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Daily Pivots: (S1) 1.6235; (P) 1.6283; (R1) 1.6348; More...

Intraday bias in EUR/AUD remains neutral for the moment, and some more consolidations could be seen above 1.6216. Further decline is expected as long as 1.6494 resistance holds. Fall from 1.6742 is seen as the third leg of the corrective pattern from 1.7062. Break of 1.6216 will turn bias back to the downside to 1.6127 support, or further to 100% projection of 1.7062 to 1.6127 from 1.6742 at 1.5807.

In the bigger picture, fall from 1.7062 medium term top is seen as a correction to the up trend from 1.4281 (2022 low). In case of deeper fall, strong support is expected around 1.5846 and 38.2% retracement of 1.4281 to 1.7062 at 1.6000 to bring rebound. Break of 1.7062 is in favor as a later stage.

Daily Pivots: (S1) 0.9747; (P) 0.9763; (R1) 0.9786; More...

Intraday bias in EUR/CHF remains neutral for the moment. Outlook is unchanged that fall from 0.9835 is seen as the third leg of the corrective pattern from 0.9847. Risk will stay on the downside as 0.9835 resistance holds. Below 0.9278 will turn bias back to the downside for 0.9563 support.

In the bigger picture, as long as 0.9563 support holds, rise from 0.9252 medium term bottom is still in favor to continue. Break of 0.9847 resistance will target 38.2% retracement of 1.2004 (2018 high) to 0.9252 (2023 low) at 1.0303, even as a correction to the down trend from 1.2004.

Yesterday was one of those days where we needed to fit a narrative to the market moves as the moves weren’t triggered by meaningful data or comments. The US 2-year yield was steady near the 4.80% level, the stocks were slow to move, the S&P500 traded slightly up, Nasdaq 100 came slightly down. Federal Reserve’s (Fed) Senior Loan Officer Opinion Survey showed an increased tightening in commercial and industrial loan standards. That’s a negative hint for the economic outlook, and combined with the latest weakness in the US GDP data suggests that economic conditions could start deteriorating in the US – which would justify a Fed action IF inflation eases. Fed’s Kashkari said that the Fed will keep the rates at the current levels for an extended period of time’ until they are certain’ that inflation is on path to their 2% target. But inflation is on a rising path since the beginning of this year and the Fed shouldn’t cut rates to boost economy. It must address the price pressures first. That’s the theory. So, appetite in US stocks remains supported by robust earnings and Fed optimism, but the earnings expectations look somehow inflated, while the Fed optimism is fragile and data-dependent – meaning that the market could be lacking enough confidence to send these indices to fresh record highs before we have more detail on the US inflation update that is due next week. Today, investors will be closely watching the $42 billion US 10-year bond auction and listen to what the Fed’s Lisa Cook has to say.

On the corporate front, Disney tumbled 10% after giving a weak subscriber outlook, Tesla fell nearly 4% on news that shipments from its Shanghai factory tanked 18% in April despite a positive growth in the EV market. Qualcomm and Intel felt the heat of the news that the US will revoke the export licenses to China, Nvidia retreated 1.72%. Apple on the other hand unveiled new iPads that would carry faster chips that could support the heavy weight of AI computations, but the market showed limited enthusiasm. Everyone waits for the June 10th announcement on AI plans. At this point, the expectations are building so high that if the company doesn’t come up with a robust plan, the stock price could come tumbling down. Meanwhile, Microsoft doesn’t content with its AI advance but does more. It now develops an AI model that is ‘entirely divorced’ from internet to give the US intelligence agencies a safe – unconnected – tool to help them analyze their data without taking the risk of leakage. But even Microsoft fell 1% yesterday.

In the FX, the US dollar rebounded on a third day as FX traders somehow shrugged off the post-FOMC optimism that was certainly overdone. The EURUSD retreated to 1.0740. The daily graph says quite a lot on the euro sentiment, as the pair tested a major Fibonacci resistance, which also coincides with the ytd descending channel top, and bounced lower. That makes sense in the context of diverging policy outlook between the Fed and the European Central Bank (ECB). The USDJPY threw itself back above the 155 level, as Governor Ueda said they are watching the impact of the soft yen. Gold remained bid above the $2300 per ounce on news that the People’s Bank of China (PBoC) continued buying gold for the 18th straight month, though their purchases slowed. US oil, on the other hand, trades below its 100-DMA and remains in the hands of the bears despite the news that Israeli army entered Rafah yesterday. The tense geopolitical landscape suggests that the risks remain tilted to the upside, the near oversold conditions suggest that it’s a good time for dip buyers to join the market. Yesterday’s API data also showed a small half-a-million barrel build in US oil inventories last week. Therefore, there is a bigger chance to see a rebound in oil prices at the current levels than the contrary. But if the $77pb support is broken, we could see the price of a barrel rapidly retreat to $75pb.

In focus for the rest of the week

Today, the main event in the Nordics is the Riksbank monetary policy decision, due at 09.30 CET. Money market pricing implies c. 80% probability of a cut but we think it is more or less a 50/50 call, and we expect the Riksbank to leave rates unchanged and signal a cut for June. Although domestic inflation has surprised to the downside recently, the risks highlighted at the March meeting (global central banks, geopolitics and the SEK) have all developed worse than expected and the Riksbank has far less to lose by opting for a cautionary stance. Between now and June we will have two more domestic inflation prints and updates from both the Fed and ECB.

Also, the National Debt Office will announce April's central government payments. This is interesting due to the SEK32bn smaller accumulated deficit than predicted in March.

In Germany, we receive industrial production data for March. The German economy grew 0.1% q/q in the first quarter of the year, and it will be interesting to see if improvements in industrial activity helped the better-than-expected growth rate.

Overnight, China will release trade data. Export orders in PMI have been quite strong lately pointing to export recovery. The monthly data are very noise, though, so hard to predict on a monthly basis. Focus also on imports as indicator for Chinese manufacturing and construction activity.

Tomorrow, we expect the Bank of England (BoE) to keep the Bank Rate unchanged at 5.25%, which is in line with consensus and current market pricing. Overall, we expect the MPC to cautiously soften its communication priming markets for a rate cut, delivering the first cut of 25bp in June.

On Friday, we will scrutinize the minutes from the April ECB meeting at 13:30 CET for any hints of the future direction of monetary policy. However, recently the minutes have not had any significant new information and subsequent market impact.

Also on Friday, the Fed will pay close attention to the University of Michigan's preliminary consumer sentiment survey for May. The April edition showed a concerning uptick in inflation expectations, but lower gasoline prices could have eased inflation concerns ever since.

The week ends with China's release of CPI and PPI overnight on Saturday for April. CPI inflation was just 0.1% y/y and China is still flirting with negative rates reflecting too weak domestic demand. PPI inflation should show some increase following the latest sharp rise in metal prices.

Economic and market news

What happened overnight

No news on a peace deal in the Middle East, as yesterday Israel expanded operations in Rafah, taking "operational control" of the main Egypt/Gaza ground crossing on the Palestinian side. Hamas said they have accepted an agreement which would have brought a ceasefire in exchange for the release of Israeli hostages, whereas Israel has stated it falls short of their requirements but have sent a delegation to negotiate. Negotiations are set to continue during the day.

BoJ Governor Ueda addressed the links between yen weakness and the potential need for tightening monetary policy. He noted that the recent volatility and weakness in the JPY could significantly drive prices upward, stating there "is a chance we may need to respond with monetary policy". The yen continued its decline overnight with USJPY having breached the 155 mark again as of this morning.

What happened yesterday

Yesterday was quiet in terms of economic news. Euro area retail sales grew 0.8% m/m in March but was still at a muted level, which indicated consumers remain cautious despite solid household financial fundamentals from high employment and rising real income.

Market movements

Equities: Global equities rose yesterday, primarily driven by Europe, and financials helped by a surprisingly strong reporting from UBS. The sector rotation differed significantly on either side of the Atlantic, but we observed the unusual phenomenon of both consumer cyclicals and tech declining while the rest of the sectors climbed, with volatility decreasing. It is noteworthy how swiftly the VIX has returned to the 13-level. Investors exhibit considerable faith in the current macro environment, which, in our opinion, is entirely reasonable. In the US yesterday, Dow +0.1%, S&P 500 +0.1%, Nasdaq -0.1% and Russell 2000 +0.2%. Asian markets are trending downwards this morning, despite the yen weakness. US and European futures are slightly lower.

FI: Rates continued sliding lower through yesterday's session, which was characterized by very little market-relevant news. The action was mainly in long-end rates with Gilts emerging as the standout performer across regions, while the declines in US and EU rates were comparably more modest. 10Y Bunds dropped 5bp to 2.41% and is now trading just marginally above our 12M forecast of 2.35%. Long-term EUR inflation swap rates (e.g. 5y5y) continued moving lower in tandem with energy prices. Implied rates volatility, as measured by the MOVE index, fell to a 1-month low, which seems fair following Fed Chair Powel'’s decision last week to rule out further hikes (and curb the outcome space).

FX: Today, all eyes will be on the highly anticipated Riksbank meeting and by extension the SEK. In our non-consensus call, we expect an unchanged decision and the Riksbank to open the door for a cut in June. In our base case, we expect this to lend support the SEK given the ca. 80% probability priced for a cut, though the scope of appreciation potential depends on forward guidance. EUR/GBP edged higher during yesterda'’s session as markets anticipate the Bank of England meeting on Thursday, trading narrowly below the 0.86 mark.

Markets

US trading hours were only a little more entertaining than dull European ones yesterday. Minneapolis Fed Kashkari (non-voter this year) gave us some flavor on how a slightly more hawkish shift at last week’s policy meeting could have looked like. His guidance sounded familiar: “the most likely scenario is we sit here for an extended period of time”. In its official statement, the onus remained on a policy rate cut though the bar to implement one was raised given little progress on inflation. We assume FOMC Minutes to highlight a split between two camps. Kashkari said that the bar for raising rates is quite high, but he doesn’t rule it out. He made the case of a higher neutral interest rate especially given persistent housing inflation, questioning how restrictive monetary policy really was/is. It would also help explaining why the labour market has proven resilient and why inflation moved sideways in recent quarters. Kashkari said that he penciled in two rate cuts for this year when Fed officials met in March and that he’ll forecast anywhere from two to zero cuts for 2024 when officials meet next on June 12. The Kashkari comments didn’t bring life into mostly sideways dealings. German Bundesbank Nagel sounded somewhat more hawkish than most of his colleagues by stressing that a range of potential factors could lead to higher inflationary pressure in the future (eg demographic trends pushing up wages). The ECB shouldn’t allow an accommodation to higher levels trigger a de-anchoring of inflation expectations. Longer term, he doesn’t eye a return to the sort of weak inflation rates (and easy monetary policy) we’ve had in the run-up to the pandemic. Apart from these central comments, the US Treasury kicked off its mid-month refinancing operation with a solid $58bn 3-yr Note auction. Tonight’s $42bn 10-yr Note sale and Thursday’s $25bn 30-yr Bond auction will likely prove more tricky.

UK gilts outperformed returning from May Day holiday and in the run-up to tomorrow’s BoE meeting. Risks are asymmetric with markets likely positioned too hawkish. Sterling already feels the pressure with EUR/GBP returning to 0.86. We eye a sustained return higher for the pair.

News & Views

The US Commerce Department has revoked export licenses that allowed major chip companies Intel and Qualcomm to do business with China’s Huawei. The move, confirmed to and reported by the Financial Times, comes amid evidence that China is able to develop advanced chips using US technology despite sweeping export controls that are already in place since 2022. “We continuously assess how our controls can best protect our national security and foreign policy interests”, the agency said. US national security officials note that these cutting edge chips have helped China engage in cyber espionage. Washington has also pushed allies/kings of the semiconductor industry in Europe and Asia, including the Netherlands & South Korea, to implement tough(er) export controls.

The Turkish government has been holding talks recently about easing restrictions on offshore currency swaps, Bloomberg reported citing people familiar with the matter. Any loosening would be gradually and could focus in a first step on longer-maturity contracts but is expected to be welcomed by foreign investors. Local banks are currently limited in the amount of liras they can lend (in the form of FX swaps, options, futures etc.) to counterparties abroad. This, however, makes it difficult for investors to hedge the currency risk they take when investing in lira assets, despite the demand being there. International optimism on Turkey has increased sharply in recent months thanks to more orthodox policies, including in monetary policy. This high demand abroad also caused a widening gap between offshore and onshore rates with the former earlier this month at some point being about half of the domestic ones (26% vs >50%), denting the currency’s carry appeal. The Turkish lira reacted stoic (USD/TRY 32 area) on the news for the time being but other Turkish assets including equities and CDS did rally.

Graphs

GE 10y yield

ECB President Lagarde clearly hinted at a summer (June) rate cut which has broad backing. EMU disinflation continued in April and brought headline CPI closer to the 2% target. Together with weak growth momentum, this gives backing to deliver a first 25 bps rate cut. A more bumpy inflation path in H2 2024 and the Fed’s higher for longer strategy make follow-up moves difficult. Markets have come to terms with that.

US 10y yield

The Fed in May acknowledged the lack of progress towards the 2% inflation objective, but Fed’s Powell left the door open for rate cuts later this year. Soft US ISM’s and weaker than expected payrolls supported markets’ hope on a first cut post summer, triggering a correction off YTD peak levels. Sticky inflation suggests any rate cut will be a tough balancing act. 4.37% (38% retracement Dec/April) already might prove strong support for the US 10-y yield.

EUR/USD

Economic divergence, a likely desynchronized rate cut cycle with the ECB exceptionally taking the lead and higher than expected US CPI data pushed EUR/USD to the 1.06 area. From there, better EMU data gave the euro some breathing space. The dollar lost further momentum on softer than expected early May US data. Some further consolidation in the 1.07/1.09 are might be on the cards short-term.

EUR/GBP

Debate at the Bank of England is focused at the timing of rate cuts. Most BoE members align with the ECB rather than with Fed view, suggesting that the disinflation process provides a window of opportunity to make policy less restrictive (in the near term). Sterling’s downside turned more vulnerable with the topside of the sideways EUR/GBP 0.8493 - 0.8768 trading range serving as the first real technical reference.

Daily Pivots: (S1) 1.3676; (P) 1.3709; (R1) 1.3757; More...

Intraday bias in USD/CAD stays neutral at this point. On the upside, break of 1.3782 resistance will argue that correction from 1.3845 has completed with three waves down to 1.3608. 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 1.3626) will argue that whole rise from 1.3176 has completed already, and target 1.3477 support next.

In the bigger picture, price actions from 1.3976 (2022 high) are viewed as a corrective pattern only. 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) 0.6575; (P) 0.6610; (R1) 0.6632; More...

Intraday bias in AUD/USD remains neutral and consolidations would continue below 0.6645. Further rise is in favor as long as 55 4H EMA (now at 0.6560) holds. Above 0.6645 will resume the rebound from 0.6361. On the downside, however, firm break of 55 4H EMA will bring deeper fall back to 0.6464 support instead.

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.

Daily Pivots: (S1) 154.11; (P) 154.43; (R1) 155.01; More...

USD/JPY's break of 55 4H EMA (now at 154.81) argues that pull back from 160.20 has completed at 151.86 already. Rebound from there is seen as the second leg of the corrective pattern. Intraday bias is back on the upside for 157.98 resistance. On the downside, in case of another fall, strong support should be seen from 150.87 resistance turned support to bring rebound.

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) 0.9061; (P) 0.9078; (R1) 0.9100; More....

Intraday bias in USD/CHF remains neutral as consolidation from 0.9005 is extending. Further decline is in favor as long as 55 4H EMA (now at 0.9099) holds. On the downside, break of 0.9005 and sustained trading below 55 D EMA (now at 0.9000) 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 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) 1.0739; (P) 1.0764; (R1) 1.0779; More...

Intraday bias in EUR/USD remains neutral and more consolidations could be seen below 1.0810. Further rally is expected as long as 55 4H EMA (now at 1.0731) holds. On the upside, above 1.0810 will resume the rebound from 1.0601 to 1.0884 resistance next. However, firm break of 55 4H EMA will argue that the rebound has completed, and turn bias to the downside for 1.0648 support instead.

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.