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Bulls are consolidating under new two-decade high but remain in play and position for further advance.

The dollar is supported by strong Fed rate hikes and hawkish stance that signals further action, as well as safe-haven demand on economic and geopolitical uncertainty, while Euro remains fragile, and yen is set for further weakness that adds to positive signals for the greenback.

Technical studies are positive and support the action, as rising daily cloud and strong bullish momentum underpin.

The dollar may hold in extended consolidation before bulls regain traction for renewed attack at 105.54 peak, with sustained break to signal bullish continuation and expose Fibo projections at 107.13 and 109.20 (123.6% and 138.2% respectively).

Dips should stay above rising 10DMA (103.89) to keep bulls intact.

Res: 104.54; 104.87; 105.26; 105.54.
Sup: 103.89; 103.62; 103.16; 102.92.

The Japanese yen has steadied on Monday, trading just above the symbolic 135 level.

Is 140 next for the yen?

The BoJ didn’t change its playbook at Friday’s meeting, and what is usually a dull affair had a huge impact on the yen, as USD/JPY surged over 2%. The central bank reiterated its commitment to an ultra-accommodative policy, despite pressure on the yen, which is wallowing close to 24-year lows against the US dollar. The BoJ’s reaffirmation of loose policy and its tenacious defence of its yield curve was all the more noticeable in a week that saw the Fed, BoE and even the SNB tighten policy.

The BoJ has been resisting attacks from bond speculators, who are betting that the Bank will release its cap of 0.25% on 10-year JGBs, but so far the BoJ has refused to blink. The Japanese yen has been bearing the brunt of this policy, with USD/JPY soaring around 17% since May 1^st. With the Fed set to continue to raise rates, the US/Japan rate differential will continue to widen, which means the yen could be headed for 140 shortly.

The BoJ didn’t adjust its policy at the meeting but it was noteworthy that the policy statement added the exchange rate to its list of risks, something we haven’t seen in previous statements. . The Bank is sending a message that it is monitoring the exchange rate, but I question whether this will deter the markets from continuing to test the yen. The BoJ and Ministry of Finance have resorted to verbal intervention to fire warning shots to defend the yen, but so far Tokyo’s cannons have been firing blanks as Japanese officials haven’t shown any concrete signs that they plan to intervene in the exchange rate.

USD/JPY Technical

• There is resistance at 1.3657 and 1.3814
• USD/JPY has support at 1.3404 and 1.3247

In a European Parliament committee hearing, ECB President Christine Lagarde reiterated the policy decision made at June meeting, including ending the asset purchase program, scheduling to raise interest rate by 25bps in July, and to raise interest rates again in September.

As for the September hike, "if the medium-term inflation outlook persists or deteriorates, a larger increment (than 25bps) will be appropriate."

Beyond September, ECB anticipates that "a gradual but sustained path of further increases in interest rates will be appropriate", depending on incoming data.

Full remarks here.

The Euro edges higher on Monday, following Friday’s drop that generated strong signal of recovery stall.

Fresh strength was fueled by weaker dollar and resisted negative news that French President Macron lost an absolute majority in the country’s parliamentary election, however prospects for stronger recovery are very low.

The action remains weighed by thick daily cloud which capped recovery attempts on Thursday and Friday, while 14-d momentum remains deeply in the negative territory and moving averages are in negative setup that supports scenario of limited recovery before larger bears resume.

Bias is expected to remain with bears while the action stays capped by the cloud base, with extended consolidation likely to precede fresh push lower.

Violation of recent lows at 1.0358/49 and more significant 2017 low (1.0340) would open way towards next key supports at 1.0069/1.0000 (Fibo 76.4% of 0.8225/1.6039 / psychological).

Caution on penetration into daily cloud (base is reinforced by converged Tenkan-sen and Kijun-sen) and lift above 1.0623 (Fibo 61.8% of 1.0786/1.0358) that would ease downside risk and allow for stronger correction, but only lift above 1.0786 (May 30 high) would neutralize bears on completion of a double-bottom pattern.

Res: 1.0537; 1.0572; 1.0589; 1.0623.
Sup: 1.0459; 1.0380; 1.0355; 1.0340.

At the beginning of the new week, the Japanese yen against the US dollar is consolidating but looks quite weak yet.

USD/JPY buyers are not gone: they are lying low, waiting for a good time to resume action.

Market players are saying that the devaluation of the yen has become one of the main trading ideas in the currency market this year. The Japanese yen has lost more than 16% and can lose more but investors are ready to change the trend. The reason isthat the Bank of Japan will most probably have to correct its monetary policy to catch up with other regulators.

This viewpoint is based on certain livening up of inflation, while the BoJ had been fighting its low rates for decades. The situation has changed, hence, foundation for changing the monetary policy has appeared.

On H4, USD/JPY has corrected to 131.50. At the moment, the market continues developing a growing wave to 136.80 (at least). Currently, there is a consolidation range forming around 134.40. We expect an escape upwards and growth to 136.80, followed by a decline to 131.50. This tech picture is confirmed by the MACD. Its signal line is trading above zero. So, we expect growth to new highs.

On H1, USD/JPY has completed a correction to 131.51. Today the market continues developing another growing wave. Currently, there is a consolidation range forming around 134.40. We expect a test of the range from above, followed by growth to 135.10. If this level is broken away, a pathway for growth to 136.80 might open. Technically, this scenario is supported by the Stochastic oscillator. Its signal line is forming a structure of growth to 50. And as soon as it is broken away, a pathway to 80 will open.

Markets

End of last week, investors concluded that EMU and US yields are discounting a ‘reasonable’ amount of tightening given the highly uncertain path for growth and inflation in the second half the year. US markets have incorporated the Fed’s dots scenario projecting a 3.4% policy rate end of this year and 3.8% next year. 2.25% is discounted for the ECB next year. These levels exceed what is commonly seen as the neutral rate. Above-neutral interest rates are ‘logic’ given the inflation overshoot. Still, as tightening will at least partially restore the demand-supply balance via lower demand, there was good reason for yield markets to move to a more neutral positioning, awaiting CB’s reaction function in case growth indeed were to slow down materially. With US markets closed, there was little ‘new news’ to guide this debate today. German May PPI inflation printed as expected at 1.6% m/m and 32.6% Y/Y (was 33.5% in April). If anything, the good news was it didn’t bring an upward surprise. Commodities including oil, copper and iron ore keep last week’s decline as investors ponder the impact of lower demand. European yields early in the session eased slightly, but the move was reversed later. German yields are rising op to 5.0 bps (5-y). The rise in natural gas prices to some extent complicates the narrative of potentially lower inflation due to lower demand (cf infra). European equities on average gain about 0.50%. Given recent sell-off, it’s much too early to label this as a rebound. Intra-EMU bond spreads show a mixed picture. France slightly underperforms after President Macron fails to secure a majority in Parliament (10-y spread vs Germany +3 bps). Greece (-7 bps) and Italy (-6 bps) narrow further as the ECB prepares an instrument to prevent market fragmentation.

No clear trends on FX markets as the US markets are unable to give guidance (Juneteenth Holiday). The DXY index eases a few ticks (104.30). USD/JPY (134.95) is holding near last week’s multiyear peak. The yen struggles as the BOJ continues its lonely journey of more policy accommodation. The euro gains marginally (EUR/USD 1.051), but the technical picture hasn’t changed with first resistance at 1.0601 needed to be broken to open the way for a return to 1.0806 range top. Sterling cedes (modest) further ground (EUR/GBP near 0.858). UK CPI and retail sales (Wed/Fri) are next reference to assess chances for the BoE to step up the pace of rate hikes in H2. The Swiss franc continues to shine (EUR/CHF 1.014) after last week’s SNB interest rate hike, annex U-turn in its assessment on the valuation of the franc (no longer overvalued). In Central Europe, the zloty outperforms (EUR/PLN 4.66). The Czech koruna doesn’t profit (EUR/CZK 24.73) in the run-up to an expected (final) CNB jumbo rate hike on Thursday (100 or 125 bps).

News Headlines

European gas futures extend an almost 40% rise last week by adding another 8% today. The Dutch gas future trades at €126/MWh, the highest level since mid-March when it shot up following the Russian invasion. The price surge relates to Russia cutting supply to top buyers including Germany, Italy and France, citing technical issues that prevent the pipeline from functioning. Nord Stream now operates at just 40% of capacity. The European Commission said Russia uses energy as “blackmail”. An outage at the Texas Freeport LNG plant, which made fewer cargoes available from the US that Europe counted on to restore reserves, adds to upward price pressures. Germany’s government already asked inhabitants to reduce consumption and said on Sunday it would pass emergency laws to reopen coal plants for electricity generation.

US corporate bond funds saw billions of dollars flowing out last week, suffering a double blow from rising yields and mounting fears over an economic downturn as the Fed tightens to combat inflation. From the week to June 15, $6.6bn was withdrawn from high-yield bond funds, the FT reported using EPFR data. It was the biggest outflow since the big sell-off in March 2020 and brings the YTD amount already to almost $35bn. Funds that buy investment-grade bonds saw an outflow of $2.1bn that week, the biggest weekly withdrawal since April 2021. CDS spreads (high-yield vs investment-grade) have risen from multiyear lows mid-2021 to almost 500 bps – the highest level since May 2020.

Canadian CPI inflation figures for May will make headlines on Wednesday at 12:30 GMT as investors look for clues to justify a potential Fed-style triple rate hike from the Bank of Canada next month. Given the unforeseen inflation spikes elsewhere, an upbeat report in Canada would not be surprising, likely making a super-sized rate increase imminent as the economy is already running hot.  

Will the BoC follow in the Fed's footsteps?

During June’s policy meeting, the Bank of Canada (BoC) hiked its benchmark interest rate by a half percentage point, underlining its intention to act even more forcefully if that’s what it’s going to take to cool inflation. Overnight swaps are now suggesting a probability of 67% for a Fed-like episode of a 75 bps rate hike in July, and despite growing concerns of an economic contraction, BoC chief Tiff Macklem did not play down the case a few weeks ago. Instead, he argued that surging borrowing costs are much needed to cool the housing market while setting a goal for a soft, manageable landing, although the finance minister advised to not take the latter as granted.

Therefore, May’s inflation report will be the next test for rate expectations on Wednesday. Following the sudden inflation pickup in the US, traders are forecasting a spike to 7.5% y/y from 6.8% previously in Canada - the highest since 1983. If estimates are right or in an extreme case, they are underestimating the inflation risk, a rate hike of a bigger magnitude in July might become a done deal.

The economy is running hot

Although households are indebted and therefore relatively sensitive to any rate increases, the Canadian economy may have the capacity to handle faster monetary tightening. The labor market is extremely tight, delivering its lowest unemployment rate on record in May. On top of that, Statistics Canada revealed that an all-time high of more than a million job vacancies were still hard to fill as of March, flagging a potential pickup in wage growth, which could consequently result in another inflation wave, and therefore toughen the BoC’s efforts to balance price growth.

Retail sales for April could shed some light on how resilient consumption is on Tuesday at 12:30 GMT. Total retail sales, which stagnated in March, are projected to gear up by 0.8% m/m, whereas the core measure is expected to diminish significantly from 2.4% to 0.6%. Even if recession fears come and go these days, the latter may do little to cancel a triple quarter rate increase next month if price growth marks a new multi-decade high. Besides, oil is an important export product for Canada and global galloping oil prices may bode well for the economy in the foreseeable future.

USD/CAD

If the headline CPI rate outpaces forecasts, the loonie may attempt to heal its wounds against the US dollar. In this case, dollar/loonie may reverse southwards to seek immediate support around 1.2950, while lower, the pair may retest the 1.2859 region ahead of the 1.2777 mark. However, with forecasts positioned wide off April’s readings, a milder CPI pickup cannot be ruled out, though that might barely pressure the commodity-linked currency.

The question that arises at this point is how far the loonie’s recovery could go. The BoC and the Fed will both likely drive their borrowing costs up to 2.25% by September and should the central banks continue to move in lockstep for the rest of the year, eliminating monetary divergence, the loonie might hardly stage any meaningful rally, unless oil prices press sustainably higher. On the other hand, the greenback could still find support from safe haven flows in case the global outlook deteriorates.

In the bearish scenario, where Canadian inflation fizzles out and retail sales portray softening domestic demand, dollar/loonie may rechallenge the ceiling at 1.3026 – 1.3075. A successful close higher could stretch towards the 1.3230 barrier.

Daily Pivots: (S1) 132.98; (P) 134.20; (R1) 136.24; More...

Range trading continues in USD/JPY and intraday bias remains neutral first. More consolidations could be seen below 135.58. But further rally is expected as long as 131.34 support holds. On the upside, break of 135.58 will resume larger up trend to 61.8% projection of 114.40 to 131.34 from 126.35 at 136.81. Firm break there will target 100% projection at 143.29.

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) 0.9636; (P) 0.9685; (R1) 0.9750; More...

Deeper fall could be seen in USD/CHF. But such decline from 1.0048 is viewed 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 0.9815 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) 1.2141; (P) 1.2254; (R1) 1.2335; More...

Range trading continues in GBP/USD and intraday bias remains neutral. 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).