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The US dollar climbed after better-than-expected NFP in April. The euro is licking its wounds after it broke March 2020’s lows near 1.0640. The price is seeking support above March 2017’s lows (1.0500). The previous rebound came to a halt at the support-turned-resistance at 1.0640. A bullish breakout could drive the bears into giving up their chips, reducing the pressure and potentially paving the way for a rally towards 1.0810. A fall below the current consolidation range (1.0480) would send the single currency to 1.0400.

Eurozone Sentix Investor Confidence dropped from -18.0 to -22.6 in May, worse than expectation of -20.8. The's the third decline in a row, and the lowest reading since June 2020. Current Situation index dropped from -5.5 to -10.5, worst since March 2021. Expectations index dropped from -29.8 to -34.0, worst since December 2008.

Germany Sentix Investor Confidence dropped from -17.1 to -20.5, lowest since May 2020. Current Situation index dropped from -4.8 to -7.3, lowest since March 2021. Expectations index dropped from -28.8 to -32.8, all-time low.

Sentix said: "War only knows victims. The traces of the Ukraine conflict are also becoming increasingly visible in the economy. The sanctions against Russia are having an effect, on enemies and friends alike. Last month, the "first mover" economic index clearly pointed the way towards recession. At the beginning of May, the downturn deepened further. Europe is hit particularly hard. The overall Eurozone index drops to -22.6 points. And for Germany we report an all-time low in economic expectations. In other words: it's coming thick and fast."

Full release here.

EUR/USD

During the last week, the single European currency was trading around the key level at 1.0565, but the week ended with a breach of 1.0565 – a level that already plays the role of the first important resistance. Today, the bears confirmed the breach of this level and are rapidly attacking the support level at 1.0480, a breach of which would draw a more bearish picture. However, if the bulls manage to tip the scales in their favour, then they would have to once more breach the key resistance level at 1.0565, with the next important zone being the level at 1.0630.

USD/JPY

The breach of the support at 129.30 and the subsequent unsuccessful attempts at breaching the next support zone at 128.66 represented the week for the Ninja. The bears’ attempt to reverse the upward trend of the greenback against the yen ended with the unsuccessful breach of the support at 128.66. Following their failure, the upward trend continued in full swing. At the time of writing the analysis, the bulls are aiming to breach the resistance at 131.23. If they are successful in their attack, then the most likely scenario would be for a move towards the resistance at 133.00.

EUGERMANY40

The bears continued to dominate the European markets, as over the past week, they managed to deepen the sell-off and cause a decline of almost 600 points in the German index. Today, with the opening of the markets, they managed to overcome the support level at 13559, and at the time of writing, the next goal for the bears would be to try and breach the level at 13400, with a corrective move towards 13560 shaping up to be a highly likely scenario.

US30

The U.S. blue-chip stock index began its trading session with a decline below 32607 and the bears now have the opportunity to gain even more ground if they manage to breach the next support level at 32333. The reason for this is that, despite the seemingly strong U.S. economy, the housing market is flashing warning signs as the treasury yields surge. Due to last week's extreme volatility, the odds of a corrective upward move are rather high and the bulls could meet resistance at 33000. This week, important economic news that could affect the U.S. index, is the data on the main consumer price index for the U.S. (Wednesday; 12:30 GMT), as well as the data on the U.S. producer price index (Thursday; 12:30 GMT).

Markets

Last week ended with another joint sell-off in stocks and bonds after solid April payrolls. The report provided the Fed with all the arguments to continue its recently beefed up tightening pace, even as monthly wage growth disappointed marginally. Wall Street shed up to 1.4% (Nasdaq). US bond yields added 2.8 (2y) to 10.6 bps (30y) in a steepening move. European swap yields rose 6.2 bps (2y) to more than 10 bps at the long end. A series of ECB governors (Holzmann on Thursday, Villeroy and Vasle on Friday) flagged the possibility of a rate hike already in June and helped to launch the move. Germany’s 10y yield in particular was eyepopping. An 8.8 bps surge hurled the closely watched reference beyond 1.06% resistance (2015 top) and made it already test the next target at 1.13%. Friday’s yield rise came mainly on the account of real yields, both in the US and the euro zone. Peripheral spreads rose marginally with Greece (+4 bps) underperforming. EUR/USD left intraday lows sub 1.05 behind after the ECB comments. The pair eventually didn’t make it much further compared to opening levels though (1.055). A strong trade-weighted dollar closed near cycle highs at 103.66. Sterling licked wounds inflicted by the openly divided Bank of England. EUR/GBP extended its break above the 0.8512 resistance to 0.855 – the highest since early December.

The Asian-Pacific equity scoreboard is all red this morning. Without much other news to trade on, investors have no option but to focus on high inflation, rapid monetary tightening and soaring growth prospects. Losses range between 1 and 4%. Core bonds tried but failed to capitalize on the risk-off. The dollar starts in pole position in FX markets, the Chinese yuan slips on lockdown-impacted trade data (see below). The British pound looks little affected by the historic victory by the Northern Irish Sinn Féin nationalists.

Economic data won’t guide markets much today. It does get interesting later this week with US CPI on Wednesday, UK GDP numbers on Thursday and an avalanche of central bank speeches, including from ECB president Lagarde, starting from tomorrow on. For today, there’s quite some nervousness about Russian president Putin’s speech during the May 9 Victory Parade. Risk-off may hold a tight grip, keeping the likes of the euro and sterling in the defensive. EUR/USD 1.05 remains a heavy gravitational force. EUR/GBP very recently swapped a month’s long downward trend channel for a narrow upward sloping one. EUR/GBP 0.8595 is next short-term resistance. Last Friday underscored the bearish momentum in core bonds. We don’t question the trend. The US 10y is testing final intermediate resistance ahead of the 2018 top (3.26%).

News Headlines

Chinese lockdowns hampered production and supply/shipments while slowing demand, affecting the country’s exports and imports. Exports in April slowed from 14.7% Y/Y to 3.9% Y/Y. Import growth came to a stand-still (0.0%) after a marginal decline in March. This resulted in a further rise of the Chinese trade surplus from $47.38 to $ 51.12 bln. The trade data confirm the growth risks for the Chinese economy. Chinese Prime Minister Li warned on the grave and complicated employment situation in both cities and, despite the lockdowns, instructed official institutions to giving priority stabilize employment, illustrating the ongoing difficult balancing act in the Covid strategy. The yuan this morning weakens further with USD/CNY jumping north of 6.71.

Market movers today

Today is victory day in Russia. We expect President Putin will escalate his rhetoric against the West. The market reaction is uncertain and will depend on the possibility of a Russian attack on other countries.

In Norway, we get industrial production figures for March.

During the rest of the week, focus will particularly be on US CPI figures.

We will also follow discussions on the EU's sixth sanctions package and if an agreement for a Russian oil embargo is found.

The 60 second overview

Victory day in Russia: While fighting continues in Eastern Ukraine, Russia celebrates the victory day today. Putin could use the occasion to formally declare a war against Ukraine, which so far has been dubbed 'a special military operation' by the Russian side. Declaration of war would enable Russia to mobilize more troops from its reserves, and further increase the pressure following only very limited progress over the past weeks. See our earlier take on the topic in Research Russia-Ukraine - Several signals point to an escalation in the war in Ukraine as Victory Day looms, 26 April.

China: Chinese trade balance recovered in April, as exports rose 3.9% y/y and imports remained unchanged y/y in dollar terms, both slightly stronger than consensus expected. The figures are affected by base effects and rising prices, and both import and export volumes likely declined m/m. China is being hit by both weakening export demand, which was evident in the latest round of PMIs, but also the prolonging Covid-restrictions. Over the weekend, authorities of Shanghai once again tightened the city's lockdown measures, with no end in sight in the near-term. Asian stocks have declined in early Monday trade, and oil prices have moved slightly lower due to rising recession risks, even though EU is set to discuss the Russian oil import ban further this week. China is likely to stick with the controversial 'zero-Covid' strategy for now, while increasing stimulus measures to support the economy. Chinese April credit data will be released this week, giving the latest sense of the strength of infrastructure stimulus.

US Jobs Report: US nonfarm payrolls grew by 428k in April, broadly in line with expectations despite the slight negative revisions. Wage growth moderated, but it still remained above pre-Covid levels at +0.3% m/m. With record high job openings, labour force participation still subdued and fast wage inflation, the overall picture of tight labour market conditions continue to support the case for fast Fed hikes, with around 68bp priced in for the next June meeting. See the details in our US Labour Market Monitor - Record-high job demand supports the case for more aggressive Fed tightening, 9 May.

Equities: Equities were lower on Friday with in new round of stagflation fears fuelled by the US job report. Hence value, defensive and low vol best performing while cyclical growth got heavily beaten down. Growth stocks down more than 20% year to date while value down only 4%. Since our latest strategy change 7 March, value has outperformed growth by 5%. The preference for value also visible in the US session at Friday with Dow -0.3%, S&P 500 -0.6%, Nasdaq -1.4% and Russell 2000 -1.7%. The risk appetite remains sour this morning with US futures lower and European futures even lower. Sentiment in Asia very negative as well with Japanese stocks down 2.3% this morning. Hang Seng (China) closed for Buddha's Birthday holiday.

FI: The continued rise in yields and widening of spreads is seen as the result of rising possibility of a 'disorderly' exit by ECB given the combination of liquidity tightening. as discussed in COTW: Introducing ECB 'LT': QT in liquidity, 6 May, early rate hikes from ECB and no clear strategy to avoid fragmentation of the EU sovereign bond and corporate credit markets.

FX: On Friday, EUR/USD ended the day nearly where it started around 1.055, as markets appear to have settled on the view that the Fed was indeed hawkish, irrespective of hiking 50bp while 'ruling out' 75bp. EUR/GBP moved further up now trading around 0.855, as relative rates have started to support the cross slightly. EUR/NOK and EUR/SEK moved sideways around 10.00 and just below 10.50, respectively. EUR/CHF moved back above 1.04.

Credit: Credit markets had yet another tough day on Friday, with iTraxx Xover and Main closing 9.5bp and 2.2bp wider, respectively. Had it not been for a strong end to the session, the indices would have widened twice as much.

Last week closed on a negative note, as US NFP data came in stronger-than-expected, revived Federal Reserve (Fed) hawks, and sent the major US indices lower. And the new week starts on a negative note, as well, after the Chinese Li Keqiang warned that the jobs situation in China is getting ‘complicated and grave’ as the government’s zero Covid policy is taking a heavy toll on the country’s economy, and impacts the rest of the world negatively, as well.

So negatively, that Saudi Arabia decided to cut oil prices for buyers in Asia from record highs pointing at the slowing demand in China. Saudi lowered all grades for the northwest Europe region and almost all for the Mediterranean, as well. However, crude oil kicked off the week under positive pressure, as leaders of the G7 nations pledged to ban the Russian oil on Sunday.

As the Russian oil ban has already been widely priced in, the positive impact will certainly remain limited, yet the worsening situation in China and Xi government’s stubbornness in keeping a Mission Impossible in place will likely cost more to China and to the world economy in terms of growth, and oil demand in the coming months. That could slow down the broader oil rally. Yet, news that Biden’s administration’s plan to buy crude to refill these strategic reserves is a sign that the drop in demand will certainly match the tighter global supply.

Jobs done; inflation next

The US NFP printed 430K new nonfarm job additions in the US last month, the unemployment rate came in a relatively low, but higher-than-expected 3.6%, and the average earnings increased a slightly less than the expectations, but not enough to cool down the Fed hawks.

The US 10-year yield closed the week above the 3.10% and the dollar index advanced to a fresh almost two-decade high.

On Wednesday, the US will reveal its latest inflation figure, and the CPI is expected to have eased to 8.1% in April, from 8.5% printed a month earlier.

If the jobs data couldn’t improve sentiment, as a strong data would fuel the hawkish Fed expectations, and a soft data would fan the recession fears, sign of softer inflation could improved appetite in risk assets, and trigger a positive correction in US indices.

In the FX and crypto

The EURUSD is preparing to clear support near 1.05. The only thing that could help the bears change their mind is a soft US inflation data, which would cool down the Fed hawks, confirming that the Fed’s efforts to slow inflation are paying off, meaning that it would not need to get too aggressive to bring inflation down toward its 2% policy target.

If we see the Fed hawks relax, we could also see recovery in cryptocurrencies, which trade closely, and positively, to the risk assets, and especially to tech stocks.

Bitcoin dived to the lowest levels since January over the weekend. The next natural target for Bitcoin bears is the $30K psychological support.

Daily Pivots: (S1) 160.39; (P) 161.00; (R1) 161.68; More...

Intraday bias in GBP/JPY remains neutral as the corrective pattern from 168.40 is still extending. Break of 159.59 will extend the correction from 168.40 lower. But downside should be contained by 61.8% retracement of 150.95 to 168.40 at 157.61 to bring rebound. On the upside, firm break of 168.40 will resume larger up trend.

In the bigger picture, up trend from 123.94 (2020 low) is still in progress. Sustained break of 61.8% retracement of 195.86 (2015 high) to 122.75 (2016 low) at 167.93 will be a long term bullish signal, and could pave the way back to 195.86 high. This will now remain the favored case as long as 150.95 support holds, even in case of deep pull back.

Daily Pivots: (S1) 136.89; (P) 137.53; (R1) 138.31; More....

Intraday bias in EUR/JPY remains neutral as consolidation from 139.99 is still extending. In case of another decline, downside should be contained by 38.2% retracement of 124.37 to 139.99 at 134.02 to bring rebound. On the upside, firm break of 139.99 will resume larger up trend for 144.06 medium term projection level.

In the bigger picture, up trend from 114.42 (2020 low) is in progress. Such rise is seen as the third leg of the pattern from 109.30 (2016 low). Next target will be 100% projection of 114.42 to 134.11 from 124.37 at 144.06. In any case, outlook will now remain bullish as long as 124.37 support holds, in case of deep pull back.

Daily Pivots: (S1) 0.8507; (P) 0.8550; (R1) 0.8589; More...

Intraday bias in EUR/GBP remains on the upside for the moment. Current rally should now target 0.8697 medium term fibonacci level next. On the downside, below 0.8500 minor support will turn intraday bias neutral first. But outlook will stays bullish as long as 0.8465 resistance turned support holds.

In the bigger picture, a medium term bottom could be in place at 0.8201, on bullish convergence condition in daily and weekly MACD. Rise from there could either be a correction to the down trend from 0.9499 (2020 high), or a medium term up trend itself. In either case, further rise should be seen to 38.2% retracement of 0.9499 to 0.8201 at 0.8697. Sustained break there will target 61.8% retracement at 0.9003.

Daily Pivots: (S1) 1.4812; (P) 1.4891; (R1) 1.4991; More...

Intraday bias in EUR/AUD remains neutral for the moment. On the upside, break of 1.5053 will resume the rebound from 1.4318, and target 61.8% retracement of 1.6223 to 1.4318 at 1.5495. On the downside, break of 1.4597 will bring retest of 1.4318 low instead.

In the bigger picture, as long as 1.5354 support turned resistance holds, larger down trend form 1.9799 (2020 high) is still expected to continue. On resumption, next target is 61.8% projection of 1.9799 to 1.5250 from 1.6434 at 1.3623, which is close to 1.3624 long term support (2017 low). However, firm break of 1.5354 will indicate medium term bottoming and bring stronger rally.