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Key Highlights

• USD/JPY tested the 153.50 support and recovered losses.
• A key bearish trend line is forming with resistance at 156.00 on the 4-hour chart.
• EUR/USD gained pace for a move above the 1.0800 resistance.
• Bitcoin climbed higher and tested the $66,500 resistance zone.

USD/JPY Technical Analysis

The US Dollar started a sharp decline from the 156.80 region against the Japanese Yen. USD/JPY tested the 153.50 support and recently recovered losses.

Looking at the 4-hour chart, the pair traded as low as 153.58 before it started an upside correction. There was a move above the 154.50 and 154.80 resistance levels. The pair cleared the 50% Fib retracement level of the downward move from the 156.78 swing high to the 153.59 low.

It settled above the 200 simple moving average (green, 4-hour) and tested the 100 simple moving average (red, 4-hour) and tested.

The first major resistance is near 156.00. There is also a key bearish trend line forming with resistance at 156.00 on the same chart. It coincides with the 76.4% Fib retracement level of the downward move from the 156.78 swing high to the 153.59 low.

A clear move above the 156.00 resistance might send it toward the 156.80 level. Any more gains might call for a move toward the 158.00 level in the near term.

Conversely, USD/JPY might start another decline. Immediate support is near the 154.80 level. The first major support is near the 154.35 level. The next major support is at 153.50. If there is a downside break below the 153.50 support, the pair might test 152.00.

Looking at EUR/USD, the pair climbed above the 1.0800 and 1.0850 resistance levels before the bears appeared at 1.0900.

Economic Releases

• Euro Zone CPI for April 2024 (YoY) - Forecast +2.4%, versus +2.4% previous.
• Euro Zone CPI for April 2024 (MoM) - Forecast +0.6%, versus +0.6% previous.

Some Fed officials have emphasized overnight the need for a extended period of restrictive monetary policy as they seek clearer signs of sustainable inflation reduction.

At an event, Cleveland Fed President Loretta Mester stated that incoming economic data suggests it will "take longer" to gain the confidence needed to start lowering interest rates. Mester emphasized that "holding our restrictive stance for longer is prudent" as Fed seeks clarity on the inflation path.

Atlanta Fed President Raphael Bostic, speaking at another event, acknowledged that the April inflation report provided some important insights, particularly noting a slowed rise in shelter costs. However, he cautioned that "one data point is not a trend," highlighting the importance of watching the May and June data to ensure figures don't reverse.

In a CNBC interview, Richmond Fed President Thomas Barkin reiterated the need for patience, noting that achieving 2% inflation sustainably "is going to take a little bit more time." Barkin pointed out that there is still significant movement on the services side of the economy.

Key themes: US equities finished lower, pulling back from a rally that briefly drove the Dow Jones to a record high.

A number of hawkish Fed speakers suggested that the Fed is in no rush to cut interest rates. This saw US bond yields increase. The US dollar also advanced.

The Aussie finished lower. The larger than expected increase in the unemployment rate triggered a sell off which continued in overnight trade.

Share markets: US equities finished lower, pulling back from a rally that briefly drove the Dow Jones over 40,000 for the first time. The Dow Jones closed just under this historic high, closing 0.1% lower.

The S&P 500 closed 0.2% lower, while the tech-heavy Nasdaq slipped 0.3%.

The ASX 200 was 1.7% higher. The higher-than-expected increase in unemployment spurred hopes for rate cuts this year driving the market higher. Financial stocks led the market higher, with ten of eleven sectors finishing in the green.

Interest rates: US bond yields were higher. This was driven by some resilence in the economic data release overnight and hawkish Fed speakers.

The 2-year bond yield increased by 7 basis points to 4.80%. The 10-year treasury yield increased by 4 basis points to 4.38%.

Interest-rate markets continue to price a full rate cut by November. For 2024, the market is pricing in around 45 basis points of cuts – slightly less than two 25-basis-point moves.

Australian yields were also higher. The 3-year government bond yield (futures) was up by 2 basis point to 3.85%. The 10-year government bond yield (futures) was up by 4 basis point to 4.23%.

Foreign exchange: The US dollar advanced ,supported by higher yields. The DXY index fell to a low of 104.08, before receiving yield support and reaching a high of 104.63. The DXY Index is trading at around 104.50.

The Aussie fell sharply following the labour force release and continued to slide in overnight trade, reaching a low of 0.6654. The pair is now trading at around 0.6677.

Commodities: Commodities were generally higher. Copper, oil, coal, and iron ore were higher. Gold was lower.

The West Texas Intermediate (WTI) futures is currently sitting at around US$79.37 per barrel.

Australia: Employment rose by +38.5k (0.3%) in April, stronger than Westpac’s forecast for +20k and the market consensus for +23.7k. This follows a volatile opening quarter, with gains ranging from +11.6k in January, to +118.2k in February and –5.9k in March.

Labour force participation was a little stronger than expected, with the participation rate moving higher from 66.6% in March to 66.7% in April. That implies an appreciable lift in the size of the labour force, up +68.8k. Given the +38.5k lift in employment, that means there was a rise in the number of unemployed persons (+30.3k), which saw the unemployment rate move from 3.9% to 4.1% (4.05% to two decimal places).

The total number of hours worked has been soft over the last year, notwithstanding the increase in the number of people employed. This continued in April, with the number of hours worked remaining unchanged compared with March. In annual terms, hours worked declined by 0.1%. This was the first annual decline since the pandemic (February 2021).

Labour demand has certainly cooled over the past year, but it has only translated into a gradual softening in employment growth. Easing labour demand appeared more clearly in average hours worked over the second half of last year. We continue to anticipate that conditions will gradually soften over the course of this year, as employment growth continues to soften, and the unemployment rate ticks up to a quarter-average of 4.3% by year-end.

Japan: Preliminary data showed economic activity declined 0.5% over the March quarter. This was worse than the decline of 0.3% the market was expecting. Activity over the December quarter 2023 was revised lower, to essentially a flat outcome compared with growth of 0.1% initially estimated.  Private consumption fell for the fourth straight quarter in March, as consumers continued to be squeezed by cost-of-living pressures. Capital expenditure also fell due to the reduction of motor vehicle production. Net exports were also a drag on activity, with exports falling by more than imports.

Industrial production in Japan increased by 4.4% month-over-month in March 2024, compared with flash data of a 3.8% rise and after a 0.6% fall in the prior month.

Industrial production increased 4.4% over the month of March, higher than the preliminary estimate of 3.8%. This follows declines of 0.5% in February and 6.7% in January.

United States: Initial jobless claims fell to 222k over the week ending 11 May. This was a higher than the 220k the market was expecting. Continuing claims rose to 1.794m, higher than the 1.780m the market was expecting.

Housing starts rose 5.7% to an annualized rate of 1.36m in April. This was slightly below the 1.42m starts the market was expecting.

Building permits fell by 3% to an annual rate of 1.44m in April. This was the lowest level since December 2022 and below market expectations of 1.48m.

The Philadelphia Fed Manufacturing Index fell to 4.5 index points in May, from 15.5 points in April. This was well below the 8.0 points the market was expecting.  The index for new orders and shipments fell sharply. The price indices remain below their long-run averages. 7.8 p (est. 7.8, prior 15.5). Industrial production was flat (est. +0.1%, prior revised from +0.4% to +0.1%). Import prices rose 0.9%m/m and 1.1%y/y (prior 0.6%m/m and 0.4%y/y).

Industrial production was flat in April, following a downwardly revised 0.1% (from 0.4%) increase in March. This was lower than the 0.1% gain expected by the market. Manufacturing output, which makes up around 80% of total production, fell 0.3% over the month of April.

Import prices rose 0.9% in April, accelerating from an upwardly revised 0.6% gain in March. Prices for fuel imports advanced by 2.4%. Export prices rose 0.5% in April, accelerating from the downwardly revised 0.1% increase in March. It was the fourth consecutive increase in export prices, driven by a 0.7% jump in non-agricultural exports.

Several Fed speakers indicated that policy settings were right for the time being, given the economy continues to hold up well and the labour market remains resilient.

Both Loretta Mester (Cleveland Fed President) and John Williams (New York Fed President) believe policy is in a “good place” with Mester stating “incoming economic information indicates that it will take longer to gain that confidence. Holding our restrictive stance for longer is prudent at this point as we gain clarity about the path of inflation.”

Thomas Barkin (Richmond Fed President) said “To get to 2% sustainably in the right kind of way, I just think it’s going to take a little bit more time”.

• USDCHF reversed from round support level 0.9000
• Likely to rise to resistance level 0.9100

USDCHF currency pair recently reversed up from the round support level 0.9000 (which stopped the previous corrections iv, 4 ii, 1).

The support level 0.90000 was strengthened by the lower daily Bollinger Band and by the 50% Fibonacci correction of the previous upward impulse from March.

Given the strong daily uptrend, USDCHF currency pair can be expected to rise further to the next resistance level 0.9100, top of the previous waves a, 2.

Markets

Since the May 1 Fed decision/communication dominos fell in place for markets to embrace a correction on the April higher-for-long rally in US (and broader) yields. Despite US inflation holding sticky, Fed Chair Powell ‘reassured’ markets that policy was tight enough. Slow progress in inflation only caused to Fed to delay a first rate cut. A rate hike remains highly unlikely. Most activity data (payrolls, retail sales) and sentiment indicators (ISM’s, Michigan consumer confidence, Empire manufacturing) printed softer than expected post-FOMC, suggesting no need for the Fed to slow demand even further. Indicators of inflation expectations admittedly showed no one-on-one link between a (presumed) slowdown in activity and a further deceleration in inflation. Still markets were happy to read some further softening in prices pressures in yesterday’s April CPI report, even as it was close to expectations. After yesterday’s additional softening, the market correction finally reached technical and ‘logical’ barriers, suggesting some consolidation. The US 2-y yield tested the 4.7% area, starting point of the yields’ ascent post the March US CPI release and revisited after the payrolls. After the recent correction, it probably won’t be that easy for the 2-y yield to decline aggressively further with markets again fully discounting a first Fed rate cut in September, with additional easing also priced in toward the end of the year and in 2025 (4% end next year?). The 10-y yield is at risk of closing the week below 4.37% (38% retracement rise since late December). Today’s US data were mixed. Jobless claims (222k) remained slightly higher than what we got used to up until recently. Housing starts and building permits were below consensus and the Philly Fed business outlook also declined more than hoped for. Admittedly, US import and export prices rebounded more than expected. US bond markets for now didn’t draw any big directional conclusion. The US yield curve inverts slightly with the 2-y adding 5.5 bps and the 30-y little changed . In a Reuters interview, NY Fed president Williams sees the economy moving to a better balance, but it’s too soon to cut rates based on these data. Several other Fed policy makers will speak later today. German yields are gaining modestly (1.5-3.5 bps). Equities are taking a breather after nearing (Eurostoxx 50) or touching (US indices) peak levels yesterday. (EuroStoxx 50 -0.4%, S&P 500 +0.1% ). The dollar shows signs of bottoming. DXY rebounds to 104.50 (104.11 this morning). EUR/USD’s test of the 1.0885/1.0895 area is rejected (1.0865). Reprieve for the yen from the broader USD correction again proved short-lived. USD/JPY easily rebounds to 155.4 (153.6 this morning).

News & Views

Norway’s economy grew for a fourth quarter in a row in 2024Q1. Norwegian mainland GDP (ex-energy) rose 0.2% q/q following an upwardly revised 0.3% in 2023Q4. While topping the Norges Bank’s projection for a stagnation, some details take away some shine. Household consumption, for one, dropped 0.7%. A steep 2.2% drop in goods consumption was only partially offset by increased services spending (0.2%). Gross fixed capital formation fell sharply, also outside of housing, Norway Statistics noted, adding that the numbers can be volatile. Government consumption rose 0.5% while a sharper uptick in imports (1%) than in exports (0.4%) meant a negative contribution from net exports. Either way, the economy keeps humming along and seems to vindicate the Norges Bank at the May meeting. It then said that “The data so far could suggest that a tight monetary policy stance may be needed for somewhat longer [beyond autumn] than we envisaged in March”, more so against the backdrop inflation still stays well above the 2% target. The krone does lose some marginal ground after hitting a speed bump around EUR/NOK 11.6 in the previous days.

Polish core inflation eased as expected from 4.6% to 4.1% in April in what could be the last base effect driven drop for months to come. Monthly dynamics showcase ongoing strong price pressures. Depending on the gauge, core prices rose between 0.7 and 1.2% m/m, the fastest pace in about a year. These kind of numbers and the expected core CPI trajectory going forward are unlikely to sway already hawkish NBP policymakers towards a rate cut anytime soon. Most of them consider end this year as the earliest possible timing with the beginning of 2025 the more probably option. The Polish zloty as a result continues to trade strong with EUR/PLN hovering near multiyear lows around 4.26.

Graphs

EUR/PLN: zloty holding near strongest levels since early 2020 as sticky inflation suggests persistent interest rate support.

US 2-y yield holding above 4.7% support area as quite some Fed easing is already discounted after the recent market easing.

EUR/NOK: NOK recently profited from global risk rally. Decent data suggest NB won’t be in a hurry to cut rates anytime soon.

Oil (Brent) tries to avoid a break lower as markets still ponder the demand outlook.

The euro has posted slight losses on Thursday. EUR/USD is down 0.20%, trading at 1.0860 in the North American session at the time of writing.

ECB warns of risks to financial stability

The ECB’s Financial Stability Review expressed concern that financial stability could be affected by the possibility of “adverse economic and financial surprises”. Geopolitical tensions such as in Ukraine and the Middle East had the potential to trigger large market reactions to negative news and the report warned that elections in the US and the European Union added more uncertainty. Still, the report found that overall threats to financial stability in the EU had lessened compared to the previous report six months ago.

The eurozone is showing signs of recovery and that has prompted the ECB to signal that it plans to lower interest rates next month, although it hasn’t provided any hints about rate plans after June.

US CPI drops to 3.4%, US dollar slips

A drop in April CPI on Wednesday reversed a trend of inflation moving higher and raised expectations of a Fed rate cut. The stock market responded with sharp gains while the US dollar was broadly lower and fell 0.54% against the euro on Wednesday.

The markets have priced in a September rate cut at 74% and a rate cut before the end of the year at 94%, according to the CME FedWatch tool.

Overlooked by all the attention to the inflation report, US retail sales fell sharply to 3% y/y in April, down from a revised 3.8% in March. Monthly, retail sales were flat, compared to a revised 0.6% in March. This points to consumers cutting down on spending due to high interest rates and could be a sign that the strong US economy is cooling down.

EUR/USD Technical

• EUR/USD is testing support at 1.0861. Below, there is support at 1.0836
• There is resistance at 1.0909 and 1.0934

• Gold remains bullish in near term
• RSI moves horizontally below 70 level

Gold prices recorded their second session of losses in the 4-hour chart after a failed attempt to break significantly above the 2,400 round level. Chances for a reversal are increasing as the RSI is pointing south after the climb in the overbought region, while the MACD is weakening its momentum above its trigger and zero lines.

Another step lower may reach a key support at 2,378, where the price stopped last Friday. Should this prove a weak obstacle, the selling could pick up speed until the 2,352 bottom, where any violation would bring more pressure to the market with the price probably stretching further down to test the 50- and the 200-period simple moving averages (SMAs) at 2,341 and 2,332 respectively.

Alternatively, in case of a rebound, immediate resistance could come from 2,400, before the focus shifts to the all-time of 2,431.48 again, which if surpassed, would confirm the long-term ascending tendency.

In the medium-term picture the price is still increasingly bullish as long as it holds well above the 200-day SMA and near the upper Bollinger band in the 4-hour chart, which is still rising.

The Japanese yen climbed as much as 0.85% earlier on Thursday but has pared most of those gains. USD/JPY is trading at 155.38, up 0.31% in the European session.

Japan’s economy contracted in the first quarter. GDP declined by 2% y/y in the first quarter, following a revised 0% reading in Q4 2023. This was weaker than the market estimate of -15.%. On a quarterly basis, GDP declined by 0.5%, down from a revised 0% reading and just above the market estimate of -0.4%.

The disappointing GDP release was a result of weak private consumption, which declined for a fourth consecutive quarter. Consumers and companies cut spending due to high inflation and sluggish wage growth. As well, exports decreased in the first quarter, as global demand remains weak.

Yen surges as US inflation eases to 3.4%

After several US inflation reports which pointed to higher inflation, April CPI reversed directions and dropped from 3.5% to 3.4%. The decline in inflation, especially in the core rate, raised expectations of a Fed rate cut and sent the yen surging 0.98% in the aftermath of the inflation report. The markets have priced in a September rate cut at 70% and a rate cut before the end of the year at 92%, according to the CME FedWatch tool.

Overlooked by all the attention to the inflation report, US retail sales fell to 3% y/y in April, down sharply from a revised 3.8% in March. Monthly, retail sales were flat, compared to a revised 0.6% in March. This points to consumers cutting down on spending due to high interest rates and high inflation.

USD/JPY Technical

• USD/JPY pushed below support at 154.21 earlier and put pressure on support at 153.51
• There is resistance at 155.38 and 156.08

Daily Pivots: (S1) 1.0783; (P) 1.0804; (R1) 1.0842; More...

Intraday bias in EUR/USD remains on the upside for the moment. Current rise from 1.0601 is in progress for 1.0980 resistance. Decisive break there will confirm that whole fall from 1.1138 has completed already. On the downside, below 1.0833 minor support will turn intraday bias neutral first. But further rally is expected as long as 1.0765 support holds, in case of retreat.

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.