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Most Asian stocks struggled for direction on Wednesday as investors turned cautious ahead of key U.S inflation data that may impact the Fed’s monetary policy path. European and US equity futures are both pointing to a mixed open in what feels like the calm before a potential storm. In the currency space, the dollar edged lower this morning weakening against almost every single G10 currency excluding the Japanese yen. Gold prices jumped over 0.7% during early trade while oil prices were mostly steady, holding near their highest close since January.

It is safe to say that markets are waiting for the pending US inflation data before making the next big move. Minutes from the Federal Reserve’s March policy meeting are also due to be released this evening, which could offer further clarity about the Fed’s 25-basis point hike after the collapse of Silicon Valley Bank and general banking fears that rattled financial markets.

Spotlight on US CPI data

Today’s big event and potential market shaker will be the latest US inflation data. US headline CPI is forecast to slow to 5.2% in March compared to the 6% witnessed in February with the key core monthly reading expected to cool modestly but remain elevated. Traders are currently pricing in a 70% probability of a 25-basis point rate hike in May, according to Fed funds futures with today’s inflation data expected to reinforce these bets. Ultimately further evidence of US inflation slowing could fuel the disinflation story that Fed Chair Jerome Powell has talked about recently, sending the dollar lower. Alternatively, stubborn core figures may dampen expectations around the Fed pausing its policy tightening anytime soon, which could offer support to dollar bulls.

A few hours after the US inflation data, the focus will shift to the FOMC minutes. Investors will closely scrutinise the language and whether any fresh clues are offered on future Fed rate moves. If the minutes strike a dovish tone similar to the March meeting decision, this could reinforce market expectations around the Fed's hiking cycle nearing an end.

Regarding the technical picture, the Dollar Index (DXY) remains in a downtrend on the daily chart. There have been consistent lower lows and lowers highs while the MACD trades below zero. A strong move back below 102.00 could encourage a decline towards this month’s low. Should prices stay above 102.00, this may signal a move back towards 102.80 and 103.30, respectively.

Bank of Canada to keep rates steady

The Bank of Canada (BoC) is expected to keep interest rates unchanged at 4.5% for a second straight meeting. The annual inflation rate in Canada continues to show signs of cooling, falling sharply to 5.2% in February compared to 5.9% in the previous month. However, some economic data has surprised to the upside with the job market still piping hot and wage pressures strong. Much attention will be directed towards the BoC's updated forecasts and Governor Mackem’s word for fresh clues on the central bank's policy path. Looking at the technical picture, USDCAD could be injected with fresh volatility due to the BoC meeting, US CPI, and Fed minutes. Prices are under pressure on the daily chart and may descend towards the 200-day SMA around 1.3395.

Commodity spotlight – Gold

Gold prices extended gains on Wednesday morning, finding comfort above $2000 as caution reigned ahead of the US inflation data. The precious metal continues to draw strength from a weaker dollar despite last Friday’s jobs report boosting expectations for one more Fed rate hike. Despite the positive performance this week, everything could come crashing down for gold if the US inflation figures exceed market expectations. Expect the precious metal to also be influenced by the FOMC minutes which could provide clues on future Fed moves. Talking technicals, prices remain bullish on the daily charts and could be heading toward the $2032 recent high. Beyond this point, the next levels of interest are $2070 and the all-time high at $2075.47. Should prices slip back under $2000, gold could retest $1950 and $1900, respectively.

The USDCNH currency can build a double zigzag w-x-y of the cycle degree. On the current chat, we see that the intervening wave x has been completed, which has the form of a double zigzag of the primary degree.

It is assumed that the initial part of the actionary wave Y is being constructed on the last section of the chart. Perhaps it will take the form of a standard zigzag.

Now the first wave is being formed, most likely, it takes the form of a leading diagonal.

The price in the last intermediate wave (5) may rise to 7.077. At that level, wave (5) will be at 123.6% of impulse (3). Let's consider an option in which the construction of the cycle intervening wave x will continue. It may take the form of a triple zigzag.

In this case, the primary intervening wave, which has the form of an intermediate triple zigzag (W)-(X)-(Y)-(X)-(Z), could end. At the time of writing, the price is in the actionary wave.

It is possible that will take the form of a standard zigzag, as shown in the chart. Its end is expected near 6.650. At that level, it will be at 76.4% of wave.

EUR/USD bounces back

The euro inched higher as retail sales across the bloc beat expectations in March. After bouncing off the daily swing low of 1.0540 the single currency is striving to resume its uptrend from last November. The latest pullback has found bids over the 20-day SMA (1.0830) and a break above the immediate resistance at 1.0920 suggests that buyers are still committed to the game. A close above 1.0970 would expose this year’s peak at 1.1030, potentially giving the bulls a decisive edge. 1.0750 on the 30-day SMA is a major floor.

NZD/USD struggles to hold

The US dollar claws back losses as traders wait to see whether inflation has been brought down. 0.6380 has once again proved to be a tough level to crack after the first two bullish attempts back in February. A drop below the twice-tested support at 0.6210 has prompted more buyers to bail out. 0.6230 is the first hurdle and a break above 0.6290 would turn sentiment around. Failing that, 0.6150 is the critical level to keep the pair afloat as its breach would make the kiwi vulnerable to a bearish reversal in the weeks to come.

US 30 holds high ground

The Dow Jones 30 rallied after Chicago Fed President Goolsbee warned about raising rates too aggressively. On the daily chart, a close above the March high of 33500 and a bullish MA cross are signs that the market’s optimism has taken hold. A brief consolidation above 33300 has allowed the bulls to hold on to their gains and a close above 33680 may extend the rally to the psychological level of 34000, a step closer towards this year’s peak at 34400. 32900 would be the bulls’ second line of defence in case of a correction.

Markets

Several Fed and ECB speakers hit the wires yesterday and provided some distraction during an otherwise news calm trading session. There’s a divide growing among Fed officials to hike rates further or not. The likes of Chicago Fed president Goolsbee call for “prudence and patience” and first want more data to assess the impact of potentially tighter credit conditions following the collapse of several regional US banks. That’s clearly the minority view though. NY Fed Williams said one more hike as suggested by the dot plot is a “reasonable starting place” but that the actual path depends on incoming data. Kashkari from the Minneapolis Fed sees hopeful signs that calm has returned and said that the central bank has more work to do. Bullard (St Louis), Harker (Philadelphia) and Mester (Cleveland) struck a similar tone and added that rates would have to stay at their peak for some time. ECB’s Villeroy is worried about inflation becoming even more widespread and potentially more persistent. He referred to underlying inflation rising steadily even as headline inflation has topped off. This requires raising rates further, though possibly not as aggressive as before, and in any case keeping them at a high enough level for a sustained period. Core bonds lost ground with German Bunds hugely underperforming USTs yesterday. In a catch-up move with the US after being closed on Friday and Monday, German rates rallied 10.7-15.2 bps with the front underperforming. American yields only added 1.3 bps at the front but that’s hiding an intraday recovery move that went as far as 12 bps. European equity sentiment was especially good. The Euro Stoxx 50 closed at the highest level since begin 2022. With the yield and sentiment advantage, EUR/USD rose to 1.091. That combo is also what weighed the yen down. EUR/JPY extended gains beyond 145 to finish at 145.89. USD/JPY held stable around 133.6. EUR/GBP again used support from the upward sloping trend line to close somewhat higher at 0.8783.

Asian markets show no clear direction going into today’s main event: US CPI. Headline inflation in March is expected to ease from 6% to 5.1% but core inflation could increase from 5.5% to 5.6% on a strong 0.4% m/m pace. An in-line or higher-than-expected outcome should further strengthen the case for a May rate hike by the Fed. Markets currently attach a 75% probability to such a scenario. We doubt it will change their thinking about rate cuts later on though. Current market pricing shows the cutting cycle to begin in September. It will take more strong data points for that to be priced out. Barring a downside surprise, today’s CPI in any case should support yields, especially at the front end of the curve. The $32bn 10y auction tonight might be interesting for the long(er) end. First resistance in the 10y yield is located at 3.50%, followed by 3.64%. UST underperformance vs Bunds may give the dollar some much-needed breathing space. This morning’s move included, the small USD uptick vs the euro over the past few days gets wiped out already. Support for the dollar kicks in at EUR/USD 1.0973/1.1033. USD resistance levels are located around the 1.08 big figure, followed by 1.0735.

News Headlines

Climate think thank Ember published its fourth annual global electricity review. Wind and solar reached a record 12% of global electricity in 2022. We might as well have seen the peak of fossil fuel electricity generation last year which was unexpectedly boosted by the rush for energy security in the wake of the Russian invasion in Ukraine. Wind and solar are set to expand enough that total electricity production from fossil fuels will decline slightly and continue downward through at least 2026, according to the Ember forecasts. The share of fossil fuel electricity generation is set to decline from currently around 60% to slightly over 50% by 2026. The International Energy Agency earlier said that renewable power sources in 2022 helped to meet the vast majority of additional power needs.

Italian PM Meloni yesterday evening unveiled the 2023 budget which included slightly more tax cuts (€3bn) than expected. The budget deficit is set to reach 4.5% of GDP with growth predicted at 1% this year (vs 0.6% previously) and 1.5% in 2024 (vs 1.9%). Critical to next year’s outlook will be receiving EU instalments under the EU Recovery Fund which are at risk of delay over discussions on some of the projects, milestones and targets to be reached.

Daily Pivots: (S1) 1.3445; (P) 1.3482; (R1) 1.3503; More....

Intraday bias in USD/CAD remains neutral and another fall is in favor with 1.3563 minor resistance intact. On the downside, break of 1.3405 will resume the decline from 1.3860, as the third leg of the corrective pattern from 1.3976, to 1.3224/61 support zone. Strong support should be seen around there to bring rebound. Meanwhile, firm break of 1.3563 will turn bias back to the upside for 1.3860 resistance instead.

In the bigger picture, the up trend from 1.2005 (2021 low) is still in progress. Break of 1.3976 will confirm resumption and target 61.8% projection of 1.2401 to 1.3976 from 1.3261 at 1.4234. Firm break there will pave the way to long term resistance zone at 1.4667/89 (2016, 2020 highs). On the downside, sustained break of 55 week EMA (now at 1.3282) is needed to confirm medium term topping. Otherwise, outlook will remain bullish even in case of deep pull back.

Daily Pivots: (S1) 0.6631; (P) 0.6656; (R1) 0.6678; More...

Intraday bias in AUD/USD remains neutral for the moment. Overall, risk will stay on the downside as long as 0.6792 resistance holds. On the downside, sustained break of 0.6563 support will resume the decline from 0.7156 to 61.8% projection of 0.7156 to 0.6563 from 0.6792 at 0.6426.

In the bigger picture, as long as 61.8% retracement of 0.6169 to 0.7156 at 0.6546 holds, the decline from 0.7156 is seen as a correction to rally from 0.6169 (2022 low) only. Another rise should still be seen through 0.7156 at a later stage. However, sustained break of 0.6546 will raise the chance of long term down trend resumption through 0.6169 low.

Daily Pivots: (S1) 1.0868; (P) 1.0898; (R1) 1.0943; More...

Intraday bias in EUR/USD stays neutral as consolidation from 1.0972 is still extending. With 1.0787 support intact, further rally is expected. On the upside, above 1.0972 will resume the rally from 1.0515 to retest 01.1032 high. Firm break there will resume larger up trend from 0.9534. However, break of 1.0787 will turn bias back to the downside for 1.0711 support instead.

In the bigger picture, rise from 0.9534 (2022 low) is in progress with 38.2% retracement of 0.9534 to 1.1032 at 1.0460 intact. The strong support from 55 week EMA (now at 1.0625) was also a medium term bullish sign. Next target is 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273. Sustained break there will solidify the case of bullish trend reversal and target 1.2348 resistance next (2021 high).

Daily Pivots: (S1) 1.2385; (P) 1.2420; (R1) 1.2461; More...

GBP/USD is still extending the consolidation pattern from 1.2524 and intraday bias remains neutral. Further rally is expected with 1.2203 resistance turned support intact. On the upside, break of 1.2524 will target 1.2759 fibonacci level first. Firm break there will target 61.8% projection of 1.0351 to 1.2445 from 1.1801 at 1.3095.

In the bigger picture, the rise from 1.0351 medium term term bottom (2022 low) is in progress for 61.8% retracement of 1.4248 (2021 high) to 1.0351 at 1.2759. Sustained break there will add to the case of long term bullish trend reversal. Further break of 61.8% projection of 1.0351 to 1.2445 from 1.1801 at 1.3095 could prompt upside acceleration to 100% projection at 1.3895. For now, this will remain the favored case as long as 1.1801 support holds, even in case of deep pull back.

Daily Pivots: (S1) 133.18; (P) 133.50; (R1) 134.01; More...

Intraday bias in USD/JPY is back on the upside as rebound from 129.62 is resuming by breaking 133.74 resistance. Further rise would be seen towards 137.90 resistance again. On the downside, though, below 132.92 minor support will turn intraday bias neutral first. Further break of 130.62 should resume the fall from 137.90 through 129.62 to retest 127.20 low.

In the bigger picture, corrective pattern from 127.20 might be extending. But after all, down trend from 151.93 is expected to resume at a later stage. Break of 127.20 will resume this down trend and target 61.8% projection of 151.93 to 127.20 from 137.90 at 122.61. This will now be the favored case as long as 137.90 resistance holds.

Market movers today

The highlight of today will be US CPI for March. We look for 0.4% m/m on the core CPI, in line with consensus. It is a decline from 0.5% m/m in February but still too high for the Fed with respect to reaching the 2% target. Hence, we believe it would seal another hike on 3 May barring any new bad news on the banking front.

Bank of Canada is widely expected to keep rates unchanged at todays' meeting at 4.5%.

Tonight at 20.00 CET we get the FOMC minutes from the 22 March meeting. It will be interesting to read their discussion of the banking issues. However, since then the banking stress has calmed down but we still need to see the effect of any tightening of lending standards, not least towards commercial real estate.

The 60 second overview

Fed-speak: FOMC participants reiterated focus on getting inflation down ahead of the key CPI data today. NY Fed's Williams noted that 'one more rate hike is a reasonable starting place', while Harker called for getting 'rates above 5%' and staying there, in line with our view. Kashkari also said that a recession is possible, yet it is better than allowing inflation to prolong. On the more dovish side, Chicago Fed's Goolsbee emphasized caution regarding the banking sector uncertainty, and said the right monetary policy stance calls for 'prudence and patience'.

Market outlook: As we see both ECB and the Fed remaining on a tightening bias, one of our long-standing market views has been that stronger USD remains a prerequisite for a return to low inflation. In FX Strategy - Throwback monetary analysis to lose its appeal again, 11 April, we highlight that as the rise and fall of the excess money supply ends over the coming months, we expect the focus to increasingly shift back to actual inflation and inflation expectations.

IMF: The International Monetary Fund released the updated World Economic Outlook yesterday, downgrading the global growth outlook by 0.1 percentage point for both 2023 (2.8%) and 2024 (3.0%).

Equities: No news is good news, as the lower vol in bonds is just good enough to lift equities. Thereby, cheerful markets in Europe and Nordics. Meanwhile, the US session struggled a bit for direction but with the same rotation taking place: Into cyclicals - and especially value cyclicals - and out of defensives and tech. Banks outperformed tech by 2p.p. Futures are a tad higher today.

FI: Yesterday, European government bond yields caught with the rise in US Treasury yields from Friday. Hence, the negative sentiment in the European bond market was a reflection of the rise Treasury yields on Friday. However, the 10Y BTPS-Bund spread has been remarkably more stable in a fairly tight range from 170bp to 200bp.

FX: FX markets are relatively quiet this morning, ahead of today's important US inflation numbers, yet with a pinch of risk on. USD/JPY continues testing the topside, now just below 134; EUR/USD still above 1.09, now at 1.0925; EUR/SEK down below 11.40, though ever so slightly; and EUR/NOK off yesterday's highs, now at 11.52.

Credit: With equities in green CDS indices were somewhat tighter yesterday as iTraxx Main closed the day 4bp tighter at 85bp and Xover 14bp tighter at 445bp. Supply was limited though the primary market saw one EUR covered bond being printed and a further five being mandated, while the corporate sphere saw euro deals mandated by Australian telecom Telstra and Sydney Airport.

Nordic macro

Norway: We expect the Norwegian mainland GDP fell 0.2% m/m in February, on weaker consumption and headwinds to both manufacturing and construction.