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The Euro is consolidating in early Thursday, following a sharp fall on Wednesday (the pair was down 0.5% in the biggest daily loss since Apr 30), driven by fresh risk aversion.

Bears found a footstep above strong supports at /1.0790/80 zone (top of thick daily cloud / 200DMA / Fibo 38.2% of 1.0601/1.0895 rally) and looking for fresh direction signals.

Near-term action is weighed down by a large Wednesday’s bearish candle, formation of failure swing pattern and 10/20DMA’s bear cross.

On the other hand, momentum is still positive on daily chart and a larger uptrend from 1.0601 intact while the price action stays above 200DMA / Fibo support / daily cloud top which would generate initial signal of healthy correction, if the price bounces strongly.

Fundamentals remain favored for dollar, as hopes for Fed rate cut anytime soon are fading, due to sticky inflation, while markets focus on key economic events – release of US revised Q1 GDP and weekly jobless claims on Thursday and PCE report, Fed’s preferred inflation measure on Friday, which will provide fresh signals.

Expect strong bearish signal on firm beak of 1.0780 zone, while jumping above initial resistance at 1.0816 (20DMA) would ease immediate downside pressure, but extension and close above 10DMA (1.0838) to provide stronger bullish signal.

Res: 1.0816; 1.0825; 1.0838; 1.0860.
Sup: 1.0780; 1.0748; 1.0724; 1.0700.

• USDJPY in a recovery mode after pullback halts at 50-day SMA
• Momentum indicators are softening but remain in bullish zones

USDJPY experienced a strong setback from its 34-year high of 160.20 following an intervention by Japanese authorities in late April. However, the pair has slowly but steadily recouped a significant part of these losses, attempting to revisit its recent multi-year highs.

Should bullish pressures persist, the price could initially test the May resistance region of 157.80. Further upside attempts could then cease at 159.10, which is the 161.8% Fibonacci extension of the 151.90-140.24 downleg. A violation of that territory could pave the way for the 34-year peak of 160.20.

Alternatively, if the pair comes under selling pressure, immediate support could be found at the 138.2% Fibo of 156.35. Failing to halt there, the price could descend towards the 123.6% Fibo of 154.64. In case the bears push the pair even lower, the May deflection point of 151.90 may provide downside protection.

In brief, despite the strong selloff in the aftermath of a fresh 34-year peak, USDJPY has been steadily regaining lost ground. Therefore, we could see some heightened volatility moving forward as the price approaches levels that the Japanese side seems willing to defend.

As the EUR/USD chart today shows, yesterday the rate dropped by 0.46% – the most significant strengthening of the US dollar against the euro in one day this month. Moreover, the rate fell below the psychological mark of 1.08 euros per dollar (in the first half of May, it served as resistance).

Yesterday's movement was influenced by:

→ news of rising inflation in Germany. As reported by Think.ING, inflation reached 2.4% year-on-year, up from 2.2% in April – highlighting uncertainty and the resilience of inflation;

→ the rise of the US dollar, driven by falling Treasury bonds, which increased the appeal of the American currency due to both higher yields in the US and demand for safe-haven assets.

Analysing the chart on 23 May in the article "EUR/USD Price Forms Bullish Reversal," we:

→ drew an ascending channel (shown in blue);

→ highlighted the importance of resistance at the 1.0875 level.

Since then, the price has risen from 1.08393, bouncing off the lower boundary to the aforementioned resistance at 1.0875, but it failed to break through. This was followed by yesterday's decline.

In addition:

→ the EUR/USD price broke below the lower boundary of the blue channel, putting its relevance into serious doubt;

→ the price formed an A-B-C-D structure (with the D low possibly yet to be rewritten) of two lower lows and highs, indicating a potential shift in the May trend from bullish to bearish.

For now, the market is holding above the 1.08 level, but it is possible that upcoming news (notably the release of the US PCE index tomorrow at 15:30 GMT+3) could disrupt the balance. If a new batch of fundamental drivers leads to another bearish impulse, we could assume that a broader downtrend (indicated by the red channel, originating from the July 2023 peak) is resuming.

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In the final trading sessions of May, leading currencies have been in a downward trend against the dollar. For instance, the pound/dollar pair lost over 100 pips in a single day, euro sellers in the EUR/USD pair are testing 1.0800, and the USD/CAD pair might update its May high around 1.3760.

USD/CAD

The rise in commodity prices and worsening geopolitical situation in the Middle East are contributing to the sharp increase of the USD/CAD pair. According to the technical analysis of USD/CAD, a bullish “piercing line” pattern was formed on the daily timeframe on 28 May. The confirmation of this pattern could lead to continued growth of the pair towards the May high of this year at 1.3760. If the price consolidates above this level, a test of the important range 1.3840-1.3790 is possible. A break below 1.3610 would invalidate the bullish scenario.

The following news could impact the pricing of USD/CAD:

• Today at 15:30 (GMT +3:00) US GDP for the first quarter
• Today at 18:00 (GMT +3:00) Crude Oil Inventories from the Energy Information Administration (EIA)
• Tomorrow at 15:30 (GMT +3:00) US Core PCE Price Index for April

GBP/USD

At the start of the week, the GBP/USD pair managed to test the important resistance level of 1.2800. A sharp rebound from this level led to the formation of a bearish “shooting star” pattern on the daily timeframe. Technical analysis of GBP/USD indicates a possible downward movement if the price confidently consolidates below 1.2670. If this pattern is invalidated, the pair might resume its rise towards the March high of this year at 1.2890.

Key events for price movement:

• Today at 21:50 (GMT +3:00) speech by Bank of England Governor Bailey
• Tomorrow at 11:30 (GMT +3:00) publication of the Bank of England Consumer Credit data for April

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This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

• WTI crude oil finds resistance at 200-day SMA
• Stochastics and RSI head south

WTI crude oil futures with delivery in July have failed to surpass the 80.00 level once again and are currently returning below the 200-day simple moving average (SMA). The price has been developing within a narrow range of 76.58-80.00 since the beginning of the month.

According to the technical oscillators, the RSI indicator is falling from the overbought region, while the stochastic oscillator is ready for a bearish crossover within its %K and %D lines near the 80 level, both indicating a bearish retracement.

If the market retreats further, immediate support could come from the medium-term ascending trend line around the 77.50 support level. Steeper decreases could open the way for a retest of the 76.58-75.80 region, but more downside pressures could open the door for a negative correction until 71.50.

On the flip side, a successful climb above the 80.00 handle and the 50-day SMA at 81.27 could drive the commodity towards the 84.45 resistance. Even higher, the almost six-month high of 87.00 is waiting to halt the upside movements.

Summarizing, WTI oil is looking neutral in the short-term view, but the broader outlook is still bullish as it is standing above the uptrend line.

Swiss KOF Economic Barometer fell from 101.9 to 100.3 in May, falling short of expectations of 102.2. This year, the barometer has managed to stay only slightly above its medium-term average. KOF noted, "Although the Swiss economy is robust, it is not showing much vigour beyond that."

Indicators for manufacturing, financial and insurance services, and foreign demand all slowed down after positive developments in the previous month. However, indicators for private consumption and the construction industry helped cushion the decline with increases.

Full Swiss KOF release here.

Switzerland's GDP, adjusted for sporting events, grew by 0.3% qoq in Q1, meeting expectations.

The industrial sector's overall value added stagnated. Manufacturing declined slightly by -0.2%, and chemical and pharmaceutical industries fell by -0.9%. Construction industry grew modestly by 0.3%, while energy sector saw solid growth of 2.1%.

Services sector drove GDP growth despite uneven performance. Financial services declined by -0.2%, and business-related services contracted by -0.3%. Transport and communication sector was flat.

However, accommodation and food services sector grew by 1.3%, health and social care services increased by 0.8%, and public administration rose by 0.2%. Retail sector grew strongly by 1.4%, leading to a 1.3% overall increase in trade.

Full Swiss GDP release here.

Markets

LT yields yesterday continued recent reacceleration. This tells at least as much on current market momentum as on the news that served as an explanation. Regional German May inflation published throughout the day were soft (0.1% M/M). At 0.2% M/M HICP inflation also decelerated markedly (0.6% in April), but due to base effects, Y/Y inflation jumped from 2.4% to 2.8%. It was enough especially for LT German/EMU yields to decisively turn north again. The German 10-y yield pierced the 2.65% YTD top. US Treasuries outperformed Bunds, but in US dealings the Treasury’s $44 bln 7-y Note auction again met mediocre investor appetite, reinforcing the bearish bond market momentum. In a steepening move the 30-y yield gained 6.7 bps. German yields added between 3.2 bps (2-y) and 9.3 bps (10-y). The rise in (real) yields this time didn’t go unnoticed by equity investors. Both European (Eurostoxx 50 -1.33%) and US indices eased from recent (near) peak levels (S&P 500 -0.74%). The dollar finally profited from tighter financial conditions combined with a risk-off sentiment. DXY is testing last week’s top at 105.11. In a similar move, EUR/USD dropped from 1.0857 to 1.0801. USD/JPY regained the 157 barrier, but is nearing suspected yen intervention territory. EUR/GBP briefly touched a new YtD low below 0.85 on initially soft German regional inflation data, but rebounded later to still close at 0.8504, even as UK yields rose even more compared to their German counter parts (up to 12 bps for ultra long maturities).

This morning, Asian equities join the interest-rate driven setback on WS yesterday. US yields ease marginally after yesterday’s sharp rise. In a speech, Atlanta Fed President Bostic indicated that, while there is still some way to go, several inflation measures are moving to the target range. Even so, he still concluded that it might take till the end of the year/Q4 to think about/being prepared to reduce rates. The dollar mostly holds yesterday’s gains. USD/JPY is an exception dropping to 156.9 as yen shorts turn more cautions on possible yen interventions. The eco calendar today contains EC confidence data and some national EMU inflation data ahead of tomorrow’s EMU Flash estimate. Fed’s Williams and Logan are scheduled to speak. Even with a rather light calendar, we continue to keep a close eye at LT yields. The US 10-y yield is moving decisively higher in the 4.37%/4.73 trading range. The German 10-y already broke 2.65% resistance. The EMU 10-y swap is nearing similar resistance at 2.95%/3.02%. EUR/USD breaking below the 1.08 support area/neckline, might trigger return action to the 1.0724 ST support.

News & Views

Outgoing president of the Swiss National Bank Jordan flagged the weaker franc is the most likely source of higher Swiss inflation. Prices in April rose 0.3% m/m and brought the yearly figure to a higher-than-expected 1.4% from 1% in March. Core inflation reaccelerated too from 1% to 1.2% on a 0.4% monthly increase. The franc meanwhile lost considerable ground. After hitting a record high (barring the intraday levels seen during the repositioning after the SNB lifted the EUR/CHF 1.20 price cap) around 0.93 at the start of 2024, the franc slipped all the way towards 0.99. While EUR/CHF 0.93 clearly was a too strong level for the SNB, the opposite seems now to be true. Jordan said the central bank could move towards selling FX to support the franc. SNB was the first to cut rates (unexpectedly) back in March from 1.75% to 1.5%. While another cut in June long seemed likely, the risks for postponing to September after Jordan’s intervention have clearly risen. Swiss money markets currently attach a 50% probability to a June rate cut. The Swiss franc noticed Jordan’s speech and strengthens to EUR/CHF 0.984 after a good (risk-off) run yesterday.

The New Zealand government announced a tax cut package worth NZ$ 14.7bn over four years. Doing so, the center-right policymakers make good on promises made in the run-up to the 2023 elections. Finance minister Willis said that the changes will be fully paid via savings and revenue initiatives instead of additional borrowing. It does however mean the start of fiscal consolidation will be delayed to 2028 instead of 2027 as envisaged in December. Budget deficits will be deeper as tax collections because of the announcement as well as slower growth will turn out to be lower than previously expected. Debt to GDP is seen peaking at 43.5% next year and will barely decline through 2028. In response to today’s budget presentation, New Zealand Treasury updated the bond programme. It expects to issue an additional NZ$ 12bn over the next four years, bringing total gross NZGB issuance to NZ$ 164 bn.

Graphs

GE 10y yield

ECB President Lagarde clearly hinted at a summer (June) rate cut which has broad backing. EMU disinflation continued in April and brought headline CPI closer to the 2% target. A more bumpy inflation path in H2 2024, the EMU economy gradually regaining traction and the Fed’s higher for longer US strategy make follow-up moves difficult. Markets are coming to terms with that. The 10-y is setting a new YtD top.

US 10y yield

The Fed in May acknowledged the lack of progress towards the 2% inflation objective, but Fed’s Powell indicated that further tightening was unlikely. Soft US early month data triggering a correction off YTD peak levels. However, the Fed minutes still showed internal debate whether policy is restrictive enough. Sticky inflation suggests any rate cut will be a tough balancing act. The US 10-y yield is rebounding in the 4.30/4.70% trading range.

EUR/USD

Economic divergence, a likely desynchronized rate cut cycle with the ECB exceptionally taking the lead and higher than expected US CPI data pushed EUR/USD to the 1.06 area. From there, better EMU data gave the euro some breathing space. The dollar lost further momentum on softer than expected early May US data. Some further consolidation in the 1.07/1.09 are might be on the cards short-term.

EUR/GBP

Debate at the Bank of England is focused at the timing of rate cuts. Most BoE members align with the ECB rather than with Fed view but slower than expected April disinflation and a surprise general election on July 4 complicated matters. A June cut in line with the ECB looks improbable. Sterling extends a recent bull rally. A test of EUR/GBP’s 2024 YtD low (0.8489) is possible. We expect this important support level to hold.

Market mood further darkened yesterday following another round of weak Treasury sales in the US. The 7-year note failed to attract enough demand on Wednesday. The 2 and 5-year auctions also saw weak demand earlier this week. The US treasuries remained under pressure. The 2-year yield – which best captures the Federal Reserve (Fed) rate expectations – shortly hit the 5% psychological mark, the 10-year yield spiked to 4.63% and the US dollar index advanced to the 50-DMA and is consolidating near that level this morning.

Things could get better or worse in the coming hours. The Fed’s Beige Book revealed yesterday that the US economy expanded at a ‘slight or modest’ pace since April, while consumers pushed back against higher prices. The latter would be ‘good news’ for the Fed – who desperately needs the US consumer demand to slow in order to progress in what they call the ‘last mile’ to hit their 2% inflation target. All eyes are on the US GDP update due today, and the Fed’s favourite gauge of inflation – the core PCE number – due tomorrow. The US GDP is expected to have slowed significantly in the Q1, with – however - a significant rise in price pressures (that’s already priced in), while the core PCE print for April could hint at some easing in the latest pickup in inflation. The best outcome would be a reasonably soft growth coupled with easing price pressures, but we could realistically get a slowing growth coupled with an insufficient easing in price pressures, instead. To the Fed, the inflation number will matter more than the growth update as regardless of the deteriorating economic growth, the progress in inflation will determine whether the Fed could remain on path to cut rates this year. Therefore, it will be hard to interpret today’s GDP data before seeing tomorrow’s PCE print. And even then, Citigroup thinks that this week’s data will trigger limited price action; the upcoming US jobs and CPI updates in the next weeks will matter more.

For now, the rising yields are taking a toll on stock valuations in the absence of other – and positive – catalysts. The S&P500 slipped below the 5300 level yesterday, and Nasdaq retreated. The US futures are in the red this morning, as Salesforce tumbled 16% in the afterhours trading after reporting a weaker-than-expected revenue growth in Q1 and after giving a softer-than-expected outlook.

Inflation is picking up beyond US

Released yesterday, the Australian inflation unexpectedly rose in April and the German inflation came in worse than expected. It appears that inflation in Germany rose from 2.4% to 2.8% in May, more than 2.7% penciled in by analysts. The German 10-year yield advanced to the highest levels since last November and the Stoxx 600 tanked more than 1% yesterday. Spain and Italy will release their inflation updates today, France tomorrow and we will have the aggregate CPI for the entire Eurozone tomorrow morning. Unless we see a big surprise – which I don’t think will happen, the European Central Bank (ECB) will probably announce a 25bp rate cut next Thursday. But an inconvenient rise in Eurozone inflation will likely vanish the expectation of a second rate cut in July.

If the Fed cut expectations vanish faster than the ECB cut expectations, the EURUSD should remain under pressure for further downside correction. The pair slipped below the 100-DMA yesterday, below the 1.08 this morning and is preparing to test the 200-DMA support at the time of writing. A sufficiently soft US growth and inflation figures could throw a floor under the EURUSD’s selloff but the divergence between the Fed and the ECB remains supportive of a deeper downside correction.

In precious metals, gold extends losses against a broad-based strength in the US dollar and the rising treasury yields. But the central bank uncertainties, geopolitical tensions and rising risk aversion could limit the gold selloff near the $2300 per ounce level.

Oil fails to clear key resistance

Happily, for everyone who doesn’t have a positive exposure to energy and energy stocks, oil prices don’t gather enough momentum above key resistance levels to further fuel the inflation worries. US crude for example sees decent resistance above the $80pb level as the waning rate cut expectations from major central banks weigh on global oil demand outlook and give the bears a good reason to remain in charge near the critical $80pb resistance. The ugly geopolitical situation in the Middle East does trigger short-term price spikes, but price rallies due to geopolitical tensions tend to remain short-lived.

Oil’s inability to gain a sustainable positive momentum is weighing heavily on energy stocks. Exxon retreated to the lowest level since March yesterday, as Chevron extended losses below the ytd bullish trend base. ConocoPhillips tumbled more than 3% on news that it will acquire Marathon Oil through a $17bn all-stock deal, while Marathon Oil jumped more than 8%. The ongoing consolidation in the Permian Bassin will help the US oil companies benefit from synergies and scale economies, and help them squeeze higher profits from their operations. At one point, the correction in energy companies’ share prices will become interesting for investors regardless of the economic and central bank prospects. If inflation eases, softer central bank expectations will boost the reflation trade, benefiting oil companies. If inflation doesn’t ease and central banks hold off on rate cuts, Big Oil's juicy dividends and buybacks will attract investors seeking extra revenue to navigate the rising inflation tide.

In focus today

In the euro area, we receive data on the unemployment rate in April. The labour market is still historically strong, and employment grew 0.3% q/q in Q1. We expect the unemployment rate remained unchanged at 6.5%.

In the euro area, we will also look out for Spanish inflation which will give a clue as to where we can expect the euro area HICP print to land tomorrow.

In Japan we get an array of interesting data overnight, which include Tokyo May inflation, April retail sales, and industrial production. As for the Tokyo May inflation, price pressures have muted in Japan recently and Tokyo data will indicate whether this trend continued in May.

In Sweden we get both GDP data for Q1 2024 as well as wages data. We expect the GDP print to come out at 0.5% q/q seasonally adjusted, up from Q4 2023 which saw negative growth at -0.1% q/q, despite a weak (unofficial) indicator. Due to a history of significant revisions to the indicator, as well as the fact that March consumption and production data (released after the indicator) have seen significant increases we maintain our expectation of a decent positive print.

At 09.00 CET we also receive NIER's Economic Tendency Survey, which will yield the latest (survey-based) insights of the Swedish economy including consumer sentiment.

In Denmark we receive gross unemployment figures for the month of April at 08.00 CET.

Fed's Williams (Vice Chair of the FOMC) speaks at 18.05 CET. The ECB commence their 'silent period' ahead of the 6 June General Council meeting.

Economic and market news

What happened overnight

Asian equity markets are in the red this morning, with the Nikkei in Japan leading the fall, as it is around 1.2% down. The drop in equities comes aback rising yields because of the German CPI figures and another weak UST auction last night, whereas the latter pushed the benchmark 10Y US Treasury yield above 4.60% in the evening, a near one-month high.

US equity futures are all in the red this morning, indicating lower prices by opening bell.

In commodities, gold, silver and copper, metals that have all seen otherwise relatively strong performance in May, takes a breather as they are down this morning between around 0.4% and 1.9%. Brent is trading flat at USD84/bbl.

What happened yesterday

German inflation stood at 2.8% y/y for headline HICP, thus slightly higher than the 2.7% consensus amongst analysts. It is however worth noting that headline inflation was affected by the so-called 'German ticket', a discount on public transportation which has lowered headline inflation. Given its introduction more than a year ago, the base effects of the discount are no longer affecting the inflation print.

Core inflation remained at 3.0% y/y and was 0.24% m/m seasonally adjusted. Hence core inflation remains on the high side month-to-month. The elevated core inflation is due to services inflation increasing to 3.9% y/y from 3.40% y/y. The momentum in services inflation is key for the ECB, and we see that service prices increased 0.46% m/m seasonally adjusted - above the 0.3-0.4% m/m average seen in the past three months. The 3m/3m seasonally adjusted annualised rate of services inflation thus stood at 4.78%, which is 'too hot' to yet 'declare victory over inflation' to paraphrase ECB Chief Economist Philip Lane.

In the euro area, the M3 monetary aggregate rose 1.3% in April from 0.9% in March. A key metric to keep your eyes on for growth outlook is credit provided to the private sector. The lending channel is still recovering, and loan dynamics continue to point to a slight improvement in lending dynamics. Loans to households rose 0.2% in April (prior: 0.2%) whereas loans to non-financial corporations rose 0.3% (prior: 0.4%).