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Daily Pivots: (S1) 0.9847; (P) 0.9879; (R1) 0.9894; More....

EUR/CHF's break of 0.9880 support confirms short term topping at 0.9928. Intraday bias is back on the downside. Deeper fall would be seen to 38.2% retracement of 0.9563 to 0.9928 at 0.9789. On the upside, break of 0.9880 minor resistance will turn intraday bias neutral first. But risk will now stay mildly on the downside as long as 0.9928 resistance holds, in case of recovery.

In the bigger picture, as long as 0.9728 support holds, rise from 0.9252 medium term bottom is still in favor to continue. Next target is 38.2% retracement of 1.2004 (2018 high) to 0.9252 (2023 low) at 1.0303, even just as a correction to the down trend from 1.2004. However, firm break of 0.9728 will raise the chance of bearish reversal and turn focus to 0.9563 support for confirmation.

The US financial markets were enveloped in a wave of risk aversion that continued into Asian session, primarily driven by the notable surge in Treasury yields. This uptick in yields followed an auction of seven-year debt that closed with higher than anticipated yields, raising alarms about weakening demand for US Treasuries. This concern was compounded by similar outcomes from auctions of two-year and five-year notes on Tuesday, suggesting a broader hesitation among investors.

The currency markets responded to these developments with significant movements, where traditional safe-haven currencies such as Yen, Swiss Franc, and Dollar strengthen broadly, indicating a clear shift towards safer assets. Conversely, Australian Dollar, New Zealand Dollar, Canadian Dollar, and British Pound were all notably weaker, while Euro also saw a slight decline.

This market behavior underscores a heightened sense of caution among investors, who are now keenly awaiting the upcoming US PCE inflation data. The outcome of this report could reinforce Fed's current stance on interest rates, leading to an even longer period of elevated rates if inflation pressures do not ease. Such a scenario would likely exacerbate the current risk-off sentiment in the markets.

Technically, 10-year yield's strong rally this week confirms that corrective pull back from 4.730 has completed at 4.318 already. Retest of 4.730 should be seen next. Firm break there will resume the rise from 3.780, as the second leg of the corrective pattern from 4.997). Next target is 61.8% projection of 3.780 to 4.730 from 4.318 at 4.906. Should this rise in Treasury yields persist, it could place further pressure on stock markets while bolstering Dollar.

In Asia, at the time of writing, Nikkei is down -1.26%. Hong Kong HSI is down -1.29%. China Shanghai SSE is down -0.53%. Singapore Strait Times is down -0.20%. 10-year JGB yield is down -0.006 at 1.075. Overnight, DOW fell -1.06%. S&P 500 fell -0.74%. NASDAQ fell -0.58%. 10-year yield rose 0.082 to 4.624.

Fed Beige Book: Modest economic growth amid heightened uncertainty

Fed's Beige Book indicates that most Federal Reserve Districts experienced "slight or modest" economic growth, while two Districts saw no change in activity. The overall economic outlook has become more "pessimistic" due to increased uncertainty and greater downside risks.

Employment across the country grew at a slight pace, with eight Districts reporting "minimal to modest" job gains and the remaining four seeing no changes. Wage growth was generally moderate, with some Districts noting that wage increases have returned to pre-pandemic levels or are moving towards those rates.

Prices rose modestly over the reporting period, and this trend is expected to continue in the near future.

Fed's Bostic eyes rate cuts by year-end

Atlanta Fed President Raphael Bostic indicated that interest rate cuts might be on the table by the fourth quarter of this year, provided economic conditions align with his expectations.

"My outlook is that if things go according to what I expect — inflation goes slowly, the labor market slowly and orderly moves back into a sort of a weaker stance, but a stable-growth stance — I'm looking at the end of the year, the fourth quarter, as the time where we might actually think about and be prepared to reduce rates," Bostic said.

While acknowledging that the breadth of inflation remains high, Bostic noted that a reduction in this breadth would increase his confidence in making rate cuts. He mentioned that many of the inflation measures "are moving back into the target range," suggesting progress towards Fed's goals.

SNB's Jordan identifies minor inflation risk due to weakening franc

SNB Chairman Thomas Jordan highlighted at an event in Seoul today a "small upward risk" to the current inflation forecasts, which could mean a "more accommodative than intended" monetary policy if realized.

Jordan pointed out that such inflationary pressures are likely tied to declines in Swiss franc. To mitigate this, the central bank might consider engaging in foreign exchange sales to bolster the currency.

Moreover, Jordan noted that the natural rate of interest—which serves as a crucial benchmark for setting monetary policies—has shown signs of increasing and may continue to rise in the foreseeable future.

Despite these concerns, Jordan reassured that the current policy settings are expected to remain effective in maintaining price stability, even if the natural rate of interest edges higher.

RBA's Hunter cautious on persistent inflation despite wage trends

At a conference today, RBA Chief Economist Sarah Hunter highlighted the central bank's intense focus on inflation, which continues to exceed the target band.

Discussing the latest CPI data, Hunter noted, "Yesterday's data did confirm that there's still strength in a number of categories that we've seen up until this point that's still there." The latest CPI figures, which show a slight increase from 3.5% to 3.6% in April, underline ongoing inflationary pressures across various sectors.

"So clearly there's still some strength in inflation, and that's a key consideration for the board in their decision-making," Hunter added.

While wage growth appears to have peaked, Hunter expressed concerns about productivity which remains weak: "We can see some components of wages growth coming off already, particularly individual agreements," she said. However, she also pointed out, "But equally, we are seeing that there's a bit of a productivity challenge over the last few years."

Looking ahead

Swiss trade balance, KOF economic barometer and GDP will be release in European session. Eurozone will publish economic sentiment indicator and unemployment rate. Later in the day, US will release jobless claims, goods trade balance and Q1 GDP revision.

EUR/CHF Daily Outlook

Daily Pivots: (S1) 0.9847; (P) 0.9879; (R1) 0.9894; More....

EUR/CHF's break of 0.9880 support confirms short term topping at 0.9928. Intraday bias is back on the downside. Deeper fall would be seen to 38.2% retracement of 0.9563 to 0.9928 at 0.9789. On the upside, break of 0.9880 minor resistance will turn intraday bias neutral first. But risk will now stay mildly on the downside as long as 0.9928 resistance holds, in case of recovery.

In the bigger picture, as long as 0.9728 support holds, rise from 0.9252 medium term bottom is still in favor to continue. Next target is 38.2% retracement of 1.2004 (2018 high) to 0.9252 (2023 low) at 1.0303, even just as a correction to the down trend from 1.2004. However, firm break of 0.9728 will raise the chance of bearish reversal and turn focus to 0.9563 support for confirmation.

Economic Indicators Update

Short Term Elliott Wave in EURUSD suggests rally from 4.16.2024 low unfolded as a 5 waves impulse Elliott Wave structure. Up from 4.16.2024 low, wave ((i)) ended at 1.0753 and pullback in wave ((ii)) ended at 1.0649. The pair extends higher again in wave ((iii)) ended at 1.0812 and correction in wave ((iv)) towards 1.0723 low. Then the pair extend higher in wave ((v)) with internal subdivision as an impulse in lesser degree. The 1 hour chart below shows the subdivision of wave ((v)).

Up from wave ((iv)), wave (i) ended at 1.0790 and dips in wave (ii) ended at 1.0760. EURUSD then extended higher in wave (iii) towards 1.0870 and pullback in wave (iv) ended at 1.0831. Final leg wave (v) ended at 1.0895 which completed wave ((v)) and wave 1. The pair then started a correction in wave 2 and we are calling as a flat structure. First leg lower ended wave ((a)) at 1.0804 low and bounced to retest the highs as wave ((b)) ended at 1.0889. Near term, as far as pivot at 1.0895 high stays intact, expect dips to find support to end wave 2 correction before further upside.

EURUSD 60 Minutes Elliott Wave Chart

EURUSD Elliott Wave Video

https://www.youtube.com/watch?v=FTIpTMe-dQE

At a conference today, RBA Chief Economist Sarah Hunter highlighted the central bank's intense focus on inflation, which continues to exceed the target band.

Discussing the latest CPI data, Hunter noted, "Yesterday's data did confirm that there's still strength in a number of categories that we've seen up until this point that's still there." The latest CPI figures, which show a slight increase from 3.5% to 3.6% in April, underline ongoing inflationary pressures across various sectors.

"So clearly there's still some strength in inflation, and that's a key consideration for the board in their decision-making," Hunter added.

While wage growth appears to have peaked, Hunter expressed concerns about productivity which remains weak: "We can see some components of wages growth coming off already, particularly individual agreements," she said. However, she also pointed out, "But equally, we are seeing that there's a bit of a productivity challenge over the last few years."

SNB Chairman Thomas Jordan highlighted at an event in Seoul today a "small upward risk" to the current inflation forecasts, which could mean a "more accommodative than intended" monetary policy if realized.

Jordan pointed out that such inflationary pressures are likely tied to declines in Swiss franc. To mitigate this, the central bank might consider engaging in foreign exchange sales to bolster the currency.

Moreover, Jordan noted that the natural rate of interest—which serves as a crucial benchmark for setting monetary policies—has shown signs of increasing and may continue to rise in the foreseeable future.

Despite these concerns, Jordan reassured that the current policy settings are expected to remain effective in maintaining price stability, even if the natural rate of interest edges higher.

Atlanta Fed President Raphael Bostic indicated that interest rate cuts might be on the table by the fourth quarter of this year, provided economic conditions align with his expectations.

"My outlook is that if things go according to what I expect — inflation goes slowly, the labor market slowly and orderly moves back into a sort of a weaker stance, but a stable-growth stance — I'm looking at the end of the year, the fourth quarter, as the time where we might actually think about and be prepared to reduce rates," Bostic said.

While acknowledging that the breadth of inflation remains high, Bostic noted that a reduction in this breadth would increase his confidence in making rate cuts. He mentioned that many of the inflation measures "are moving back into the target range," suggesting progress towards Fed's goals.

Fed's Beige Book indicates that most Federal Reserve Districts experienced "slight or modest" economic growth, while two Districts saw no change in activity. The overall economic outlook has become more "pessimistic" due to increased uncertainty and greater downside risks.

Employment across the country grew at a slight pace, with eight Districts reporting "minimal to modest" job gains and the remaining four seeing no changes. Wage growth was generally moderate, with some Districts noting that wage increases have returned to pre-pandemic levels or are moving towards those rates.

Prices rose modestly over the reporting period, and this trend is expected to continue in the near future.

Full Fed's Beige Book here.

• OPEC+ oil producers might extend current supply cuts on Sunday June 2
• Deeper cuts could be acceptable by major members but probably not for long
• Plans for capacity increases might cause some divisions within the group
• Geopolitical tensions, China outlook, and Fed rate cut path to move oil prices too

An agreement seems to be on the table already

OPEC oil producers and their allies including Russia postponed their 188th gathering for a day to Sunday June 2 and switched from an originally scheduled in-person meeting in Vienna to a virtual conference following the death of the Iranian president Ebrahim Raisi and as the Saudi King, the father of energy minister Abdulaziz bin Salman, who is also the cartel’s chairman, is in poor health.

The last-minute shift to an online meeting flagged that an agreement for members to extend their current production cuts in the second half of the year is already guaranteed. Perhaps this is the easiest and fastest solution for the time being. Distributing a potential output increase or decrease among members could lead to political disagreements within the group, given that some of them are directly or indirectly involved in the Middle East turmoil and the war in Ukraine. Note that 79.5% of global oil reserves are located in OPEC states and particularly in the Middle East.

Compliance is challenging

For instance, Iraq, which is the second largest OPEC producer and the world’s fifth largest owner of reserves, has been seeking to increase its supply by 7 million bpd since the pandemic, producing over its quota limits at the start of this year with a pledge to compensate for it in the second half of the year.

However, Iraq is known for its low degree of compliance, raising questions about whether it will indeed meet its obligations. Yet, this is a common phenomenon among OPEC members who rely heavily on oil production to ensure economic funding and avoid indebtedness. Kazakhstan has been overproducing as well during the first quarter, while Gabon seems to have no plans to compensate, with the compliance rate within the OPEC+ group easing to 96.5% in April from 97.9% in March.

Recall that Angola decided to leave the group after a 16-year membership, joining Ecuador and Qatar over a dispute on output quotas. Therefore, it will be intriguing to observe if additional oil producers jeopardize the group’s unity. Specifically, Iran, whose exports are at a six-year high, flagged a 4 million bpd boost amid economic challenges recently without providing a timeframe and the UAE also announced an output capacity increase shortly before June’s meeting. Nigeria has been expressing its dissatisfaction over restrictions on quotas too, but is still endorsing its collaboration with the organisation.

Would steeper production cuts be acceptable?

The existing plan involves a total 5.86 million bpd supply reduction (5.6% of global demand), composed by the initial 3.66 million bpd cut announced in steps since late 2022 and the additional 2.2 million bpd cut (from 1.3 million previously) led by selected members such as Saudi Arabia and Russia.

A tighter supply could boost oil prices, benefitting the key OPEC players Saudi Arabia and Russia, which have a high break-even price between $90 and $100/bpd according to the International Monetary Fund (IMF), as the former aims to fund its ambitious economic plans and the latter deals with war expenses for the second consecutive year.

Perhaps other important OPEC producers such as Iran and Iraq might not complain either and could even accept a new round of cuts as their breakeven price is even higher, though the expansion in their supply capacity suggests that persisting production cuts might not be in their interest as US supply is expected to hit a record high in 2025. Canada, Brazil and Norway could also lead production increases in the months ahead.

Would OPEC+ members welcome a reversal in cuts?

Alternatively, softer production cuts could send oil prices lower, benefiting only a minor group of exporters, including Libya and the UAE. The latter faces an estimated break-even price of around $56.7 in 2024 and aims to increase its capacity further by 2027. Yet, capacity assessments will not be delivered before the meeting and an increase in production could be a tough task this week. Perhaps, such a decision could be easier next year. OPEC estimates a demand slowdown to 1.8 million bpd in 2025 from 2.2 million bpd in 2024. The IEA foresees a steeper decline to 1.1 million bpd estimated by the IEA. Hence, production might be more balanced next year and after the US election.

For now, OPEC’s supply cut policy combined with the ongoing geopolitical risks in Ukraine and Israel keeps adding a floor under crude oil prices. The summer travel season ahead and a more optimistic outlook about China’s recovery could boost demand for fuel, while more clarity on when the Fed will start cutting rates could be a positive catalyst for oil investments too.

WTI crude oil

Technically, WTI oil futures will need to close above the broken support trendline at $81.37 to extend their upturn towards the 23.6% Fibonacci retracement of the previous uptrend at $82.40. Even higher, the focus might fall on the constraining zone of $83.90-$84.35, where the ascending line from the pandemic low and the tentative resistance line from the 2022 top are located. A successful penetration of this border could cause an acceleration towards April’s ceiling of $86.80.

In the event the OPEC+ group signals a softer supply cut approach in 2025, WTI crude could drift lower. The flattening 200-day simple moving average is nearby and attached to the 38.2% Fibonacci mark of $79.65. Therefore, any steps lower and below the 50-day SMA at $78.92 could see a continuation towards the 50% Fibonacci of $77.42. An extension below May’s base of $76.00 would worsen the outlook.

Key Highlights

• AUD/USD started a fresh decline from the 0.6680 resistance.
• It traded below a key contracting triangle with support at 0.6660 on the 4-hour chart.
• NZD/USD started a downside correction after a strong increase to 0.6160.
• The US GDP could grow 1.3% in Q1 2024 (Preliminary), down from 1.6%.

AUD/USD Technical Analysis

The Aussie Dollar struggled to stay above the 0.6700 level against the US Dollar. AUD/USD started a fresh decline from the 0.6680 zone.

Looking at the 4-hour chart, the pair traded below a key contracting triangle with support at 0.6660. The bears gained strength and were able to push the pair below the 0.6650 support.

There was a move below the 50% Fib retracement level of the upward move from the 0.6591 swing low to the 0.6679 high. The pair is now trading below the 100 simple moving average (red, 4-hour). AUD/USD is now showing bearish signs below the 0.6630 level.

If the bears remain in action, the pair could decline toward the 0.6590 level. If there are more downsides, the pair could test the 200 simple moving average (green, 4-hour).

Immediate resistance is near the 0.6635 level. The first major resistance is near the 0.6660 level. A clear move above the 0.6660 resistance might send it toward the 0.6680 level. Any more gains might call for a move toward the 0.6700 level in the near term.

Looking at NZD/USD, the pair is correcting gains and might continue to slide toward the 0.6080 support in the near term.

Economic Releases

• US Gross Domestic Product Q1 2024 (Preliminary) – Forecast 1.3% versus previous 1.6%.
• US Initial Jobless Claims - Forecast 218K, versus 215K previous.

• GBPUSD reversed from resistance level 1.2800
• Likely to fall to support level 1.2675

GBPUSD currency pair recently reversed down from the key resistance level 1.2800, which has been repeatedly reversing the price from December.

The downward reversal from the resistance level 1.2800 is likely to form the daily Japanese candlesticks reversal pattern Evening Star Doji.

Given the strength of the resistance level 1.2800, GBPUSD currency pair can be expected to fall further to the next support level 1.2675 (low of the previous correction ii).