  There is support at 160.63 and 160.43

EUR/USD is on a downward trajectory on Friday, hovering around 1.0686 after a short-lived pause. The dollar experienced a temporary dip due to mixed American economic indicators and market anticipation ahead of the critical Core PCE inflation report, a significant factor in Federal Reserve decision-making.

Yesterday's data showed a larger-than-expected decrease in US unemployment claims and a modest rise in Durable Goods Orders for May, although Core PCE dipped. The final GDP figures for Q1 2024 were slightly adjusted upward, showing the US economy grew by 1.4% compared to the previously estimated 1.3%, in contrast to the 3.4% growth seen in Q4 2023.

US Treasury yields also saw a minor decline, contributing to the dollar's brief retreat. However, market dynamics are shifting as focus intensifies on today's economic releases, including the Core PCE data, personal income and expenditures, and the University of Michigan's May consumer sentiment index.

EUR/USD technical analysis

The EUR/USD has completed a downward movement to 1.0666 and corrected up to 1.0715. Currently, the market is forming another downward wave, targeting 1.0655. Should this level be reached, a rebound to 1.0690 is possible before continuing the downward trend towards at least 1.0577. This bearish outlook is supported by the MACD indicator, which remains below zero with a firm downward trajectory.

On the H1 chart, EUR/USD is consolidating around 1.0690. A downward breakout could lead to a continuation of the decline to 1.0655. Subsequently, a corrective move to 1.0690 may occur before a further drop to 1.0640. The Stochastic oscillator, hovering near 20, suggests potential for further declines before a rebound to 80 could happen, indicating volatile short-term movements.

Market outlook

Investors are advised to closely monitor the upcoming US economic data, which will likely influence Federal Reserve policy expectations and impact EUR/USD movements. The currency pair remains sensitive to shifts in US economic indicators and Federal Reserve signals regarding interest rates.

Richmond Fed President Thomas Barkin highlighted the divergence between expectations and reality of US monetary in a speech today. He noted, "Most anticipated we would be cutting rates by now, either because we returned inflation to target, or perhaps because the economy took a turn for the worse. Yet, in contrast to the European Central Bank, that has not yet been the case."

Barkin elaborated on the unique challenges facing the US economy, emphasizing that monetary policy operates with "long and variable lags." He suggested that these lags might be longer than expected due to factors such as labor hoarding, excess savings, delayed exposure to interest rate hikes, and newfound pricing power among businesses.

Furthermore, Barkin raised the possibility that the Fed's rate hikes might not be constraining the economy as much as anticipated. He pointed to the concept of r-star, the neutral real rate of interest, suggesting it might have shifted to a higher level. "It is too soon to tell, but there's one way to find out: Proceed deliberately while keeping a close eye on the real economy. And that's what I am doing," Barkin stated.

Full speech of Fed's Barkin here.