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Key insights from the week that was.

After a very strong run, Australia’s labour market took a breather in April, with only 4k jobs created in the month (market consensus 30k). Still, the unemployment rate recorded a new near 50-year low of 3.9% (note, March was also revised down to 3.9%). Further highlighting the current strength of labour demand, hours worked rose 1.3% in the month as part-time roles transitioned to full-time, and more full-time positions were created.

Ahead, we continue to expect further strong gains for employment, resulting in a low for the unemployment rate of 3.2% late this year despite record participation. As this trend persists, the wage pulse is set to build, from a modest 2.4%yr at Q1 2022 to 4.0%yr in 2023. The detail of the Q1 WPI provides support for this view, with the 15% of private workers who received an increase in the quarter seeing their pay rise by 3.4%, a percentage point more than the current annual rate and the largest increase since June 2013. The 2022 minimum wage decision may provide additional support, with unions having put forward an ambit claim for 5.5%.

The minutes of the May RBA meeting provided additional evidence from their business liaison work of labour market strength and growing momentum for wages. Also of significance for the inflation outlook, firms reported they were becoming more confident in raising prices.

As detailed by Chief Economist Bill Evans, the current momentum in inflation and uncertainty surrounding the outlook suggests the most appropriate path for policy is a moderate but front-loaded hiking cycle from the current level of 0.35% (following May’s 25bp increase) to 0.75% in June; 1.75% come November; and a peak of 2.25% by May 2023. Australia’s high level of household debt will then see debt service at highs back to the GFC, affecting both discretionary income and sentiment.

In New Zealand, this week saw the release of our team’s latest quarterly Economic Overview, a detailed assessment of current conditions and the outlook for the NZ economy. In this release, the team upgraded their expectation for the RBNZ, with a peak cash rate of 3.50% now seen at year end to combat a potent combination of global and local inflation pressures. House sales and prices have already taken a hit and are expected to weaken further as the cycle continues. That said, the cumulative decline should only take prices back to the level seen in early 2021. Through confidence and wealth, this shock is expected to pass to consumption and GDP growth in time, creating the slowdown necessary to quell inflation pressures and risks. Recognising the hit household incomes are taking, the NZ Government’s Budget 2022 provided some temporary, targeted cost-of-living relief.

For the US, FOMC speakers including Chair Powell again highlighted this week that, for the time being, inflation pressures and risks remain their focus. Concern over the strength and persistence of inflation in the UK and Euro Area meanwhile had a broad impact, global equities hit hard by fears of stagflation.

We believe it is important to distinguish between the risk of above-target but decelerating inflation with activity growth near trend and that of a stalled or contracting economy with inflation a multiple of target (stagflation).

Our baseline forecast for the US sees GDP growth modestly below trend in 2023; but, throughout that year, inflation is expected to throttle back to be only marginally above 2.0%yr. Achieving this feat in the US requires the abating of energy price growth, not a material fall, and other supply-side price pressures coming back from extreme levels to a moderate positive pace – a process that has clearly set it but has a long way to run.

As emphasised by Chair Powell this week, it is not enough to trust this trend will run its course. Instead, demand’s strength has to be actively reined in through financial conditions and real household incomes. Equally though, this does not mean central banks have to halt growth altogether and risk recession. In the US and across most of the developed world, there is a clear belief in acting quickly to move policy and tighten financial conditions towards a neutral level, but only taking an outright contractionary stance if risks materialise. Fears over the outlook for growth therefore should be recognised as a function of market behaviour and uncertainty, not the actions of central banks.

Finally to events in China. Data headlines over the past week caused considerable angst over the economic outlook, far more than the detailed data suggest is warranted. The biggest concern was retail sales, reported to be down 11% in April versus a year ago. However, assessed on a year-to-date basis, the cost to 2022 consumption from COVID-zero policies is seen to be much more manageable, with activity down only 0.2% in the first four months of 2022 versus the same period in 2021. Also important is that year-to-date growth in fixed asset investment largely held up in April, the narrow geographic focus of the lockdowns helping to maintain activity elsewhere.

If success in controlling the spread of the virus in Shanghai and Beijing holds, then the recovery should be swift and sizeable. Supporting this view, the past month has seen authorities’ support of the economy continue to build through announced and mooted policy initiatives, and by encouraging credit availability/ borrowing. This is not to say that we will see a surge in any and all projects no matter their profitability; but rather that local government and State Owned Enterprises’ curated lists of productivity enhancing old and new economy infrastructure projects are being given the green light. Meanwhile, with the residential construction sector having completed its reform phase and given recently announced policy easing, confidence should return amongst buyers and builders in the second half of 2022, supporting a strong recovery in activity.

Clearly, as long as it is active globally, COVID-19 will remain a risk for China. But the continuation of heavy restrictions on international travel should give authorities comfort that the domestic economy can re-open and operate with limited risks hence. This approach to COVID-zero would provide a double win for GDP, limiting the loss to imports while building momentum and confidence in local activity. This is a key support for our view that GDP can still achieve growth near authorities' target for 2022 despite a weak Q2. Apart from the virus, looking ahead the other significant risk to China growth is external demand which is coming under pressure from tighter financial conditions, weakening real incomes and, of course, uncertainty.

DXY:

On the H4, with prices below the ichimoku indicator and prices breakout of the ascending channel, we have a bearish bias that price will drop to our 1st support at 102.492 where the horizontal swing low support and 78.6% Fibonacci projection are from our 1st resistance at 103.276 in line with the horizontal pullback resistance. Alternatively, price may break 1st resistance structure and head for 2nd resistance at 103.903 where the horizontal swing high resistance and 50% Fibonacci retracement are.

Areas of consideration:

• H4 time frame, 1st resistance at 103.276
• H4 time frame, 1st support at 102.492

XAU/USD (GOLD):

On the H4, with RSI moving in a bullish momentum and prices breaking out of the descending trendline,we have a bullish bias that price will rise from our 1st support at 1829.56 where the horizontal overlap support is to our 1st resistance at 1857.48 in line with the horizontal swing high resistance, 61.8% Fibonacci retracement and 100% Fibonacci projection. Alternatively, price may break 1st support structure and head for 2nd support at 1820.14 where the horizontal pullback support is.

Areas of consideration:

• H4 time frame, 1st Resistance at 1857.48
• H4 time frame, 1st Support at 1829.56

GBP/USD:

On the H4, with price moving above the ichimoku indicator, we have a bullish bias that price will rise from our 1st support at 1.23920 where the horizontal overlap support is to our 1st resistance at 1.25474 in line with the 61.8% Fibonacci projection. Alternatively, price may break 1st support structure and head for 2nd support at 1.23329 where the horizontal swing low support and 78.6% Fibonacci projection are.

Areas of consideration:

• H4 1st resistance at 1.25474
• H4 1st support at 1.23920

USD/CHF:

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from our 1st resistance at 0.98710 where the 50% Fibonacci retracement is to our 1st support at 0.97071 in line with the swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the 61.8% Fibonacci retracement.

Areas of consideration

• 1st support level at 0.97071
• 1st resistance level at 0.98710

EUR/USD :

On the H4, with price expected to reverse off the ichimoku cloud resistance, we have a bearish bias that price will drop from our 1st resistance at 1.04826 where the 23.6% Fibonacci retracement is to our 1st support at 1.03586 in line with the horizontal swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal swing high resistance is.

Areas of consideration :

• H4 1st resistance at 1.04826
• H4 1st support at 1.03586

USD/JPY:

On the H4, with prices moving below the ichimoku indicator, we have a bearish bias that price will drop from our 1st resistance at 128.085 where the 38.2% Fibonacci retracement and horizontal overlap resistance is to our 1st support at 126.787 in line with the 78.6% Fibonacci projection. Alternatively, price may break 1st resistance structure and head for 2nd resistance at 128.831 where the horizontal swing high resistance and 61.8% Fibonacci retracement is.

Areas of consideration:

• H4 time frame, 1st resistance at 128.085
• H4 time frame, 1st support at 126.787

AUD/USD:

On the H4, with price expected to reverse off the ichimoku cloud resistance, we have a bearish bias that price will drop from our 1st resistance at 0.70604 where the overlap resistance and 50% Fibonacci retracement is to our 1st support at 0.68277 in line with the swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal swing high resistance is.

Areas of consideration

• H4 1st resistance at 0.70604
• H4 1st support at 0.68277

NZD/USD:

On the H4, with price expected to reverse off the ichimoku cloud resistance, we have a bearish bias that price will drop from our 1st resistance at 0.63669 where the overlap resistance and 50% Fibonacci retracement is to our 1st support at 0.62288 in line with the swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal swing high resistance is.

Areas of consideration:

• H4 time frame, 1st support at 0.62288
• H4 time frame, 1st resistance at 0.63669

USD/CAD:

On the H4, with price moving below the ichimoku, we have a bearish bias that price will drop from our 1st resistance at 1.29039 where the horizontal pullback resistance is to our 1st support at 1.27122 in line with the swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal swing high resistance is.

Areas of consideration:

• H4 time frame, 1st resistance at 1.29039
• H4 time frame, 1st support at 1.27122

OIL:

On the H4, with price expected to bounce off the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance at 111.36 where the 23.6% Fibonacci retracement from our 1st support at 106.74 in line with the horizontal overlap support and 50% fibonacci retracement. Alternatively, price may break 1st support structure and head for 2nd support where the horizontal pullback resistance is.

Areas of consideration:

• H4 time frame, 1st resistance of 111.36
• H4 time frame, 1st support of 106.74

Dow Jones Industrial Average:

On the H4, with price expected to bounce off the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance at 31835 where the 23.6% Fibonacci retracement from our 1st support at 31167 in line with the horizontal overlap support and 50% fibonacci retracement. Alternatively, price may break 1st support structure and head for 2nd support where the horizontal pullback resistance is.

Areas of consideration :

• H4 time frame, 1st resistance at 31835
• H4 time frame, 1st support at 31167

Japan headline CPI (all items) rose from 1.2% yoy to 2.5% yoy in April. CPI core (ex-fresh food) rose from 0.8% yoy to 2.1% yoy. CPI core-core (ex-fresh food, energy) rose from -0.7% yoy to 0.8% yoy.

The 2.1% CPI core reading was slightly above expectation of 2.0% yoy. It topped BoJ's 2% target for the firs time since March 2015. Also, it should be noted that CPI core-core was positive for the first time since July 2020.

New Zealand goods exports rose 17% yoy to NZD 6.3B in April. Imports rose 15% yoy to NZD 5.7%B. Monthly trade surplus came in at NZD 584m, versus expectation of NZD -350m deficit.

Exports rose for all top destinations except China, which was down -1.8%. Exports to Australia was up 4.9%, US up 26%, EU up 26%, Japan up 58%.

Import from all top partners rose, including China (up 8.9%), EU (up 18%), Australia (up 44%), US (up 29%), Japan (up 0.5%).

Full release here.

Minneapolis Fed President Neel Kashkari said yesterday, "we know we have to get inflation down; we are doing everything we can to achieve a 'soft landing,' but I'll be honest with you: I don't know the odds of us pulling that off."

On recent stock market rout, he said, "The wealth effect is a real thing...those who have stocks have higher 401Ks, they feel more confident, they go out and spend more, when those things come down, it may change their behavior... we do pay attention to that feedback."

Short Term Elliott Wave View in EURUSD suggests the decline from February 10, 2022 peak is unfolding as a 5 waves impulse Elliott Wave structure. Down from February 10, wave (1) ended at 1.0806 and rally in wave (2) ended at 1.1185. Pair then resumes lower in wave (3) and ended at 1.0348. Wave (4) corrective rally is presently in progress with internal subdivision as a zigzag structure.

Up from wave (3) low on May 13, wave ((i)) ended at 1.04384 and dips in wave ((ii)) ended at 1.0388. Pair then extends higher in wave ((iii)) towards 1.0555, dips in wave ((iv)) ended at 1.0519 and final leg wave ((v)) ended at 1.0563 which completed wave A. Pullback in wave B ended at 1.0457. Pair has resumed higher in wave C with potential target at 100% – 161.8% Fibonacci extension of wave A at 1.067 – 1.08. Near term, as far as pivot at 1.0457 low stays intact, expect dips to find support in 3, 7, 11 swing for further upside.

EURUSD 1 Hour Elliott Wave Chart

GBP/USD look headed for its first weekly gain in four weeks moving into late Thursday trading. At the time of writing, the pair was trading up by 2.03% at 1.25089, supported by a broadly weaker US dollar. But a stronger pound this week didn’t relate to any major positive news about the UK economy. On the contrary, economic data from the UK has been a relative disappointment. Traders, therefore, should be cautious reading too heavily into the positive price action in recent days.

UK Q1 GDP data last week proved a real disappointment and March monthly GDP did by even more. Tuesday’s April CPI release didn’t prove to be all that much better. Granted, both headline and core inflation came one ppt lower than estimated, but at 9% y/y CPI – inflation in the UK is still running at a year high. The only real glimmer of sunshine was last weeks March labour market report, which revealed employment was holding up well for now. But wages were still well behind the pace of inflation.

Furthermore, the situation with the Northern Ireland protocol still hangs over the pound like the sword of Damocles. On Thursday, the UK government was setting out plans to re-write the legislation, setting off a potential row with the EU. Relations with EU in this regard could come under more strain in the coming days. If the recent moves higher in GBP/USD reflect anything, it is lower bond yields in the US driving down the relative returns between the two currencies.

Yields, however, are falling in part because of fears over global growth as much as they are over concerns about US growth conditions. If concerns about the global economy get too extreme, there is a risk the US dollar starts to take on its safe-haven attributes. As a result, the US dollar may rise even if US yields fall. At times like these, tight risk management and cautious position sizing can be more beneficial than having deep convictions that a major reversal is at hand.

• GBPCHF reversed from key support level 1.2100
• Likely to rise to resistance level 1.2200

GBPCHF today reversed up with the daily Long-Legged Doji from the key support level 1.2100 (which has been steadily reversing the pair from the start of March).

The support zone near the support level 1.2100 was strengthened by the lower daily Bollinger Band.

Given the strength of the nearby support level 1.2100, GBPCHF can be expected to rise further toward the next resistance level 1.2200.

• AUDCHF reversed from support area
• Likely to rise to resistance level 0.6900

AUDCHF today reversed up from the support area lying at the intersection of the support level 0.6835 (former resistance from March, acting as support now) and the lower daily Bollinger Band.

This support area was further strengthened by the 38.2% Fibonacci correction of the upward impulse from December.

Given the clear daily uptrend, AUDCHF can be expected to rise further toward the next resistance level 0.6900.

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