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Daily Pivots: (S1) 155.75; (P) 156.03; (R1) 156.56; More...

Outlook in USD/JPY is unchanged and intraday bias stays neutral. Price actions from 160.20 are seen as a corrective pattern. On the upside, break of 156.78 will resume the rise from 151.86, as the second leg, to 100% projection of 151.86 to 156.78 from 153.59 at 158.51. On the downside, below 153.59 will target 151.86 and below as the third leg.

In the bigger picture, a medium term top might be formed at 160.20. But as long as 150.87 resistance turned support holds, fall from there is seen as correcting rise from 150.25 only. However, decisive break of 150.87 will argue that larger correction is possibly underway, and target 146.47 support next.

Headline CPI inflation edged lower in April to 2.7% year-on-year (y/y), matching expectations. The broad-based deceleration was led by food prices, services and durable goods.

However, higher prices at the pump in April worked against the cooling in inflation. Gasoline prices were up 6.1% versus a year ago, up from 4.5% in March. But it wasn't entirely due to the increase in the federal carbon levy. Statistics Canada cited that higher oil prices and the switch to summer blends were also factors lifting prices at the pump. Excluding gasoline, all-items CPI slowed to 2.5% y/y in April, down from 2.8% in March.

Goods inflation as a whole continued to slow, up only 1% y/y in April, as prices for durable goods (like furniture and appliances) are in deflation, down 0.8% y/y. Consumers are also seeing lower inflation for food, which is at 2.3% y/y in April, down from a peak of 10% last year.

Shelter inflation has been a thorn in the Bank of Canada's side, but it took a small step in the right direction in April, up 6.4% y/y, down a tenth from March. Rent inflation cooled slightly to 8.2% y/y as did mortgage interest costs, which remain high at 24.5% y/y. Leaning against these increases, homeowner's replacement cost is down 0.9% versus a year ago. CPI ex-shelter was up only 1.2% y/y on April.

In other good news, the Bank of Canada's preferred "core" inflation measures continued to make progress towards the 2% target in April. The average of the Bank's median and trim measures was 2.8% y/y in April, down from 3.1% in March. The three and six month annualized pace of core inflation – at 1.6% and 2.4% - continue to point to a lower year-on-year pace of price growth going forward.

Key Implications

April was another month of good news on Canadian inflation. The BoC's preferred inflation gauges moved into the 1-3% target range for the first time in nearly three years. However, at 2.8% it is still close to the top of the BoC's range, and we expect the bank will want to see a bit more confirmation before taking rates lower and lean towards a July cut.

However, markets have found today's inflation number a bit more reassuring, and have increased the odds of a June cut to better than 50-50. But June or July, Canadians can be increasingly confident that alongside lower inflation, interest rates are headed lower soon.

Daily Pivots: (S1) 1.3602; (P) 1.3618; (R1) 1.3641; More...

USD/CAD recovered notably today but stays below 1.3689 resistance. Intraday bias stays neutral first. Strong bounce from current level will confirm support by 55 D EMA (now at 1.3628). Break of 1.3689 minor resistance will argue that correction from 1.3845 has completed, and bring stronger rally to 1.3761 resistance. However, sustained break of 55 D EMA will argue that whole rise from 1.3176 has completed already, and turn outlook bearish.

In the bigger picture, price actions from 1.3976 (2022 high) are viewed as a corrective pattern. In case of another fall, strong support should emerge above 1.2947 resistance turned support to bring rebound. Firm break of 1.3976 will confirm up resumption of whole up trend from 1.2005 (2021 low). Next target is 61.8% projection of 1.2401 to 1.3976 from 1.3176 at 1.4149.

Canadian Dollar sees a broad decline in early US session due to growing speculation about rate cut by BoC in the near future. April's headline CPI slowed as expected, despite a significant increase in gasoline prices. Core inflation measures also showed more progress in disinflation than anticipated. While it remains uncertain if this progress will be enough to prompt BoC to ease policy at next meeting, speculation is likely to intensify ahead of June 5 meeting.

Meanwhile, New Zealand Dollar followed Loonie as the second weakest performer of the day. Attention is now turning to RBNZ rate decision scheduled for tomorrow, with most market participants expecting the central bank to hold the rate steady at 5.50%. While many analysts see November as the likely timing for the first rate cut, this view is not universally held. The upcoming OCR forecasts from RBNZ will be closely scrutinized, particularly to see if they adjust to remove the possibility of another rate hike. However, it remains uncertain whether RBNZ will move up the timeline for the first rate cut from next year.

Elsewhere in the currency markets, Dollar is currently the third weakest. Swiss Franc has emerged as the strongest performer, followed the British Pound and Australian Dollar. Euro and Japanese Yen are positioned in the middle of the performance spectrum.

Technically, NZD/USD turned sideway after rebounding to 0.6139, but the retreat is so far shallow. Further rise is expected as long as 0.6044 resistance turned support holds. Above 0.6139 will resume the rally from 0.5873 to 0.6215 resistance. Decisive break there should confirm that whole corrective fall from 0.6368 has completed at 0.5873 already, and bring retest of 0.6368 next.

In Europe, at the time of writing, FTSE is down -0.42%. DAX is down -0.53%. CAC is down -1.06%. UK 10-year yield is down -0.029 at 4.147. Germany 10-year yield is down -0.0168 at 2.518. Earlier in Asia, Nikkei fell -0.31%. Hong Kong HSI fell -2.12%. China Shanghai SSE fell -0.42%. Singapore Strait Times fell -0.19%. Japan 10-year JGB yield rose 0.0051 to 0.985.

Canada's CPI falls to 2.7% in Apr, matches expectations

Canada's CPI slowed from 2.9% yoy to 2.7% yoy in April, matched expectations. Ex-gasoline, CPI slowed from 2.8% yoy to 2.5% yoy. Gasoline prices accelerated from 4.5% yoy to 6.1% yoy. Food prices slowed from 1.9% yoy to 1.4% yoy. On a monthly basis CPI rose 0.5% mom, matched expectations.

Looking at the core measures, CPI median slowed from 2.9% yoy to 2.6% yoy, below expectation of 2.7% yoy. CPI trimmed slowed from 3.2% yoy to 2.9% yoy, matched expectations. CPI common slowed from 2.9% yoy to 2.6% yoy, below expectation of 2.8% yoy.

IMF recommends BoE cut rates by 50-75 bps in 2024

IMF issued a report today suggesting that with UK inflation currently 2% above its neutral rate estimate, BoE should consider moving towards monetary easing.

IMF highlighted the risks of "delayed easing", cautioning that while BoE emphasizes the need to wait for clearer signs of reduced inflation persistence, holding off too long could be detrimental.

Additionally, keeping the Bank Rate unchanged as inflation and inflation expectations decrease would "raise ex-post real rates", which could hinder or even reverse the economic recovery. This scenario might lead to "extended undershooting of the inflation target".

To address these concerns, IMF recommends that BoE implement rate cuts totaling 50-75 basis points in 2024. This would help balance the risks of premature easing against the need to support economic growth and ensure inflation remains on target.

Eurozone goods exports down -9.2% yoy in Mar, imports down -12.0% yoy

Eurozone goods exports fell -9.2% yoy to EUR 245.5B in March. Goods imports fell -12.0% yoy to EUR 221.3B. Trade balance recorded EUR 24.1B surplus. Intra-Eurozone trade fell -12.4% yoy to EUR 222.1B.

In seasonally adjusted term, goods exports rose 0.1% mom to EUR 237.7B. Goods imports fell -0.1% mom to EUR 220.4B. Trade surplus widened slightly from EUR 16.7B to 17.3B. Intra-Eurozone trade fell -0.5% mom to EUR 213.7B.

RBA minutes highlight debate over rate hike

RBA minutes from May 7 meeting reveal that a rate hike was considered but ultimately, the decision was made to hold cash rate target steady at 4.35%. The board emphasized that recent data indicated that "risks around inflation had risen somewhat," acknowledging the considerable uncertainty and the difficulty in "ruling in or ruling out" future changes in interest rate.

The minutes detailed that raising the cash rate could be appropriate if the board believed that the staff forecasts were "overly optimistic" about the forces driving down inflation, leaving the balance of risks tilted to the upside. Additionally, a higher cash rate might be necessary even with ongoing weakness in aggregate demand if "other factors slowed the pace of disinflation."

Conversely, the decision to hold the cash rate steady was based on the view that, although there had been significant updates on the economy since the last meeting, these updates were "not sufficient to warrant a change in the stance of monetary policy." Inflation was still declining towards the target, and the new information "did not materially alter its trajectory."

Australian Westpac consumer sentiment falls -0.3% mom amid budget disappointment

Australia Westpac Consumer Sentiment index fell by -0.3% mom to 82.2 in May. Westpac highlighted that the primary takeaways from the May survey are "no let-up in the weak consumer environment" and the cautious mindset of consumers. Consumers are more inclined to use funds from fiscal measures to repair their finances rather than go on spending sprees, which aligns with RBA's efforts to bring inflation back to target.

The May survey, conducted during budget week, provided a clear comparison of sentiment before and after the budget announcement. Sentiment among those surveyed before the budget was relatively optimistic, with an index reading of 86.8, marking a 5.3% increase from April. However, sentiment plummeted to 76.6 after the budget announcement, reflecting a 7% decline from April. This -11.8% drop in sentiment post-budget contrasts with a -7.4% decline observed last year.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.3602; (P) 1.3618; (R1) 1.3641; More...

USD/CAD recovered notably today but stays below 1.3689 resistance. Intraday bias stays neutral first. Strong bounce from current level will confirm support by 55 D EMA (now at 1.3628). Break of 1.3689 minor resistance will argue that correction from 1.3845 has completed, and bring stronger rally to 1.3761 resistance. However, sustained break of 55 D EMA will argue that whole rise from 1.3176 has completed already, and turn outlook bearish.

In the bigger picture, price actions from 1.3976 (2022 high) are viewed as a corrective pattern. In case of another fall, strong support should emerge above 1.2947 resistance turned support to bring rebound. Firm break of 1.3976 will confirm up resumption of whole up trend from 1.2005 (2021 low). Next target is 61.8% projection of 1.2401 to 1.3976 from 1.3176 at 1.4149.

Economic Indicators Update

The New Zealand dollar is almost unchanged on Tuesday. NZD/USD is down 0.06%, trading at 0.6102 in the European session at the time of writing.

RBNZ expected to maintain cash rate

The Reserve Bank of New Zealand has shown it can be patient, having held the cash rate at 4.35% for six straight times. The central bank is expected to maintain rates yet again at Wednesday’s meeting as inflation has remained stubbornly high.

Inflation has been moving lower and fell to 4% in the first quarter, down from 4.7% in the fourth quarter of 2023. However, this remains double the midpoint of the 1-3% target range and is too high for the RBNZ to start trimming rates in the near-term.

At the same time, economic data for the first quarter was soft which should result in disinflation. The unemployment rate rose to 4.3% in the first quarter, private wage growth decelerated and GDP contracted by 0.1% q/q.

The RBNZ had its mandate limited to inflation in December; previously, the central bank was mandated to maintain low inflation and full employment. Still, the strength of the labor market and wage growth will be eyed by the central bank as it determines its rate policy.

The Federal Reserve continues to sound hawkish about rate policy and remains cautious about rate cuts. On Monday, Fed Vice Chair Philip Jefferson said that it was too early to tell if the downtrend in inflation would be “long lasting”. Fed Vice Chair of Supervision Michael Barr said that first-quarter inflation data was disappointing and was not supportive of easing monetary policy. For a second straight day, there are no US economic releases and we’ll hear from a host of FOMC members, which could provide insights about the Fed’s rate policy plans.

NZD/USD Technical

• NZD/USD is tested support at 0.6089 earlier . Below, there is support at 0.6039
• 0.6185 and 0.6235 are the next resistance lines

Canada's CPI slowed from 2.9% yoy to 2.7% yoy in April, matched expectations. Ex-gasoline, CPI slowed from 2.8% yoy to 2.5% yoy. Gasoline prices accelerated from 4.5% yoy to 6.1% yoy. Food prices slowed from 1.9% yoy to 1.4% yoy. On a monthly basis CPI rose 0.5% mom, matched expectations.

Looking at the core measures, CPI median slowed from 2.9% yoy to 2.6% yoy, below expectation of 2.7% yoy. CPI trimmed slowed from 3.2% yoy to 2.9% yoy, matched expectations. CPI common slowed from 2.9% yoy to 2.6% yoy, below expectation of 2.8% yoy.

Full Canadian CPI release here.

IMF issued a report today suggesting that with UK inflation currently 2% above its neutral rate estimate, BoE should consider moving towards monetary easing.

IMF highlighted the risks of "delayed easing", cautioning that while BoE emphasizes the need to wait for clearer signs of reduced inflation persistence, holding off too long could be detrimental.

Additionally, keeping the Bank Rate unchanged as inflation and inflation expectations decrease would "raise ex-post real rates", which could hinder or even reverse the economic recovery. This scenario might lead to "extended undershooting of the inflation target".

To address these concerns, IMF recommends that BoE implement rate cuts totaling 50-75 basis points in 2024. This would help balance the risks of premature easing against the need to support economic growth and ensure inflation remains on target.

Full IMF report on the UK here.

• It has been a rollercoaster period for Fed rate cut expectations
• Sticky US inflation is keeping the market on its toes
• Numerous Fed speakers this week; market sensitive to hawkish comments
• Dollar’s 2024 gains dented despite divergent monetary policy outlooks

The year started with the market firmly believing that the Fed would deliver six rate cuts during 2024 on the back of an aggressive slowdown in inflation, which has not materialized up to now. Developments elsewhere, in particular the numerous geopolitical events, have greatly affected market sentiment during 2024, but US inflation remains a dominant force of market movements, causing a rethinking of the Fed’s outlook every time there is a surprise in store.

The last CPI report showed a small easing in price pressures

US headline inflation for April printed at 3.4% yoy, slightly below the March figure, but remains in the middle of its recent 3.0-3.7% range. The stickiness in CPI prints during 2024 has thrown a spanner in the works for the Fed doves, despite the continued easing seen in the core index that excludes food and energy prices, albeit at a very gradual pace. Potent consumer spending appears to be one of the key reasons for these elevated inflation prints, despite the relatively high Fed rates.

The most recent inflation reports indicate that both food and energy prices have eased considerably over the past few months. However, services, and in particular shelter, continue to generate strong price increases. The April report showed an annual growth of 5.5% in shelter costs, below the 2022 high of an 8.2% increase, but still far above the Fed’s inflation target.

Market looks for almost two rate cuts

The market is acknowledging the stickier inflation as it is currently pricing in only 42bps of easing for 2024 - one full 25bps rate cut and a 68% probability for a second rate move of equal size. Interestingly, the key investment houses are split between September and December for the timing of the first Fed cut.

Until the next set of key US data releases, rate cut expectations could be affected by Fed members’ rhetoric. A minimum of 15 Fed members are scheduled to speak this week, including most of the 2024 voters.

An analysis of almost 30 public appearances by Fed speakers since May 1 reveals an overwhelming support for patience as both the hawks and the doves accept the lack of progress on the inflation front. The recent economic growth moderation has been welcomed but the main message is that more time is needed to measure the domestic demand’s strength, via the retail sales data, and hence evaluate the firms’ ability to keep raising their prices.

Hawks more aggressive; minutes could confirm their stance

Importantly, the hawks have become more concerned lately about the restrictiveness of the current Fed rates forcing Chairman Powell to denounce any thoughts of rate hikes at this juncture. Repeated hawkish commentary this week could prompt a market reaction, although chances for a rate hike are currently perceived as extremely low.

Interestingly, on Wednesday the minutes from the May 1 Fed meeting will be published. This release is slightly out-of-date considering the newsflow since then, but it will be an interesting read to further understand the Fed's reaction function and how high the bar was set for a rate hike.

A true test of both the market’s understanding and the hawks’ determination could come on Thursday with the preliminary PMI manufacturing and services surveys for the month of May. With both the ISM surveys dropping below 50 in April, but their prices paid sub-indicators recording decent jumps, it would be extremely interesting to judge if the current US soft patch has legs or if the hawks could be justified to maintain their recent rhetoric.

Dollar remains dominant despite the recent pullback

The US dollar has been outperforming its main counterparts in 2024. It is currently 1.5% higher against the euro and a massive 10% versus the ailing yen. Despite the aggressive scaling back of Fed rate cut expectations, the US economy remains the strongest one among the developed nations, which along with certain geopolitically-induced risk-off episodes, is keeping the demand strong for the greenback.

Until the June 12 meeting, the numerous Fed speakers, the US labour market data and the June CPI report are bound to keep the market on its toes. Barring a considerable worsening in US data, the dollar could remain supported especially as the ECB is ready to commence its easing spree and the Bank of England could enjoy a rare drop in inflation.

• Fed’s cautious stance drives WTI crude oil lower
• Commodity capped by bearish cross and 80.00 level in daily chart
• Prices consolidate in 4-hour timeframe

Oil prices continued to decrease on Tuesday due to the cautious stance of Fed officials despite the recent softening of inflation. This has raised concerns that US interest rates may remain elevated for an extended period. The prices of Brent crude and WTI futures have both decreased by almost 2% from yesterday, with Brent crude trading at $83.11 per barrel and WTI trading at $78.45 per barrel. Federal Reserve officials are still hesitant to declare that they have successfully controlled inflation. This indicates that they believe it is necessary to maintain a policy of restricting economic activity for some time.

Federal Reserve Vice Chair Philip Jefferson stated on Monday that it is currently premature to determine whether the deceleration in inflation will have a lasting impact. Meanwhile, Vice Chair Michael Barr expressed the view that a more cautious approach to policy implementation requires additional time. Raphael Bostic, the President of the Atlanta Federal Reserve, stated that it will require a significant amount of time for the central bank to have a high level of certainty over the durability of a deceleration in price growth.

Overall, the statements made by the Federal Reserve officials indicated that interest rates are likely to remain elevated for a longer duration than what is anticipated by the financial markets. This has consequences for the oil market, as increased borrowing costs restrict the availability of cash, thus impacting economic growth and the demand for crude oil.

WTI crude oil – 4-hour chart

From a technical perspective, in the 4-hour chart, oil prices are consolidating within a three-week trading range, with upper boundary the 80.10 resistance and lower boundary the 76.60 support.

Currently, the price is moving slightly lower of the 20- and the 50-period simple moving averages (SMAs) with the next support level coming from the 77.70 barricade. Even lower, the 77.25 mark and the lower boundary of the channel at 76.60 could come next, before retreating below the range, testing the three-month low of 76.34 and the 75.60 support, taken from the lows on February 15. A dive towards the latter level could switch the outlook to a strongly bearish one.  

The oscillators are confirming the recent descending movement with the RSI slipping below the neutral threshold of 50 and the stochastic oscillator easing in the oversold area, indicating more losses.

On the other hand, a successful jump above the SMAs could take the commodity towards the upper boundary of the range at 80.10. Surpassing this line, the 80.90 level and more importantly the 200-period SMA at 81.60 could act as strong resistance barriers. The outlook may turn to a more positive one only if there is a rise above the 82.00 round number.

Bigger outlook on oil prices

Turning to the longer-term timeframe and the daily chart, oil prices are still developing above the ascending trend line, which has been drawn from December 13, but it is currently capped by a death crossover within the 20- and the 200-day SMAs around the 80.00 psychological number.

These obstacles may send the market for another challenge with the uptrend line before trying again to jump above the SMAs. A successful attempt above 80.00 could raise the positive scenario for a retest of the 50-day SMA at 81.50. If there’s more upside pressure, it could hit the 84.45 bar.

However, if the bears take the upper hand, the immediate support region could be at 75.80-76.90 before tumbling to 71.80, achieved on February 5.

The technical oscillators are suggesting a bearish retracement, with the RSI pointing down beneath the 50 level and the stochastic posted a negative crossover within its %K and %D lines in the oversold area.

To sum up, WTI crude oil is looking neutral in the 4-hour chart, while in the daily timeframe, it is remaining above the uptrend line. But the obstacle of the 80.00 level may prove to be tough for traders to surpass it anytime soon. 

• USDCAD pivots gently higher but still constrained between trendlines
• A decisive bounce above 1.3745 needed for fresh buying
• Canadian CPI scheduled for release at 12:30 GMT; Fed speakers on the agenda too

USDCAD has been tip-toeing higher since its downward pattern that started after April’s peak stalled near the 1.3588 level last week.

Traders remain skeptical near the 1.3630 barrier and the 50-day SMA, as reflected by the soft price momentum. Interestingly, the 61.8% Fibonacci retracement of the November-December 2023 downleg is in the neighborhood too.

Additionally, the recent upturn in the RSI hasn’t stretched above the 50 neutral mark, and the MACD remains in the negative region, signaling that selling interest hasn’t completely diminished. Yet, the rebound in the stochastic oscillator that took place near the 20 oversold level suggests that an increase towards the 20-day SMA at 1.3668 and the nearby resistance line at 1.3690 cannot be excluded, especially as long as the support trendline from December's low holds firm around 1.3622.

In the bullish scenario, where the price closes above 1.3690, the bulls could gain fresh impetus towards the 1.3740 constraining zone and the 78.6% Fibonacci. The upper band of the 2024 bullish channel is located in the same region. Therefore, a break higher may improve the outlook, prompting a new rally towards the 1.3800-1.3844 level. Additional gains from there might attempt to violate the long-term neutral territory above the 1.3900 number.

On the downside, a step beneath 1.3622 could initially retest last week's low of 1.3588 ahead of the important 1.3530-1.3550 trendline territory. Should the sell-off continue, the bears might next pause within the 1.3450-1.3475 region and near the 38.2% Fibonacci.

To sum up, USDCAD may encounter a challenging session in the short term. For the pair to attract new buyers, it must run sustainably above the 1.3745 bar. Conversely, should the pair fall below 1.3530, traders might engage in new selling activities.

Note that Canada will release its latest CPI report today at 12:30 GMT, while Fed speakers Williams and Bostic are scheduled to speak later in the day.