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Australian Dollar strengthened broadly in Asian session today, shrugging off lackluster retail sales data. Instead, Aussie is responding positively to Shanghai's announcement of significant policy measures aimed at boosting the housing market. Yesterday, China's commercial and financial hub declared it would relax home purchase restrictions and provide subsidies for new flat buyers. This move is designed to invigorate the city's real estate sector and comes less than two weeks after the central government introduced a rescue package to prevent a property market collapse.

Conversely, Dollar is trading broadly lower as last week's rebound attempt has faded. There has been no new information to suggest a shift in Fed's policy outlook. Fed fund futures still indicate a 50/50 chance of a rate cut in September. As financial markets are digesting these expectations well, risk-on sentiment could return, putting pressure on the greenback.

For the week thus far, New Zealand Dollar is following Aussie as the second strongest currency, followed by British Pound and Canadian Dollar. Japanese Yen is the second weakest next to Dollar, followed by Swiss Franc. This alignment reflects typical risk-on sentiment in the market.

Technically, despite some hesitation last week, NZD/USD is picking up momentum to resume the rise from 0.5873. This rally could represent the third leg of the rise from 0.5771. For now, outlook will stay cautiously bullish as long as 0.6086 support holds. Break of 0.6216 resistance will affirm this bullish case and target 0.6368 and above.

In Asia, at the time of writing, Nikkei is down -0.17%. Hong Kong HSI is up 0.57%. China Shanghai SSE is up 0.01%. Singapore Strait Times is up 0.36%. Japan 10-year JGB yield is up 0.013 at 1.038.

Japan's CSPI rises 2.8% yoy in Apr, highest annual increase since 2015

Japan's Corporate Service Price Index saw a notable increase of 2.8% yoy in April, surpassing the expected 2.3% yoy and accelerating from 2.4% yoy in the previous month. This marks the fastest annual rise since March 2015. On a monthly basis, service prices rose 0.7% mom from March, though this was a slight slowdown from the prior month's 0.9% mom increase.

The significant annual gains can be attributed to rising labor costs in labor-intensive service sectors, particularly in areas such as machine repair and industrial facility renovation. This surge in service prices highlights the growing cost pressures within Japan's service industry, driven by an tight labor market.

Australia's retail sales rises 0.1% mom in Apr, weak consumer spending continues

Australia's retail sales rose by 0.1% mom to AUD 35.7B in April, falling short of the expected 0.3% mom increase. This modest rise followed a -0.4% mom decline in March, indicating continued weakness in consumer spending.

Ben Dorber, ABS head of retail statistics, commented, "Underlying retail spending continues to be weak with a small rise in turnover in April not enough to make up for a fall in March."

He further noted that "since the start of 2024, trend retail turnover has been flat as cautious consumers reduce their discretionary spending."

Looking ahead

Canada IPPI and RMPI will be released in European session. US will release house price index and consumer confidence.

AUD/USD Daily Report

Daily Pivots: (S1) 0.6631; (P) 0.6645; (R1) 0.6669; More...

AUD/USD's recovery from 0.6591 extends higher today, but stays below 0.6713 resistance. Intraday bias remains neutral first. Further rally is in favor with 0.6578 cluster support (38.2% retracement of 0.6361 to 0.6713 at 0.6579 intact. On the upside, firm break of 0.6713 will resume whole rise from 0.6361 to 0.6870 resistance next. However, firm break of 0.6578 will dampen this bullish view, and bring deeper fall to 61.8% retracement at 0.6495.

In the bigger picture, price actions from 0.6169 (2022 low) are seen as a medium term corrective pattern to the down trend from 0.8006 (2021 high). Fall from 0.7156 (2023 high) is seen as the second leg, which could have completed at 0.6269 already. Rise from there is seen as the third leg which is now trying to resume through 0.6870 resistance.

Economic Indicators Update

Short Term Elliott Wave in Nasdaq Futures (NQ) suggests the rally from 4.19.2024 low is in progress as an impulse. Up from 4.19.2024 low, wave ((i)) ended at 17949 and dips in wave ((ii)) ended at 17386. The NQ extended higher in wave ((iii)) with internal subdivision as another impulse in lesser degree. Up from wave ((ii)), wave (i) ended at 18348 and dips in wave (ii) ended at 18165. Wave (iii) ended at 18760, wave (iv) ended at 18545, and wave (v) ended at 19023 which completed wave ((iii)).

Wave ((iv)) pullback did a zig zag Elliott Wave structure. Down from wave ((iii)), wave (a) ended at 18802 and pullback in wave (b) ended at 18933. Final leg wave (c) completed wave ((iv)) at 18621 low. The future rallied again in wave ((v)) ending an impulse as wave (i) of ((v)) at 18956 high. Near term, as far as pivot at 18621 low stays intact, expect a correction in 3 or 7 swings in wave (ii) before resuming to the upside in wave (iii) of ((v)). It expect short term upside in ((v)) towards 19117 – 19270 area as minimum extension, while dips remain above 18623.85 low. Alternatively, it can do double, if break below 18623.85 low as ((iv)) before turning higher.

Nasdaq Futures (NQ) 60 Minutes Elliott Wave Chart

Nasdaq Futures (NQ) Elliott Wave Video

https://www.youtube.com/watch?v=jiMqbVSs2lc

Australia's retail sales rose by 0.1% mom to AUD 35.7B in April, falling short of the expected 0.3% mom increase. This modest rise followed a -0.4% mom decline in March, indicating continued weakness in consumer spending.

Ben Dorber, ABS head of retail statistics, commented, "Underlying retail spending continues to be weak with a small rise in turnover in April not enough to make up for a fall in March."

He further noted that "since the start of 2024, trend retail turnover has been flat as cautious consumers reduce their discretionary spending."

Full Australia retail sales release here.

Japan's Corporate Service Price Index saw a notable increase of 2.8% yoy in April, surpassing the expected 2.3% yoy and accelerating from 2.4% yoy in the previous month. This marks the fastest annual rise since March 2015. On a monthly basis, service prices rose 0.7% mom from March, though this was a slight slowdown from the prior month's 0.9% mom increase.

The significant annual gains can be attributed to rising labor costs in labor-intensive service sectors, particularly in areas such as machine repair and industrial facility renovation. This surge in service prices highlights the growing cost pressures within Japan's service industry, driven by an tight labor market.

• ECB June rate move looks like a done deal
• May inflation could open the door to a July rate cut
• Euro could benefit from a stronger CPI print
• German CPI on Wednesday, eurozone report on Friday at 09:00 GMT

Busy calendar, inflation stands out

With the market counting down to next week’s ECB meeting, the preliminary inflation report for May will be published this week. The data calendar is rather full and includes unemployment data for the eurozone and the German retail sales, but the focus will be firmly on inflation.

The various German states will start reporting their respective inflation data from 08:00 GMT on Wednesday with the German aggregate print expected at around 12:00 GMT. The market is currently expecting a small acceleration to 2.4% yoy from 2.2% in April. Then, on Friday, the euro area headline figure is forecast to edge slightly higher to 2.5% with the core indicator that excludes energy, food, alcohol and tobacco remaining at 2.7%.

The euro area economy is picking up pace

Based on the recent economic data, the economic recovery is gaining speed in the euro area. More specifically, the upside surprise in the GDP for the first quarter of 2024 has been followed by stronger business survey prints. Last week’s preliminary PMI reports and Monday’s IFO business survey from Germany confirm this trend change.

This apparent economic improvement has been noted by the ECB members, but their overall rhetoric has not been moderated. Essentially, since the April 11 meeting, ECB officials have been focused on preparing the market for the June 6 rate cut. While the ECB does not precommit, this rate cut could be the one of the most telegraphed rate moves in the history of the ECB.

June rate cut is a done deal; focus on the July meeting

The discussion has gradually moved to the July meeting’s outcome. The doves are clearly advocating for consecutive rate cuts, assuming that the June meeting results in a 25bps rate move. This week’s inflation report will play a key role in the behind-the-door discussions and the overall rhetoric at the imminent ECB meeting regarding the ECB’s outlook for the rest of 2024.

A strong inflation report, for example, if the euro area headline inflation accelerates aggressively above 2.5% and the core indicator jumps above 3%, is unlikely to change the strong expectations for the June gathering. However, it could significantly dent the growing chances of back-to-back rate cuts.

On the flip side, a weaker inflation report will just act as confirmation of the June rate decision and keep the July rate cut option firmly on the table.

Euro needs a strong inflation report

Despite the evident economic divergence between the US and the euro area, the euro has been on the front foot against the US dollar over the past month. However, this bullish trend has stalled lately as the stronger US data releases are raising doubts about the realistic possibilities of the Fed cutting rates in 2024.

All in all, this week’s eurozone preliminary inflation report is unlikely to change the medium-term outlook for the euro. Having said, if inflation surprises on the upside, we could see some upwards pressure on euro/dollar towards the 1.0900 area. On the other hand, a weak inflation report could open the door to a move below the busy 1.0773-1.0809 area, which is currently acting as very strong.

Key Highlights

• GBP/USD is gaining bullish momentum above the 1.2700 zone.
• A key rising channel is forming with resistance at 1.2785 on the 4-hour chart.
• Gold price found support near the $2,320 zone and might attempt a fresh increase.
• Bitcoin price could rally if it clears the $72,000 resistance zone.

GBP/USD Technical Analysis

The British Pound formed a base above the 1.2640 zone against the US Dollar. GBP/USD started a major increase above the 1.2680 and 1.2700 resistance levels.

Looking at the 4-hour chart, the pair settled above the 200 simple moving average (green, 4-hour) and the 100 simple moving average (red, 4-hour). The pair cleared the key hurdle at 1.2720 and might continue to move higher.

There is also a key rising channel forming with resistance at 1.2785 on the same chart. A clear move above the 1.2785 resistance might send it toward the 1.2850 level. Any more gains might call for a move toward the 1.2950 level in the near term.

If there is no move above the 1.2785 resistance, the pair might correct gains. Immediate support is near the 1.2720 level. The next major support is at 1.2700.

If there is a downside break below the 1.2700 support, the pair might test the 100 simple moving average (red, 4-hour) at 1.2620. Any more losses might send the pair toward the 200 simple moving average (green, 4-hour) at 1.2545.

Looking at Gold, the price found support near the $2,320 level and the bulls are now aiming for a fresh increase.

Economic Releases

• US Housing Price Index for March 2024 (MoM) - Forecast +0.5%, versus +1.2% previous.

• EURAUD reversed from resistance level 1.6365
• Likely to fall to support level 1.6210

EURAUD currency pair previously reversed down from the key resistance level 1.6365, former support from April and January.

The resistance level 1.6365 was strengthened by the upper daily Bollinger Band and by the 38.2% Fibonacci correction of the previous downward impulse 1 from April.

EURAUD can be expected to fall further to the next support level 1.6210, which stopped the previous impulse wave 1.

• The potential upcoming interest cut on 6 June from the ECB is likely to have been fully priced in by the markets.
• The forward guidance by ECB officials on the timing of subsequent rate cuts is murky and the consensus forecasts for the current Eurozone core inflation deceleration trend may have plateaued in May.
• These factors are likely to support a further potential widening of the premium seen in the Eurozone/Switzerland 2-year sovereign bond yield spread.
• Watch the key medium-term support of 0.9830 on the EUR/CHF

Since our last analysis, the EUR/CHF cross pair has staged a minor corrective slide and almost hit the support zone of 0.9540/9470 as highlighted. It printed an intraday low of 0.9565 on 19 April, staged a bullish reversal, and rallied by 3.8% (365 pips) in the next four weeks to hit the current 52-week high of 0.9930 seen today at this time of the writing.

After the recent Swiss National Bank (SNB) surprise rate cut by 25 basis points (bps) on its main policy interest rate to bring it down to 1.50%, its first cut in nine years on 21 March, the Swiss franc (CHF) has underperformed against other G-10 currencies except against the Japanese yen (JPY).

The ongoing slow crash of Swiss franc (CHF)

Fig 1: 3-month rolling performance of CHF against G-10 currencies as of 27 May 2024 (Source: TradingView, click to enlarge chart)

Based on rolling 3-month relative performance as of 27 May, the CHF has tumbled by 3.9 % against the EUR; and ranked the third weakest CHF cross pair before CHF/GBP (-4.3%), and CHF/AUD (-4.8%) (see Fig1).

The 2-year Eurozone sovereign bond yield is still trading at a premium over Switzerland

Since the last European Central Bank (ECB) monetary policy meeting in April, ECB officials have guided market participants for a widely anticipated first interest cut of 25 bps in the Eurozone for the upcoming 6 June meeting after being on hold for a fifth consecutive month.

The potential first rate cut from the ECB is likely to have been almost fully priced in since it is well “telegraphed” but the timing for the next subsequent interest rate cuts is murky as officials have given mixed views on the inflationary and economic growth trends in the Eurozone.

Some of the less dovish officials; ECB Chief Economist Philip Lane told the Financial Times in an interview published on Monday, 27 May that the ECB will need to keep policy in “restrictive territory” through 2024 despite it is on track to cut interest rate in June.

In addition, it seems that Lane’s concerns are also being echoed by the private sector economists’ consensus forecast for the preliminary Eurozone core inflation data (excluding food and energy) for May out this Friday, 31 May. The forecast is calling for an unchanged pace at 2.7% y/y and if it turns out as expected, it will be the second consecutive month of a similar pace of increase since April which implies that the deceleration trend of Eurozone inflation has tapered off after eight consecutive months of slowdown in inflationary growth.

Murky forward guidance from ECB officials on the timing of the second interest rate cut coupled with an expectation that the ongoing deceleration trend in the Eurozone’s core inflation growth may plateau in May is likely to have supported the current yield premium seen in the shorter-term 2-year Eurozone sovereign bonds over Switzerland sovereign bonds of the same tenure.

The premium of the 2-year sovereign bond yield spread between the Eurozone and Switzerland has continued to widen since the start of the year and recently it has staged a medium-term bullish breakout on 21 March and traded higher by 18 bps to hit 1.99% at this time of the writing (see Fig 2).

Watch the 0.9830 key medium-term support on the EUR/CHF

Fig 2: EUR/CHF medium-term trend with 2-year sovereign bond yield spread of Eurozone/Switzerland  as of 27 May 2024 (Source: TradingView, click to enlarge chart)

Overall, the widening of premium seen in the 2-year sovereign bond yield spread between the Eurozone and Switzerland has supported the ongoing medium-term uptrend phase of the EUR/CHF cross pair in place since the 29 December 2023 low of 0.9254.

If the 0.9830 key medium-term pivotal support holds, the EUR/CHF may see another round of potential impulsive upmove sequence for the next medium-term resistance zone to come in at 1.0040/1.1000 (also confluence closely to the long-term secular descending trendline from April 2018 swing high).

On the flip side, a break below 0.9830 negates the bullish tone to expose the next medium-term supports at 0.9680 and 0.9575 (also the key 200-day moving average).

The improvement in Germany’s business climate stalled in May, according to data released by Ifo. The index remained at the same level of 89.3 as a month earlier. The indicator was last higher in May last year, but analysts, on average, were expecting a further increase to confirm the more positive PMI reading released last week.

Although markets reacted sluggishly to this publication, it probably accounts for the Euro’s weaker performance against its major peers. EURUSD has pulled back below 1.0850, while EURGBP is testing the 0.8500 mark. The latter pair has not traded persistently lower since August 2022.

The steady decline over the past two weeks is mainly due to the belief that the Bank of England will extend the pause before the rate cut cycle starts and the ECB will ease policy at its next meeting on 6 June.

If the support at 0.8500 does not hold, the nearest next support will be the area of 0.8250-0.8300, but one should be prepared that the decline will not stop there.