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Daily Pivots: (S1) 1.2538; (P) 1.2565; (R1) 1.2621; More...

Intraday bias in GBP/USD stays neutral as range trading continues. Further rise is mildly in favor with 1.2445 support intact. On the upside, break of 1.2633 will resume the rally from 1.2298 to 1.2708 resistance next. However, firm break of 1.2445 will indicate that this rebound has completed, and revive near term bearishness. Retest of 1.2298 should then be seen in this case.

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) 0.9047; (P) 0.9074; (R1) 0.9094; More....

No change in USD/CHF's outlook. Intraday bias stays neutral and further decline is in favor as long as 55 4H EMA (now at 0.9080) holds. On the downside, break of 0.9005 and sustained trading below 55 D EMA (now at 0.9009) will bring deeper fall to 38.2% retracement of 0.8332 to 0.9223 at 0.8883. However, firm break of 55 4H EMA will suggest that the pull back from 0.9223 has completed, and bring stronger rebound to retest 0.9223 high.

In the bigger picture, price actions from 0.8332 medium term bottom are tentatively seen as developing into a corrective pattern to the down trend from 1.0146 (2022 high). Rejection by 0.9243 resistance, followed by sustained break of 38.2% retracement of 0.8332 to 0.9223 at 0.8883 will strengthen this case, and maintain medium term bearishness. However, decisive break of 0.9243 will argue that the trend has already reversed and turn medium term outlook bullish for 1.0146.

Daily Pivots: (S1) 156.09; (P) 156.43; (R1) 156.78; More...

USD/JPY continues to lose upside momentum as seen in 4H MACD. But further rise could still be seen with 155.25 support intact. Rebound from 151.86, as the second leg of the corrective pattern from 160.20, is in progress for 157.98 resistance. On the downside, break of 155.25 minor support will suggest that the third leg has started, and turn bias back to the downside for 151.86 support.

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.

Daily Pivots: (S1) 1.3625; (P) 1.3658; (R1) 1.3684; More...

USD/CAD is staying in range above 1.3608 and intraday bias remains neutral. On the upside, break of 1.3761 resistance will argue that correction from 1.3845 has already completed. Intraday bias will be back to the upside to resume larger rally from 1.3176 through 1.3845. However, sustained trading below 55 D EMA (now at 1.3631) will argue that whole rise from 1.3176 has completed already, and bring deeper fall to 1.3477 support next.

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.

Daily Pivots: (S1) 0.6595; (P) 0.6612; (R1) 0.6643; More...

AUD/USD's breach of 0.6645 resistance suggests that rise from 0.6361 is resuming. Intraday bias is now on the upside for 61.8% projection of 0.6464 to 0.6645 from 0.6578 at 0.6690. Firm break there will target 100% projection at 0.6759. For now, further rally will remain in favor as long as 0.6578 support holds, in case of retreat.

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 still be in progress. Overall, sideway trading could continue in range of 0.6169/7156 for some more time. But as long as 0.7156 holds, an eventual downside breakout would be mildly in favor.

Dollar remains broadly under pressure during Asian session as markets await the highly anticipated US CPI data. Expectations of Fed rate cuts have been building again since non-farm payroll data indicated a loosening job market. However, for the Fed to consider monetary easing, it is crucial that inflation shows signs of following suit with clear decline. Fed Chair Jerome Powell, appearing unperturbed by the stronger-than-expected PPI readings released yesterday, described the data as "mixed" rather than "hot." Additionally, he reiterated that the next move in interest rates is unlikely to be a hike. Today's CPI data will be pivotal in shaping both market expectations and Fed's future policy direction.

Meanwhile, Australian Dollar and New Zealand Dollar are currently the strongest performers of the day. Aussie, in particular, is buoyed by reports that China is considering a plan for local governments to purchase millions of unsold homes to alleviate the ongoing property crisis. This development has provided significant support to the Aussie, overshadowing the news that US has unveiled a bundle of tariff increases on various Chinese imports, including electric vehicles, computer chips, and medical products. The market largely shrugged off these tariffs, focusing instead on the potential boost from China's housing plan.

Elsewhere in the currency markets, Canadian Dollar is the third strongest for now. On the other hand, British Pound is the second weakest currency after Dollar, followed by Euro. Japanese Yen and Swiss Franc are positioned in the middle of the pack.

Technically, NASDAQ closed record 16511.17 overnight, despite missing intraday record of 16538.86. For now, another fall is still expected before corrective pattern from 16538.86 completes. Break of 16226.06 support will argue that this third leg has started back towards 38.2% retracement of 12543.85 to 16538.86 at 15012.76. However, decisive break of 16538.86 will invalidate this view and confirm larger up trend resumption. Today's developments should provide more clarity.

In Asia, at the time of writing, Nikkei is up 0.11%. Hong Kong is on holiday. China Shanghai SSE is down -0.20%. Singapore Strait Times is down -0.62%. Japan 10-year JGB yield is down -0.006 at 0.960. Overnight, DOW rose 0.32%. S&P 500 rose 0.48%. NASDAQ rose 0.75%. 10-year yield fell -0.036 to 4.445.

Fed's Mester not eager to consider rate hikes

Cleveland Fed President Loretta Mester, in an interview with WSJ, expressed a cautious stance on interest rate hikes, stating, "I am not eager to consider interest rate hikes." Mester emphasized that Fed is in a "really good place" to study the economy before deciding on the next steps for interest rates.

Mester highlighted that it's too early to determine whether the disinflation has stalled or if inflation is set to reverse. She noted that there are clear indications that the real side of the economy is "moderating", which is contributing to a better balance within the economy.

Fed's Schmid advocates patience in tackling inflation

Kansas City Fed President Jeffrey Schmid expressed confidence that inflation will gradually return to Fed's 2% target "over time". But he also emphasized the importance of patience, saying, "I am prepared to be patient as this process plays out."

Schmid highlighted the necessity of curbing demand growth to allow supply to catch up, which is essential for closing the imbalance driving inflation.

Regarding Fed's balance sheet, "I didn't really think we should have slowed the runoff," Schmid said. "I think there was room to continue to run off like we were doing."

Australia's wage price index rises 0.8% qoq, 4.1% yoy in Q1

Australia wage price index rose 0.8% qoq, below expectation of 0.9% qoq. The private sector rose 0.8% qoq and the public sector rose 0.5% qoq. Over the year, WPI slowed from 4.2% yoy to 4.1% yoy, below expectation of 4.2% yoy.

Michelle Marquardt, ABS head of prices statistics, said: "The WPI annual all sectors wage growth has remained at or above 4 per cent since September quarter 2023. The last time wages growth was at this level for three consecutive quarters was March quarter 2009."

Looking ahead

Eurozone will release GDP revision, and industrial production. Later in the day, Canada will release housing starts and manufacturing sales. US will release CPI, retail sales, Empire State manufacturing, business inventories and NAHB housing index.

AUD/USD Daily Report

Daily Pivots: (S1) 0.6595; (P) 0.6612; (R1) 0.6643; More...

AUD/USD's breach of 0.6645 resistance suggests that rise from 0.6361 is resuming. Intraday bias is now on the upside for 61.8% projection of 0.6464 to 0.6645 from 0.6578 at 0.6690. Firm break there will target 100% projection at 0.6759. For now, further rally will remain in favor as long as 0.6578 support holds, in case of retreat.

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 still be in progress. Overall, sideway trading could continue in range of 0.6169/7156 for some more time. But as long as 0.7156 holds, an eventual downside breakout would be mildly in favor.

Economic Indicators Update

• We expect the RBNZ will leave the OCR at 5.5% at its May Monetary Policy Statement.
• The RBNZ will likely remain comfortable with the forward outlook communicated in the February Monetary Policy Statement.
• We don't see a significant change in the RBNZ's projections for the OCR – easing still looks like a 2025 affair.
• Weaker than expected GDP growth and numerous indications of a flat economy should trigger a downward adjustment in the 2024 growth profile.
• But the inflation outlook remains challenging as a non-tradables driven upward inflation surprise in Q1 2024 likely implies a still elevated near-term inflation outlook.
• Market views of OCR easing as early as October are unlikely to find support.

RBNZ decision and associated communication.

We don't expect any significant change to the RBNZ's "Watch, Worry and Wait" strategy it has been following since the May 2023 Monetary Policy Statement.

We expect the RBNZ to keep the OCR at 5.5% and reiterate its view that the OCR will need to remain at 5.5% for "a sustained period" to bring inflation back within the 1-3% target range. We expect the RBNZ to reiterate that while economic growth remains weak, inflation pressures remain elevated.

The RBNZ will continue to forecast inflation returning close to 2% by end 2025 contingent on a forward OCR profile as presented in the February Statement (which implied around a 40 percent chance of a further OCR increase in 2024 but an initial cut to the OCR to 5.25% by mid-2025).

Key developments since the February Monetary Policy Statement.

We noted at the time of the April Monetary Policy Review that relatively little data has come to light since the February Statement to disturb the RBNZ's view on the inflation outlook. We think that the general tone of activity and sentiment data since the February meeting will have helped balance the very strong inflation data which indicate unexpectedly persistent inflation pressures. It's likely still the case that there is little to support the idea that interest rates can be cut earlier than the RBNZ previously assumed (early to mid-2025). We think the RBNZ will be reluctant to reduce the pressure on the economy to adjust while inflation remains elevated.

Key developments since the February Statement have been:

• Slightly weaker Q4 2023 GDP (↓) and associated revisions. GDP growth in Q4 was slightly weaker than forecast (-0.1%q/q vs 0% forecast) and cumulative revisions mean that the economy was 0.2% smaller than forecast. This will likely reduce the RBNZ's starting point output gap very modestly.
• Weak forward indicators for GDP growth in H1 2024 (↓↓). Retail spending indicators remain weak, and the PMIs, business and consumer confidence have taken a step lower after a boost in January and February 2024. It's plausible the RBNZ will be looking at revising down their 2024 growth projection (1.6%y/y for 2024) to better reflect the current apparently weak growth momentum. Treasury have also indicated they have revised down their growth forecasts in recent months.
• Lower business inflation expectations but still elevated household inflation expectations and sticky price intentions indicators (→?). The RBNZ will have been encouraged by falling inflation expectations – especially in the April 2024 business survey – which show inflation expectations either at or very near long term average levels (the more important household survey will be available immediately before the MPC meets and is still quite elevated). On the other hand, pricing intentions indicators remain sticky and not consistent with sub-3% inflation. The record of meeting in the April Review indicated the MPC would need to see all these indicators at more normal levels to be comfortable with policy easing – even with headline inflation below 3%.

• A slightly weaker labour market in Q1 (→). The unemployment rate printed 0.1% higher than forecast and the Labour Cost Index was in line with projections.
• Stronger CPI inflation components (↑↑). the RBNZ forecast a low 0.4% quarterly outcome for the Q1 CPI (3.8% y/y) in its February Statement versus the outcome of 0.6% for the quarter (4.0% y/y). Importantly, non-tradable inflation drove the forecast miss (1.6% q/q vs 1.1% q/q forecast by the RBNZ) indicating the potential for more persistent inflation looking ahead.

• Higher oil prices (↑) – Oil prices are around 4% higher than the level assumed for Q2 2024 in the February Statement (Dubai spot oil at USD 80.80) which will lift the RBNZ's near-term CPI forecasts, all else equal.
• Weaker terms of trade in Q4 2023 (↓) – these data came in notably weaker than expectations, although in large part this reflects timing effects that will likely unwind in coming quarters.
• A lower NZD TWI (↑) – the TWI is now around 1.5% below the H1 24 level that had been assumed. The lower exchange rate probably broadly balances the impact of the weaker terms of trade.

The RBNZ's formal projections will continue to be based on those in the Treasury's Half Year Economic and Fiscal Update (HYEFU) as Budget 2024 is not tabled until 30 May. That said, the Treasury will have briefed the RBNZ on the key macro features of Budget 2024, so any deviations from expectations will feed into the rhetoric the RBNZ chooses to describe the policy outlook.

It is worth recalling that the February Statement included a special topic in which the RBNZ reached a preliminary verdict on the impact of the Government's proposed policies on monetary policy. The RBNZ's analysis concluded that it was unclear whether the net effect of the new Government's policies would be inflationary or deflationary. As we don't expect any big surprises in Budget 2024, the RBNZ should continue with this line in the May Statement.

We anticipate that a more definitive quantitative assessment of the impact of Budget 2024 on the RBNZ's projections will occur in the August Statement. By then, Budget 2024 will be public and the reaction of the economy to government policy changes – such as the income tax cuts and investor housing policy – will be clearer.

The communications objective.

We think the RBNZ will be happy with the current level of financial conditions. Markets have backed off the nearterm easing expectations they held early in 2024 but similarly are not pricing in OCR increases either. They will want the market to respond to the data – especially the inflation data – that emerges over the next 6 months. We don't think they will want to give the market a sense that their strategy has changed from that of holding the OCR at current levels for the foreseeable future.

We also don't think the RBNZ will want to fan expectations of near-term policy easing (as we think they will want to see a couple of quarters of well-behaved inflation data at the very least before considering moving to a less restrictive stance). In the April Review the RBNZ signalled that their views hadn't changed much by issuing a very short press release. We see similar potential this time around.

The bottom line is that we are not expecting significant shifts to the RBNZ's projections for the OCR. In February, these had been reduced slightly but still implied a 40% chance of an OCR increase in 2024. We think the mix of weaker activity indicators, but still-strong domestic inflation will leave the RBNZ in a similar space. Hence there will be more of the "Watch, Wait and Worry" message this time around.

Scenarios.

We see three main scenarios:

• Baseline case (70% probability): the RBNZ retains a similar OCR track as in the February MPS i.e., a peak OCR in Q3 consistent with 40% chance of an OCR increase to 5.75%. The forward profile in 2025 would also be similar with current persistence in domestic inflation balanced by weaker growth.
• Hawkish case (20% probability): the OCR profile returns to where it was in November 2023 which implied around a 75% chance of a rate hike in Q3 2024. This would occur if the RBNZ concludes that domestic inflation is sufficiently sticky such that a return of inflation close to 2% in 2025 now looks remote (for example moving in the direction of the hawkish scenario depicted in our recent Hawks and Doves note that showed a scenario where recent upside surprises to non-tradables inflation continue leaving overall inflation at a low of 2.7%y/y in late 2025).
• Dovish case (10% probability): the RBNZ downgrades its outlook for growth and dismisses concerns about non-tradable inflation concerns. The OCR profile shifts to bring forward an easing to Q1 2025. The earlier start to easing could imply an OCR at 4.5% by year end 2025. This would occur if the RBNZ is confident that weak growth momentum and a widening output gap will generate lower nontradable inflation outcomes as the year progresses. The RBNZ would implicitly leave open the possibility of a November easing should their expected low nontradable CPI outcomes eventuate in Q2 (data released July) and Q3 (data released October) and if further downside risks to growth emerge.

Australia wage price index rose 0.8% qoq, below expectation of 0.9% qoq. The private sector rose 0.8% qoq and the public sector rose 0.5% qoq. Over the year, WPI slowed from 4.2% yoy to 4.1% yoy, below expectation of 4.2% yoy.

Michelle Marquardt, ABS head of prices statistics, said: "The WPI annual all sectors wage growth has remained at or above 4 per cent since September quarter 2023. The last time wages growth was at this level for three consecutive quarters was March quarter 2009."

Full Australia wage price index release here.

Kansas City Fed President Jeffrey Schmid expressed confidence that inflation will gradually return to Fed's 2% target "over time". But he also emphasized the importance of patience, saying, "I am prepared to be patient as this process plays out."

Schmid highlighted the necessity of curbing demand growth to allow supply to catch up, which is essential for closing the imbalance driving inflation.

Regarding Fed's balance sheet, "I didn't really think we should have slowed the runoff," Schmid said. "I think there was room to continue to run off like we were doing."

Cleveland Fed President Loretta Mester, in an interview with WSJ, expressed a cautious stance on interest rate hikes, stating, "I am not eager to consider interest rate hikes." Mester emphasized that Fed is in a "really good place" to study the economy before deciding on the next steps for interest rates.

Mester highlighted that it's too early to determine whether the disinflation has stalled or if inflation is set to reverse. She noted that there are clear indications that the real side of the economy is "moderating", which is contributing to a better balance within the economy.