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Daily Pivots: (S1) 1.2660; (P) 1.2686; (R1) 1.2727; More...

No change in GBP/USD's outlook and intraday bias stays on the upside. Firm break of 1.2708 resistance will extend the rise from 1.2298 to 100% projection of 1.2298 to 1.2633 from 1.2445 at 1.2780. On the downside, below 1.2642 minor support will turn intraday bias neutral again. But further rise will now remain in favor as long as 1.2445 support holds, in case of retreat.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern. Fall from 1.2892 is seen as the third leg which might have completed already. Break of 1.2892 resistance will argue that larger up trend from 1.0351(2022 low) is ready to resume through 1.3141. Meanwhile, break of 1.2298 support will extend the corrective pattern instead.

Daily Pivots: (S1) 1.0844; (P) 1.0861; (R1) 1.0886; More...

EUR/USD is staying in consolidation below 1.0894 and intraday bias stays neutral. Further rally is expected as long as 1.0810 resistance turned support holds. Break of 1.0894 will resume the rise to 1.0980 resistance. Decisive break there will confirm that whole fall from 1.1138 has completed at 1.0601 already.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern. Fall from 1.1138 is seen as the third leg and could have completed. Firm break of 1.1138 will argue that larger up trend from 0.9534 (2022 low) is ready to resume through 1.1274 high. On the downside, break of 1.0601 will extend the corrective pattern instead.

Global financial markets are trading with a risk-on sentiment today, starting from the Asian session and continuing through the European and early US sessions. However, gains in stocks have been relatively limited, partly constrained by recovery in benchmark treasury yields, and partly capped by low trading activity.

In the currency markets, positions have shifted somewhat from earlier in the day. While Kiwi stay as the weakest, Aussie is now the second worst, followed by Yen. Dollar, Swiss Franc, and Sterling are the stronger ones. Canadian Dollar and Euro are positioning in the middle.

In Europe, at the time of writing, FTSE is up 0.06%. DAX is up 0.33%. CAC is up 0.46%. UK 10-year yield is up 0.0334 at 4.165. Germany 10-year yield is up 0.015 at 2.534. Earlier in Asia, Nikkei rose 0.73%. Hong Kong HSI rose 0.42%. China Shanghai SSE rose 0.54%. Singapore Strait Times rose 0.02%. Japan 10-year JGB yield rose 0.0276 at 0.980.

Fed's Barr: Not confident to start easing monetary policy yet

Fed Vice Chair Michael Barr stated in a speech today that while inflation has decreased from its peak of 7.1% to 2.7%, it is "not yet all the way to 2% target. He noted that inflation readings for the first quarter were "disappointing," as highlighted in FOMC's recent statement.

"These results did not provide me with the increased confidence that I was hoping to find to support easing monetary policy by reducing the federal funds rate," Barr noted. He added that Fed's restrictive policy would need "some further time to continue to do its work" in bringing inflation down.

Fed's Bostic: Maybe only one rate cut this year

Atlanta Fed President Raphael Bostic stated in a BloombergTV interview today that it will take time before the Fed is confident that inflation will return to 2%. He reiterated his stance that "nothing has changed" regarding his view that perhaps only one rate cut will be necessary this year.

He noted that inflation data for the first part of the year has been "very bumpy," reflecting a slow but gradual slowdown in economic activity. Bostic mentioned that business leaders report a gradual slowdown in their operations, with pricing power weakening.

"I do think that our new steady state is likely to be higher than what people have known over the last decade — maybe back to where we were in the 1990s and 2000s, but we'll just have to see," Bostic added, suggesting a shift in the long-term inflation outlook compared to recent years.

BoE's Broadbent: Summer rate cut possible

In a speech today, BoE Deputy Governor Ben Broadbent indicated that if current forecasts hold, which suggest that monetary policy will need to become "less restrictive at some point", a rate cut could occur "over the summer".

Broadbent noted that the direct impact of the pandemic and the war on inflation has now diminished. What remains are the "more persistent second-round effects" on domestic inflation stemming from these earlier shocks.

He emphasized the uncertainty surrounding how long these effects will persist. While a symmetrical process might suggest a quick unwinding within the next year, the Committee has consistently judged that the process is likely to be "asymmetric". As stated in recent Monetary Policy Reports, "second-round effects in domestic prices and wages will take longer to unwind than they did to emerge."

ECB's Kazaks: June rate cut likely, future moves data dependent

ECB Governing Council member Martins Kazaks indicated in a Bloomberg Adria interview that the central bank is nearing its 2% inflation target, paving the way for interest rate cuts. However, he emphasized that any reduction in rates should be "cautious" and "gradual," and that the process should not be rushed.

"From today's perspective, it's quite likely June is going to be the time when we start the rate cuts," Kazaks noted. However, he stressed the importance of relying on incoming data for decisions beyond June, stating, "After June, going forward, let's see again the data."

Kazaks highlighted the ECB's approach of making decisions on a meeting-to-meeting basis, based on the latest economic data. He described this strategy as "an appropriate one so far," given the high levels of uncertainty.

China holds rates steady amidst property sector support measures

China kept its benchmark lending rates unchanged at today's monthly fixing, aligning with market expectations. One-year Loan Prime Rate remained at 3.45%, while Five-year LPR stayed at 3.95%. This decision follows the People's Bank of China's move last week to maintain a key policy rate at 2.50% while rolling over maturing medium-term lending facilities.

Additionally, China announced on Friday a series of measures to stabilize its crisis-hit property sector, including the central bank facilitating CNY 1T in extra funding and easing mortgage rules. This strong supportive policy rollout has increased the likelihood of further monetary easing in the coming months.

Some economists now expect one or two cuts to LPR later this year, alongside a reduction in the reserve requirement ratio. These anticipated measures aim to bolster the property sector and sustain economic growth amid ongoing challenges.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0844; (P) 1.0861; (R1) 1.0886; More...

EUR/USD is staying in consolidation below 1.0894 and intraday bias stays neutral. Further rally is expected as long as 1.0810 resistance turned support holds. Break of 1.0894 will resume the rise to 1.0980 resistance. Decisive break there will confirm that whole fall from 1.1138 has completed at 1.0601 already.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern. Fall from 1.1138 is seen as the third leg and could have completed. Firm break of 1.1138 will argue that larger up trend from 0.9534 (2022 low) is ready to resume through 1.1274 high. On the downside, break of 1.0601 will extend the corrective pattern instead.

Economic Indicators Update

Fed Vice Chair Michael Barr stated in a speech today that while inflation has decreased from its peak of 7.1% to 2.7%, it is "not yet all the way to 2% target. He noted that inflation readings for the first quarter were "disappointing," as highlighted in FOMC's recent statement.

"These results did not provide me with the increased confidence that I was hoping to find to support easing monetary policy by reducing the federal funds rate," Barr noted.
He added that Fed's restrictive policy would need "some further time to continue to do its work" in bringing inflation down.

Atlanta Fed President Raphael Bostic stated in a BloombergTV interview today that it will take time before the Fed is confident that inflation will return to 2%. He reiterated his stance that "nothing has changed" regarding his view that perhaps only one rate cut will be necessary this year.

He noted that inflation data for the first part of the year has been "very bumpy," reflecting a slow but gradual slowdown in economic activity. Bostic mentioned that business leaders report a gradual slowdown in their operations, with pricing power weakening.

"I do think that our new steady state is likely to be higher than what people have known over the last decade — maybe back to where we were in the 1990s and 2000s, but we'll just have to see," Bostic added, suggesting a shift in the long-term inflation outlook compared to recent years.

• Investors assign 60% chance for a June rate cut by the BoE
• UK CPI data to reveal whether inflation hit the BoE’s target
• But PMIs imply some upside risks
• The data is scheduled for Wednesday at 06:00 GMT

BoE appears more dovish than expected

While a few weeks ago investors were convinced that the European Central Bank (ECB) may be the first major central bank to start lowering interest rates, the latest developments seem to have somewhat mixed up the picture instead of clearing it. Yes, the ECB is still largely anticipated to deliver its first 25bps rate cut in June, but now there is a decent 60% probability for the Bank of England to do so as well.

Market participants have been ramping up their rate-cut bets after the central bank appeared more dovish than expected at its latest gathering, leaving interest rates unchanged but with two members voting for a 25bps reduction. In the statement accompanying the decision there was an addition saying that they will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding. Combined with the downward revisions in the inflation projections, this suggested that officials believe inflation will continue easing towards their objective.

Did inflation hit 2% in April?

However, just the day after the decision, data revealed that the UK economy rebounded more than expected in Q1, after slipping into recession during the second half of 2023, while the following week, the employment report pointed to hotter-than-expected wage growth in March, raising some concerns on whether inflation could hit the BoE’s 2% target any time soon.

With that in mind, next week’s CPI numbers for April may attract special attention, especially with the BoE itself expecting the data to show that the headline CPI has already fallen near its objective of 2% in April, largely due to a drop in regulated energy prices. That said, the Bank also forecasted that inflation would rebound again later in 2024, although it revised down its projections from last time.

PMIs point to some upside risks

According to the PMIs for the month, prices charged inflation across the service sector, which accounts for around 80% of total UK GDP, eased to a three-year low, suggesting that indeed inflation may have continued slowing at a fast pace. Nonetheless, the manufacturing survey revealed that cost pressures are growing and feeding through to higher selling prices at the factory gate, which means that goods’ prices may not be cooling as fast as prices in the service sector.

This implies that there is the risk of the headline rate not falling close enough to the BoE’s target and indeed, in the PMI reports it was noted that the overall output charge inflation eased slightly since March. Thus, if the headline rate does not fall to 2% as analysts are also projecting, and the core CPI proves to be somewhat stickier than expected, the pound may gain ground as the probability for a rate cut in June could decline somewhat.

PMIs and retail sales also in focus

Even if UK inflation drops to 2% as projected, a set of better-than-expected PMIs for May on Thursday, could still allow a question mark hanging over a June rate cut. The UK economy grew more than anticipated in Q1, and should the PMI suggest that it continues to perform well, investors may see less need for a rate reduction in June and thereby erase a portion of Wednesday’s CPI losses. After all, ahead of the June gathering, traders will have to examine and digest another CPI report. Friday’s retail sales may also be monitored for gauging the health of the economy.

Will pound/dollar break above 1.2800 soon?

From a technical standpoint, pound/dollar has been in a recovery mode since April 22. However, for the medium-term outlook to be considered overly bullish, the pair may need to overcome the key barrier of 1.2800, which stopped the bulls from drifting north on multiple occasions in the recent past.

Such a break may encourage advances towards the high of July 27 at 1.2995, the break of which could curry extensions towards the high of July 14 at around 1.3145. For the picture to darken, a drop below the 1.2500 zone may be needed.

• AUDCAD is higher again today above 0.9100
• RSI and MACD are holding in their positive regions

AUDCAD has been in an upward movement since February 8, posting a 14-month high of 0.9125 earlier in the day.

Entering the 0.9100 area has been a struggle over the past two days, and there might be another tough obstacle around the multi-month high, but the bulls may not give up on the battle yet according to the technical indicators. Specifically, the RSI is standing marginally beneath the 70 level and the MACD is extending the positive momentum above its trigger and zero lines, both keeping the bias on the positive side for now.

In the event the pair re-activates its uptrend above today’s top, the next target will be the 0.9230 barrier, taken from March’s 2023 high.

On the downside, the 23.6% Fibonacci retracement level of the up leg from 0.8725 to 0.9125 at 0.9030 has been the first support level to have in mind. Hence, a step beneath that line at 0.9005, which overlaps with the 20-day simple moving average (SMA) might produce fresh negative volatility.

Overall, AUDCAD is sustaining an upward trend in the daily picture. To attract new buyers, the pair will need to pierce through the 0.9125 bar.

Market picture

Crypto market capitalisation rose 5.2% over the past seven days to $2.41 trillion. Over the weekend, it reached $2.44 trillion, its highest level in nearly four weeks.

Bitcoin is treading near local highs, remaining just below $67K. That’s a gain of 8.4% in seven days and a retest of the previous peak area in late April. Despite the burgeoning risk appetite in global markets, demand for Bitcoin, Ethereum and many altcoins is rather subdued. However, BTCUSD remains firmly above the 50-day moving average, indicating an upward trend.

Investors are more optimistic about Solana, whose price rose to its highest since early April at $177 (+1.5% in 24h). It may well reach the March highs before Bitcoin, acting as a more sensitive indicator of risk appetite in cryptocurrencies.

News background

According to Arbelos Markets, the correlation between bitcoin and the Nasdaq-100 index has returned to its highest levels since late summer 2023. Investors now view BTC as an asset identical to tech stocks.

According to JPMorgan, the cost of mining Bitcoin has reached $45,000, up $3,000 from its previous estimate. The bank kept its medium-term forecast for BTC at $42,000 due to limited inflows into spot bitcoin-ETFs.

CoinGecko compared blockchains in terms of speed records. The fastest network was Solana—on 6 April, the daily average number of transactions per second (TPS) reached a record high of 1,504 against the backdrop of the meme-coin boom. This makes Solana 46 times faster than Ethereum and more than five times faster than Polygon, which has the highest TPS among scaling solutions. Sui, BNB Chain, Polygon, and TON are next in line.

MN Trading founder Michael van de Poppe sold all bitcoins and bet on altcoins but promised to return to BTC later. The community noted the riskiness of this strategy; some believe the time for altcoins is not yet ripe.

Venezuela has banned cryptocurrency mining to stabilise the national energy grid. Authorities say the country’s energy security is more important than the digital asset mining industry.

According to BitRiver, miners from the Russian Federation mined 54,000 BTC ($3.5bn at current exchange rates) last year. At the end of the year, the Russian Federation ranked second in terms of cryptocurrency mining, second only to the United States.

• The Japanese Government Bond (JGB) market is now anticipating a potential Q2 recovery in the Japanese economy as the 2-year and 10-year JGB yields have rallied to more than a decade high.
• The 10-year and 20-year yield premiums of US Treasuries over JGBs have shrunk in the past two weeks which in turn supports a potential bearish reversal in USD/JPY.
• However, technical analysis suggests an ongoing potential medium-term uptrend in USD/JPY.
• In the short term, watch these two key levels of 157.00 and 155.30 on the USD/JPY

Since our last publication, the price actions of the USD/JPY have staged a decline of -5.2% (837 pips) to print a recent low of 151.85 on 3 May after it hit its long-term pivotal resistance of 159.30/160.20 on 29 April.

The swift decline of USD/JPY has been attributed to a yet-to-be-confirmed Bank of Japan (BoJ) direct FX intervention on 29 April and 2 May under the instructions of the Ministry of Finance (MoF) to sell the US dollar against the yen.

Since its 3 May low of 151.85, the USD/JPY has traded sideways around a flat 20-day moving average as both bulls and bears are bombarded by conflictive factors.

Fundamentals suggest a potential revival of JPY bulls

Fig 1: JGB yields medium-term & major trends as of 20 May 2024 (Source: TradingView, click to enlarge chart)

Fig 2: 2-YR & 10-YR US Treasury/JGB yield spread medium-term & major trends as of 20 May 2024 (Source: TradingView, click to enlarge chart)

Despite the weaker-than-expected preliminary Japan Q1 2024 GDP data released last Thursday, 16 May that came in at -0.5% q/q, below consensus of -0.4% q/q. The Japanese Government Bond (JGB) market has looked past this set of lagging data as both the short and long-end of the JGB curve traded higher.

The 30-year JGB yield is considered a gauge for long-term growth and inflationary trends have rallied above its prior week level to 2.09% at this time of the writing, its highest level since April 2011.

Also, the 2-year JGB yield that is more sensitive to anticipating BoJ’s monetary policy stance on its short-term overnight interest rate has inched higher concurrently to 0.35%, its highest level since June 2009 (see Fig1).

The current bullish backdrop on both the 2-year and 10-year JGB yields suggests that market participants in the JGB market have likely shrugged off the weak Q1 GDP growth data and expect the Japanese economy to potentially recover in Q2 due to the recent Shunto wage rise and tax cuts that should lift consumption spending for households.

Interestingly, the recent pace of increase in JGB yields seen in the past two weeks is much steeper than yields of the US Treasury notes. The premium on the yield spread between 10-year US Treasury/JGB and 2-year US Treasury/JGB have narrowed since the bearish breakdown below their former key medium-term supports at 3.61% and 4.57% respectively (see Fig 2).

The narrowing of the 10-year yield spread premium between US Treasury notes over JGBs has made US Treasury notes a less attractive fixed-income investment for Japanese insurance companies that in turn may reduce their US Treasuries exposure and overweight their fixed-income portfolio towards JGBs due to higher odds that the long-term JGBs yields are likely to trend higher.

These potential upcoming fixed-income portfolio adjustments from Japanese insurance companies may offer some support to stall the major yen’s weakness against the US dollar.

Medium-term momentum factor suggests potential JPY weakness

Fig 3: USD/JPY medium-term & major trends as of 20 May 2024 (Source: TradingView, click to enlarge chart)

Fig 4: USD/JPY short-term trend as of 20 May 2024 (Source: TradingView, click to enlarge chart)

Based on the lens of technical analysis, the medium-term uptrend phase of the USD/JPY in place since the 28 December 2023 low of 140.25 remains intact as its price actions continued to oscillate within an ascending channel (see Fig 3).

In addition, its daily RSI momentum indicator is still being supported by a parallel ascending trendline at the 50 level which suggests no clear signs of bearish momentum at this juncture.

Short-term key technical elements are mixed as seen on the 1-hour chart of USD/JPY where the hourly RSI momentum indicator has printed a series of “lower highs” (see Fig 4).

Neutral between 157.00 and 155.30. Only a clearance above 157.00 may see the next near-term resistance coming in at 158.00 and above it exposes the 159.60/160.30 long-term pivotal resistance in the first step.

On the other hand, a break below 155.30 may see a slide towards the next near-term supports at 154.30 and 153.30 (also the upward-sloping 50-day moving average).

• The Australian dollar is unchanged at the time of writing, trading at 0.6692 in the European session.
• There are no economic releases out of the US or Australia today, which should translate into a quiet day for AUD/USD.

The Aussie is coming off an excellent week, gaining 1.36% and hitting its highest level since January. In the month of May, AUD/USD has surged 3.4%.

Tuesday will be busier, with the Reserve Bank of Australia releasing the minutes of the policy meeting earlier this month. At that meeting, there were no surprises as the RBA held the cash rate at 4.35% for a fourth straight time.

Notably, the central bank discussed the possibility of a rate hike at the meeting, which was not the case at the March meeting. This was likely a response to first-quarter CPI, which was slightly higher than expected. CPI fell from 4.1% to 3.6%, missing the forecast of 3.5%. Service inflation remains sticky, which means that CPI is expected to continue to ease, but slowly.

RBA policy makers are concerned that the path to the 2% inflation target will be bumpy and are hesitant to start lowering rates until they see evidence of sustainable price stability. The fact that a rate hike is on the table, albeit an unlikely scenario, indicates that the RBA remains cautious and somewhat hawkish, and a rate cut will have to wait until inflation shows a substantial decline.

Australia will also release Westpac Consumer Sentiment on Tuesday. The index has declined two straight times and remains in negative territory as consumers remain surly about high interest rates and the high cost of living. The May release is expected to show an improvement, with a market estimate of a 0.9% gain.

AUD/USD Technical

• AUD/USD has support at 0.6681 and 0.6662
• 0.6714 and 0.6733 are the next resistance lines