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Consumer price inflation heated up in May, rising to 7.7% year-on-year (y/y), up from 6.8% in April. That was the fastest pace since January 1983, and higher than forecasters, including ourselves, were expecting.

Gasoline prices were a key driver, with prices at the pump up 12% month/month, and 48% y/y. For energy prices as a whole, May saw the biggest one-month increase since 2003.

Food price pressures were steady, up an elevated 8.8% y/y in May. Costs at grocery stores were up even further, up 9.7% y/y. Statistics Canada cited that Canadians report being the most affected by rising food prices.

Shelter inflation also remained steady, up a rapid 7.4% y/y, matching April's pace. Homeowners' replacement cost rose to a lesser extent in May (+11.1% y/y), as prices for new homes showed signs of cooling.

Services prices as a whole were up 5.2% y/y in May, a step up from 4.6% in April. Not surprisingly as Canadians start travelling again, inflation surged from traveller accommodation (+40.2% y/y).

Seasonally adjusted, month-on-month prices were up 1.1% following a 0.7% gain in April. That is the fastest increase since the introduction of the series in 1992, with the acceleration largely driven by energy prices.  All items excluding food and energy were up 0.6% m/m in May, matching April's pace.

Statistics Canada started including used vehicle prices in the CPI for the first time in May, which rose 2.2%, but did not impact the headline tally. Statcan said headline CPI would have been the same without the introduction of used vehicle prices.

All three of the Bank of Canada's core inflation metrics edged higher in May. CPI-trim rose 0.2 percentage points (pp) to 5.4%, CPI-common by 0.4 pp to 3.9%, and CPI-median by 0.3 pp to 4.9%.

Key Implications

A generation of Canadians is experiencing high inflation for the first time. If you aren't over 40, you have never lived through inflation like this, and unfortunately, we are not expecting much of a reprieve going forward. Inflation is expected to remain elevated through 2022 as outlined in our recent forecast. On the shelter side, we are likely to see a continuation of rent price increases alongside rising mortgage interest costs. This will be balanced against the impact of declining house prices.

All of this re-enforces the view that the Bank of Canada will hike by 75 basis points (bps) on July 13th, following in the Fed's footsteps.

Daily Pivots: (S1) 135.50; (P) 136.10; (R1) 137.28; More...

No change in USD/JPY's outlook as further rally is expected. On the upside, break of 61.8% projection of 114.40 to 131.34 from 126.35 at 136.81 will target 100% projection at 143.29. On the downside, below 134.52 minor support will turn intraday bias neutral first. But outlook will remain bullish as long as 131.48 support holds.

In the bigger picture, current rally is seen as part of the long term up trend from 75.56 (2011 low). Next target is 100% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 149.26, which is close to 147.68 (1998 high). This will remain the favored case as long as 126.35 support holds.

Daily Pivots: (S1) 0.9634; (P) 0.9659; (R1) 0.9686; More...

USD/CHF's fall from 1.0048 resumes today and deeper decline could be seen. But it's seen as the third leg of the corrective pattern from 1.0063. Strong support should be seen at around 0.9543 to contain downside to bring rebound. On the upside, above 0.9731 minor resistance will turn bias back to the upside for retesting 1.0063 resistance.

In the bigger picture, down trend from 1.0342 (2016 high) should have completed with three waves down to 0.8756 (2021 low) already. Rise from 0.8756 is likely a medium term up trend of its own. Next target is 1.0237/0342 resistance zone. This will remain the favored case as long as 0.9471 resistance turned support holds. However, sustained break of 0.9471 will extend long term range trading with another falling leg.

Daily Pivots: (S1) 1.0502; (P) 1.0542 (R1) 1.0576; More...

Intraday bias in EUR/USD remains neutral as range trading continues. Further fall is in favor with 1.0786 resistance intact. On the downside, sustained break of 1.0339/48 will resume larger down trend. Next target is long term projection level at 1.0090.

In the bigger picture, focus stays on 1.0339 long term support (2017 low). Decisive break there will resume whole down trend from 1.6039 (2008 high). Next target is 61.8% projection of 1.3993 to 1.0339 from 1.2348 at 1.0090. However, firm break of 1.0805 support turned resistance will delay this bearish case, and bring stronger rebound first.

Daily Pivots: (S1) 1.2241; (P) 1.2282; (R1) 1.2323; More...

Intraday bias in GBP/USD remains neutral and outlook is unchanged. Outlook stays bearish as long as 1.2666 resistance holds. On the downside, break of 1.1932 will resume larger down trend from 1.4248. However, firm break of 1.2666 will suggest medium term bottoming and bring stronger rebound back towards 1.3158 support turned resistance.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.3175).

Risk aversion seems to back in indecisive markets today, with major European indexes and US futures trading down. Yen and Swiss Franc are trading mildly higher, followed by Dollar. Sterling and Canadian receive little support from strong consumer inflation reading. But Aussie and Kiwi are the worse performers while Euro is mixed. Focus will turn to Fed Chair Jerome Powell's testimony.

Technically, Aussie bears seem to be making some progresses. EUR/AUD is now pressing 1.5277 resistance and break will put 1.5354 support turned resistance in focus. Sustained break there will be a sign of larger bullish reversal and could prompt further buying. At the same time, AUD/USD might extend lower to take on 0.6828 low. Firm break there will also resume larger down trend to 0.6756/60 cluster support.

In Europe, at the time of writing, FTSE is down -1.31%. DAX is down -2.02%. CAC is down -1.84%. Germany 10-year yield is down -0.167 at 1.609. Earlier in Asia, Nikkei dropped -0.37%. Hong Kong HSI dropped -2.56%. China Shanghai SSE dropped -1.20%. Singapore Strait Times dropped -0.78%. Japan 10-year JGB yield rose 0.0049 to 0.241.

Canada CPI rose to 7.7% yoy in May, highest since 1983

Canada CPI accelerated from 7.7% yoy to 6.8% yoy in May, above expectation of 7.5% yoy. That's the highest reading since January 1983. The monthly rise 1.4% mom was the fastest since introduction of the series in 1992. Excluding gasoline, CPI rose 6.3% yoy, up from April's 5.8% yoy.

CPI common rose from 3.5% yoy to 3.9% yoy, above expectation of 3.4% yoy. CPI median rose from 4.6% yoy to 4.9% yoy, above expectation of 4.7% yoy. CPI trimmed rose from 5.2% yoy to 5.4% yoy, matched expectations.

ECB de Guindos: Fragmentation instruments should not interfere with monetary policy approach

ECB Vice-President Luis de Guindos said today "fragmentation is a significant worry." The central bank is " speeding up process to ready a tool against fragmentation," but the governing council has "still not discussed the details yet".

But he emphasized, "fragmentation instruments should not interfere with the overall monetary policy approach, which should be focused on fighting inflation." Also, the new tool should be different to previous PEPP, APP or OMT programs as "circumstances are not the same.

UK CPI rose to 9.1% yoy in May, another 40-yr high

UK CPI accelerated further from 9.0% yoy to 9.1% yoy in May, matched expectations. That's another record high since the series began in 1997. Also, based on indicate model, it's the highest since around 1982, which was at nearly 11% yoy. CPI core, on the other hand, slowed from 6.2% yoy to 5.9% yoy, below expectation of 6.0% yoy.

ONS said: "Rising prices for food and non-alcoholic beverages, compared with falls a year ago, resulted in the largest upward contribution to the change in both the CPIH and CPI 12-month inflation rates between April and May 2022 (0.17 percentage points for CPIH). The largest offsetting downward contributions to change in the rates were from recreation and culture (0.10 percentage points for CPIH) and clothing and footwear (0.08 percentage points for CPIH).

Also released PPI input came in at 2.1% mom, 22.1% yoy in May. PPI output was at 1.6% mom, 15.7% yoy. PPI output core was at 1.50% mom, 14.8% yoy.

BoJ firm on maintaining ultra-loose monetary policy

In the minutes of April 27-28 meeting of BoJ indicated that while the board was concerned with fluctuation in Yen's exchanger rate, it remained firm on the stance to continue with ultra-loose monetary policy.

One board member noted that Japan's economy was "still on its way to recovery". As a "commodity importer", the rise in commodity prices would "lead to an outflow of income from Japan and thus exert downward pressure on the economy." Hence, it's "necessary" to "continue with the current powerful monetary easing and thereby firmly support the economy."

Another member noted that "the challenge of monetary policy in Japan was not to curb inflation, as in the case of the United States and Europe, but to overcome inflation that was still too low". A different member commented that," with the addition of Russia's invasion of Ukraine to the existing downside risks to the economy, the situation had further changed significantly; against this backdrop, it was not appropriate for the Bank to make any big changes to its monetary policy stance."

Regarding Yen's depreciation, "a few members said excessive fluctuations in the foreign exchange market over a short period of time, such as those observed recently, would raise uncertainties about the future and make it more difficult for firms to formulate their business plans".

Some member noted, "it was necessary for the Bank to clearly communicate to the public that the aim of monetary policy conduct was to fulfill its mandate of achieving price stability, rather than to control foreign exchange rates."

Australia Westpac leading index dropped to 0.58 in May

Australia Westpac leading index dropped form 1.09% to 0.58% in May, still indicating above trend growth for 2022. Westpac said, "the components of the Index are indicating an important emerging theme around Australia's growth prospects – a significant shock to consumer confidence."

On RBA policy, Westpac expects the central bank to hike a further 50bps in July. It assessed that at 1.35% after the hike, interest rate is still below the neutral setting. Given the tight labor market and rising inflation, further monetary tightening can be expected through 2022.

New Zealand goods exports rose 18% yoy in May, imports rose 24% yoy

New Zealand goods exports rose 18% yoy or NZD 1.1B to NZD 7.0B in May. Goods imports rose 24% yoy or NZD 1.3B to NZD 6.7B. Monthly trade surplus narrowed from NZD 440m to NZD 263m, smaller than expectation of NZD 580m.

Exports to all top destinations rose except to China: China (down -3.8%), Australia (up 49%), US (up 18%), EU (up 23%), Japan (up 0.7%).

Imports from most partners rose except from the US: China (up 25%), EU (up 12%), Australia (up 18%), US (down -5.5%), Japan (up 41%).

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2241; (P) 1.2282; (R1) 1.2323; More...

Intraday bias in GBP/USD remains neutral and outlook is unchanged. Outlook stays bearish as long as 1.2666 resistance holds. On the downside, break of 1.1932 will resume larger down trend from 1.4248. However, firm break of 1.2666 will suggest medium term bottoming and bring stronger rebound back towards 1.3158 support turned resistance.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.3175).

Economic Indicators Update

Canada CPI accelerated from 7.7% yoy to 6.8% yoy in May, above expectation of 7.5% yoy. That's the highest reading since January 1983. The monthly rise 1.4% mom was the fastest since introduction of the series in 1992. Excluding gasoline, CPI rose 6.3% yoy, up from April's 5.8% yoy.

CPI common rose from 3.5% yoy to 3.9% yoy, above expectation of 3.4% yoy. CPI median rose from 4.6% yoy to 4.9% yoy, above expectation of 4.7% yoy. CPI trimmed rose from 5.2% yoy to 5.4% yoy, matched expectations.

Full release here.

UK inflation nudged higher in May, as was expected. The headline release rose to 9.1% YoY, up slightly from the 9.0% gain in April. On a monthly basis, CPI nudged higher to 0.7%, up from 0.6% in April.

UK inflation nudges higher

The fact that UK inflation accelerated and an inflation peak remains elusive is not positive news. Still, the 9.1% reading matched the estimate and the market reaction has been muted. The ball is in the court of the Bank of England, but the trouble is that Bailey & Co. appear to have raised the white flag in response to the inflation onslaught. The BoE is projecting that inflation will peak above 11%(!) later in 2022, which is cold comfort for Britons who are grappling with a serious cost of living crisis. Inflation expectations are rising, and if these become unanchored, it will be a mammoth task for the government and the BoE to get expectations back into the box. There is a wave of discontent among workers and this week’s paralysing rail strike could be just the start of major labour unrest. Consumer confidence is understandably down, and if this translates into less consumer spending, the economic woes will only compound.

With no US releases today, investors will be directing their full attention at what Fed Chair Powell has to say on Capitol Hill. The markets will be looking for clues on the direction of monetary policy and the tone of Powell’s testimony will be doubly important to jittery markets which are becoming more concerned about a recession by the day. Powell’s appearance could shake up the currency markets, which are having a quiet day.

GBP/USD Technical

• GBP/USD tested support at 1.2187 earlier in the day. Next, there is support at 1.1969
•  There is resistance at 1.2441 and 1.2659

The Canadian dollar started the week with gains, but has reversed directions on Wednesday. USD/CAD is trading at 1.2978, up 0.47% on the day.

CPI expected to hit 7.4%

Canada releases the May inflation report later today, and the markets are bracing for another rise. CPI is expected to rise to 7.4%, which would be a sharp rise from the 6.8% gain in April, a 30-year high. In a sign of the times, today’s inflation report will include used car prices for the first time and give more weight to gasoline prices.

With no sign of the long-sought-after inflation peak, the Bank of Canada is under strong pressure to ratchet up its rate hikes. The BoC holds its next meeting on July 13^th, and a CPI reading above 6.8% would virtually cement a massive 0.75% rate hike. The markets have priced in a 0.75% at about 80%. RBC and CIBC also expect the central bank to deliver a 0.75% increase.

The BoC has warned that it expects inflation to move higher in the near term and has signalled that it will raise rates towards the upper end of the 2%-3% neutral range. With the benchmark rate currently at 1.5%, that means that we can expect significant tightening in the second half of the year. The BoC is also looking to remain in sync with the Federal Reserve, which delivered a super-size 0.75% hike just last week.

There are no US releases on Wednesday, but there will be plenty of interest in what Fed Chair Powell has to say on Capitol Hill. The markets will be looking for clues on the direction of monetary policy. Last week, Powell said that further 0.75% hikes were unlikely, and a repeat of this stance could dampen sentiment towards the US dollar. At the same time, if Powell’s forecast for the US economy is on the pessimistic side, risk appetite could fall and send the greenback higher.

USD/CAD Technical

• USD/CAD faces resistance at 1.2894. Above, there is resistance at the round number of 1.3000
• There is support at 1.2706 and 1.2600

The USDJPY is taking a breather under new 24-year high on Wednesday, as overbought conditions prompt some profit-taking after the pair advanced 3.3% in past three days and traded at levels last seen in 1998.

Overall picture shows bulls fully in play, as dollar remains well supported by strong safe-haven demand, expectations for Fed to remain hawkish in coming months and weakness of its major counterpart.

Shallow dips signal positioning for fresh push higher, with former top at 135.57 and rising 10DMA (134.73) to ideally contain.

Fibonacci projections at 137.13 and 138.09 mark next target, with violation of the latter to unmask psychological 140 barrier.

Res: 136.70; 137.13; 137.61; 138.09.
Sup: 135.81; 135.57; 134.73; 134.09.