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The AUDUSD edges higher from new 22-month low (0.6910) on Tuesday, as US dollar bulls lose pace and traders partially take profit after pair’s 4.2% loss in past three days.

Overall picture remains bearish, as larger downtrend from 2022 peak at 0.7661 made a textbook correction (0.7029/0.7265) capped by 100DMA and near Fibo 38.2% of 0.7661/0.7029 downleg, before resuming.

Break and weekly close below psychological 0.70 support added to negative signals from daily indicators, as 14-d momentum continues to trend lower deep in the negative territory and south-heading daily moving averages formed a number of bear-crosses, weighing on the Aussie.

Ideal scenario sees limited upticks by 0.7000 (reverted to resistance) and 0.7029 (previous low) to offer better selling opportunities for extension through 0.6910 (new 22-month low) towards the top of thick monthly cloud (0.6822).

Traders await Wednesday’s release of inflation data for April from China (1.8% y/y f/c vs 1.5% Mar) and the US (8.1% y/y f/c vs 8.5% Mar) which will provide fresh signals.

Res: 0.6986; 0.7000; 0.7029; 0.7075
Sup: 0.6910; 0.6877; 0.6822; 0.6758

ECB Governing Council member Joachim Nagel said today, "as inflation in the euro area continues to run high, we need to act." He expects the asset purchases to end in June and "will advocate a first step normalizing ECB interest rates in July."

Nagel warned that risk of acting too late on inflation is "increasing notably". "Delaying a monetary-policy turnaround is a risky strategy," he said. "The more inflationary pressures spread, the greater the need for a very strong and abrupt interest rate hike."

GBPAUD suffered a very sharp decline in recent months, sinking to fresh 4-year lows. That said, the pair has rebounded and a double bottom pattern seems to have formed on the daily chart.

Momentum indicators on the weekly chart mirror the latest bounce in the price action, with the RSI bouncing off its 30 line and the MACD looking ready to cross back above its red trigger line.

If the bulls remain in the driver’s seat and manage to pierce above the 1.7800 region, which halted the advance several times lately, the next barrier to the upside might be the 1.8150 area.

Now in the case the bears wrestle back control, initial support to declines could be found near the 1.7400 level. If that’s violated, the focus would turn towards the 4-year low of 1.7200.

Overall, the long term trend in the pair is neutral. However, a potential drop below 1.7200 could change that. 

The British pound is in calm waters early in the week, as GBP/USD trades slightly above the 1.23 line. There are no major releases out of the UK or the US, which means that the pound should enjoy a quiet day.

Can the BoE get it right?

The British pound plunged over 2% last Thursday, a most difficult feat, considering that the Bank of England actually raised interest rates at its meeting that day. What went so wrong for the pound?

The BoE dutifully raised rates at the meeting, but investors lasered in on the central bank’s downbeat message which warned of a recession, while at the same time forecasting that inflation will top 10% this year. The UK is experiencing soaring inflation at growth remains weak, which are the ingredients for stagflation. The Bank slashed its growth forecast from 1.25% to -0.25%, and the spectre of negative growth may have shaken up investors and sent the pound on its laurels. The rate hike, which in any event was relatively small at 0.25%, failed to impress the markets.

BoE Governor Bailey was brutally honest when he said after the meeting that “It is a very weak projection, a very sharp slowdown”. I always appreciate when central bankers don’t hide behind gobbledygook, but the markets tend to reward good news, not honest news. There appears to be a heavy dose of scepticism as to whether the BoE can get it right, as it navigates between raising rates in order to curb inflation, while at the same time not choking economic growth. BoE Governor Bailey will need to show some achievements, such as lower inflation, in order to re-establish the central bank’s credibility, which has taken a blow in recent months.

The pound has stabilized for the time being but remains vulnerable. There is plenty of risk aversion in the air, with spiralling inflation, a slowdown in China and the Ukraine war. With the Federal Reserve in hawkish mode and the US economy performing well, the risk towards GBP/USD is tilted to the downside.

GBP/USD Technical

• There is support at 1.2199 and 1.2056
• GBP/USD faces resistance at 1.2418 and 1.2561

Markets

Global markets entered calmer waters after yesterday’s wild risk-off. Even so, after losses of 3.0-4.0%, equities rebounding 2.0%/1.5% (EuroStoxx50/Nasdaq) isn’t enough to conclude that the repositioning has run its course. Eco data provided only secondary help for investors to make up their mind on how the triangular relationship between too high inflation, decelerating growth and CB tightening will turn out. Economic expectations as measured by the German ZEW survey remained deeply negative but improved modestly from -41.0 to -34.3, while a further decline was expected. The current situation index declined further to -36.5 from -30.8. ZEW indicated that lockdowns in China caused a strong decline in current assessment. Interestingly, the ZEW indicator for the EMU improved more significantly from -43.0 to -29.5. Also remarkable, both for Germany and for the EMU experts expect a substantial cooling of inflation (-10.5 from 26.8 and -10.6 from 25.9) as they see interest rates hikes in the next six months. In the US, NFIB small business confidence (93.2) stabilized at the weakest level post corona. Entrepreneurs still see inflation and quality of labour as their biggest headwinds. In a speech, NY Fed President Williams defended the Fed frontloaded approach that should lead to a soft landing route by bringing demand back in line with supply. As the Fed normalizes interest rates ‘expeditiously’, he expects PCE inflation to return to 2.5% next year and to the Fed’s 2.0% goal in 2024. Inspired by a better risk sentiment, US yields initially tried to regain some upward momentum, but the attemp never gained traction. The (corrective?) short squeeze resumed. US yields face another downleg with the belly of the curve (5/10-y minus 6 bps) outperforming the wings (2-y -1.5 bps; 30-y -4 bps). EMU/German bonds even outperform their US counterparts declining between 7.5 bps (2-y) and 8.8 bps (5-10-y). Evidently, there is no direct link with the ZEW assessment, but also this decline is driven by a further easing of inflation expectations. The 10-y EMU inflation swap trades at 2.76%, down from a peak of 3.14% 10 days ago. The combination of a risk rebound, lower nominal yields and easing inflation expectations is a more comfortable context for EMU peripheral bonds. After a protracted widening recently, 10-y spreads versus Germany are easing with Italy outperforming (minus 9 bps), bringing the 10-y yield back below the 3.0% handle (2.97%).

Very little to report on the major FX cross rates. DXY (103.60) hovers sideways off recent 104+ peak levels. EUR/USD (1.056) also trades near the middle of a sideways intraday range. Similar story for EUR/GBP (0.8560). USD/JPY is holding yesterday’s decline but fails to sustainably break below 130, despite the decline in core yields.

News Headlines

Norwegian inflation accelerated unexpectedly in April by 1.2% m/m to 5.4% y/y (from 4.5% in March vs 4.7% expected). It’s the highest level since 2008. Underlying core inflation rose more than forecast as well, by 0.9% m/m to 2.6% y/y (from 2.1% vs 2.4% expected). Details showed broad-based price increases with only alcoholic beverages and tobacco down on a monthly basis (-0.1% m/m). Housing & utilities (2%), clothing and footwear (1.8%), transport (1.3%) and recreation & culture (1.2%) showed the biggest increases. The Norges Bank last week indicated concern with the risk of accelerating price and wage inflation and readiness to raise the policy rate more quickly than indicated in the March policy rate (quarterly hikes towards a 2.5% top end 2023). Markets already discount such faster scenario, reaching the 2.5% mark early 2023 and a policy rate peak around 3.25% end 2023. The NOK stabilizes near EUR/NOK 1.1025 following a string of losses which deteriorated the NOK-technical picture (see graph).

Czech inflation reached its highest level since the independence of the Czech Republic, rising by 1.8% m/m in April to 14.2% y/y. Prices of goods in total went up by 1.9% m/m and prices of services by 1.6% m/m. The hot CPI-print comes in the immediate aftermath of last week’s CNB policy meeting and again fades the CNB’s ‘fresh’ inflation forecasts (13.8% y/y expected). It suggests that the policy rate cycle could reach beyond the often rumoured final finetuning. Czech money markets discount a 6.75% policy rate peak this year compared with the current 5.75% level. The Czech koruna trades a tad stronger today, just below EUR/CZK 25.

Cleveland Fed President Loretta Mester said, she supports 50bps rate hikes at the next couple FOMC meetings. She also expects interest rate to go above 2.5% to bring inflation down.

"We need to get monetary policy in a more neutral and then we have to evaluate how much is needed to move that inflation needle down. It's going to be challenging… because there's things going down on the supply and demand sides," she said.

"It may very well be that the unemployment rate will have to move up a little bit, we may get another quarter of negative or slow growth, but that's going to have to happen if we want to get inflation down," she told Yahoo Finance. "I don't think what are planning to do with monetary policy, at least in my base case, is going to push the economy into a downturn that's sort of a sustained downturn."

Economic Sentiment in Germany rose unexpectedly, according to the latest May assessment. The corresponding ZEW indicator rose to -34.3 in May from -41.0 a month earlier, against expectations of a dip to -43.0.

Meanwhile, the current assessment of the economic situation continues to deteriorate, both under the influence of the situation in Ukraine and due to a slowdown in China. Germany, for which China is the main export market, is concerned with the lockdown in the second world economy and the resulting economic slowdown and falling demand for machinery and cars from Germany.

Despite the lapse in the current assessment, investors and traders are paying more attention to sentiment. The positive surprise helps EURUSD stabilise near 1.0500 and reinforces the bulls’ hopes that a straight road below parity is not yet a done deal.

AUDUSD is confronting the falling red Tenkan-sen line at 0.6971 after finding fresh positive footing between the 0.6921 base, formed over the first half of July 2021, and the 0.6900 handle. Despite new positive forces, the falling simple moving averages (SMAs) are endorsing the negative picture that evolved around the beginning of April.

The Ichimoku lines are indicating that downward pressures remain active, while the short-term oscillators are reflecting mixed messages in directional momentum. The MACD is flattening, implying some dwindling in negative potency, while the positively charged stochastic oscillator, is promoting additional gains after the bounce in the pair. That said, the RSI is failing to improve towards the 50 threshold, revealing weakness in buying interest.

If the red Tenkan-sen line at 0.6971 caps additional advances, sellers could revisit the 0.6900-0.6921 support zone where the pair recently found its feet. If this region fails to curb sellers’ second attempt to push lower, the price may then meet the 0.6876 barrier before targeting the 0.6806-0.6832 support section, moulded by the lows over the latter part of June 2021. Should frail buying pressures remain scarce, the price could then test the June 2020 trough of 0.6776.

On the flipside, if buying interest intensifies, initial resistance could occur at the 0.7029 obstacle. If buyers overstep this barrier, the price may then encounter multiple upside constraints, operating within the region from the 0.7058 low until the 0.7100 handle. In the event buyers conquer this section too, the bulls could then try to cement confidence in the pair by recapturing the area beyond the 0.7135 high and the adjacent Ichimoku cloud.

Summarizing, AUDUSD is sustaining a negative bearing beneath the SMAs and the 0.7100 barrier. The bearish bias remains robust should the price fail to lift back above the 0.7029 obstacle.

The S&P500 index lost about 3.2% Monday, closing below 4,000, a significant round level. The performance of S&P futures on Tuesday morning is feeding us with cautious optimism, pointing to buyers’ dominance at the start of trading in Europe. The market looks emotionally and technically oversold, which allows you to expect a rebound in the coming days.

The current values for the US S&P500 are the lowest in 13 months. At the beginning of last year, the index did not take the high of 4000 at the first attempt, and now this level could be no less significant support.

The local disposition shows that the market looks oversold after almost a month and a half of decline. Meanwhile, the Relative Strength Index hints at potential exhaustion of the downside momentum, as along with new lows in the S&P500, the RSI on the daily charts has not updated its lows.

Moreover, since January, a sequence of lower local lows for S&P has been followed by higher lows for RSI. A reversal often follows this, and the crucial round level 4000 could be just that.

The Nasdaq100 has taken an even more pronounced loss in the last six months, losing more than 27% from the peak to the bottom, and yesterday it touched lows from December 2020. However, we also see an accumulated oversold condition, which could work as at least a temporary shock absorber for a bounce.

The Nasdaq100 has corrected to more than 61.8% from a rise from the lows of December 2018 to the highs of November 2021 and is around the August-November 2020 peaks, which puts it in line with the S&P500. Although it wanders into the bear market territory, it could still receive support from buyers in the coming days.

Among the fundamental reasons to buy are expectations of an imminent peak in inflation, which is often a turning point for the stock market, and expectations that the economy will continue to pick up, which will restore confidence in companies to rebuild their earnings. This makes the stock market potentially attractive for buying from current levels.