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EUR/USD

After the strong depreciation of the euro against the U.S. dollar from 1.0910 to 1.0520, the currency pair entered a consolidation phase in the narrow range of 1.0480 – 1.0565. During yesterday’s trading session, the bulls unsuccessfully attacked the resistance at 1.0565, which led to additional losses for the EUR towards the level at around 1.0510. The market is still failing to find a clear direction and the expectations for today’s trading session are for the bears to attack the critical support at 1.0480, where a breach would most probably lead to a resumption of the long-term downtrend. In case this scenario is realised and the pair holds its position below 1.0480, then the next target for the sellers should be the support at 1.0450, followed by the psychological level at 1.0400. In the opposite direction, only a successful breach of the resistance at 1.0565 may lead to a corrective movement towards the next resistance at 1.0653. The most important news for investors today is the expected Fed Interest Rate decision (today; 18:00 GMT) and the follow-up press conference at 18:30 GMT, as well as the data regarding the change in ADP non-farm employment for the United States at 12:15 GMT.

USD/JPY

Low volatility is observed since the beginning of the week and the pair is trading in the narrow range of 129.70 – 130.30. A breach of the local resistance at 130.30 may lead the pair towards a test of the next important resistance at 131.23. A successful breach of the mentioned resistance may resume the uptrend and inch the price towards the level of 133.00, which was last reached in 2022. On the other hand, if the bears prevail, then a correction and a deepening of the sell-off towards the support at 127.66 is not excluded. However, such a decline could be expected only if the support at 129.29 is breached.

GBP/USD

The situation with the GBP/USD is similar to that of the EUR/USD, and at the time of writing, the pair is situated just above the key support at 1.2473. In case the bears take control and overcome this level, then an impulsive downward movement and a test of the next support at 1.2400 could be expected. However, if the mentioned support resists the sellers’ pressure, then we could expect an upward movement towards 1.2600.

EUGERMANY40

During the previous trading session, the German index managed to remain above the support at 13958, but the buyers could not gain enough momentum to reach the resistance at 14121. The current market sentiment is rather neutral and the expectations for today’s trading session are for the price of the index to fluctuate in the channel of 13958 – 14121. However, in case the bulls manage to take control over the market and violate the support at 14121, then an appreciation towards 14295 may be expected. In the downward direction, only a successful breach of the support at 13958 could possibly head the price towards the next support at 13850.

US30

At the time of writing this analysis, the index is headed towards a test of the support at 33164 and an eventual breach of this level would head the price towards a test of the next support at 33411. However, the market sentiments remain negative and the forecasts are for this support to resist the buyers’ pressure and for the sell-offs to resume, heading the index towards a new test of the critical support at 32724. Today, an increase in market volatility can be expected around the announcement of the Fed Interest Rate Decision (18:00 GMT), as well as during the follow-up FOMC press conference (18:30 GMT).

The FTSE 100 rallies ahead of the BOE meeting on Thursday. A bullish RSI divergence could be a soothing sign for the bulls as it indicates a slowdown in the sell-off.

A bounce above 7490 prompted sellers to cover their positions, further easing the downward pressure. 7580 is the next hurdle and its breach would bring the index back to the double top at 7670, where a breakout could resume the uptrend in the medium-term.

7420 is immediate support and 7300 an important level to keep the recent rebound intact.

The New Zealand dollar steadied after the Q1 jobless rate met expectations. The break below January’s lows at 0.6540 sent the kiwi into a free fall.

On the daily chart, a bearish MA cross exacerbated the downward pressure, though the RSI’s incursion into the oversold area may temper the bearish drive.

A rebound to 0.6540 may be necessary to recover from the overextension, which could be an opportunity to sell into strength. June 2020’s low at 0.6390 would be the next target when momentum returns.

The Australian dollar recovered after the RBA raised its cash rate for the first time in over a decade. A break below 0.7100 further weighed on sentiment.

Caution still prevails as buyers are wary of catching a falling knife. The RSI’s oversold condition on the daily chart may attract increasing buying interest, notably some short-covering.

Nonetheless, the bulls need to lift offers near 0.7170 before a reversal could gain a foothold. This year’s low at 0.6970 is a critical floor and its breach could send the Aussie into 0.68s.

Investors are holding their breath before today’s FOMC decision. The Federal Reserve (Fed) is expected to raise the interest rates by 50bp for the first time in two decades, and start reducing its balance sheet by $95 billion per month to tame the rising inflation in the US.

While the 50-bp hike is fully priced in, there is a chance for the Fed to get more aggressive and hint at a 75bp hike in a future meeting, despite the economic indicators that start showing signs of slow down.

US jobs

The latest jobs data will throw light on what happened in the US jobs market in April. Due today, the ADP report is expected to print 395K new private job additions last month, and NFP data, due Friday, is also expected to add near 400K near nonfarm jobs.

The strong recovery trend in US jobs market also means that the weakness in the latest GDP read is unlikely to change the Fed’s tightening plans. The Fed knows that the monetary policy will be paralyzed if inflation remains significantly above the policy targets. Therefore, the US policymakers will remain focused on the inflation battle for the coming quarters, in the expense of growth.

Dollar strength

It is, of course, not a surprise that we see the US dollar continue strengthening. The US dollar index rallied to near 104 mark last week, as besides the tighter Fed expectations, the safe haven flows support the greenback in the actual high economic and high geopolitical risk environment. Plus, the US position as a net energy exporter gives a further boost to the greenback as oil prices remain elevated.

The EURUSD hit the 1.05 mark on the back of a solid divergence between the Fed and the European Central Bank (ECB) expectations. Given the pricing around the hawkish Fed expectations, we may see some profit taking in long US positions after today’s FOMC announcement, yet a further advance toward parity in EURUSD is what the bears will likely be targeting next.

Oil

We haven’t seen a significant fall below the $100pb in US crude, and the risks remain tilted to the upside as the European nations now consider walking away from the Russian energy, before Russia cuts its energy supply them, after it turned off the tap for Poland and Bulgaria.

This week’s OPEC decision will be no relief, as the cartel is not planning to increase production by more than 432K barrels per day, as planned. Moreover, the latest reports suggest that the member states couldn’t even meet their actual production target due to capacity constraints, operational disruptions, and lower investment.

The only ‘hope’ is to see the Chinese lockdown, and broader economic slowdown due to China disruptions, and tighter financial conditions weigh on oil demand and pull prices lower in the coming quarters.

Market movers today

The highlight for markets today will be the FOMC meeting. We expect the Federal Reserve to hike the target range by 50bp, a view shared by consensus and market pricing, and signal that further 50bp rate hikes are looming this year. We also look for the Fed to announce that the balance sheet run-off will start in mid-May, with a cap set at USD95bn as outlined in the minutes (read more in Fed Preview, 28 April).

Services PMIs are released in the morning in a range of European countries, with the US ISM services index following in the afternoon. Rebounding services activity following the pandemic is an important economic driver at the moment.

The US ADP employment report for April will give some insights into the state of the US jobs market, ahead of non-farm payrolls on Friday.

The 60 second overview

Market sentiment: Markets are tuning in for an FOMC meeting later today with a 50bp hike, the largest since 2000, fully priced in and all eyes on the post-meeting press conference and Powell's comments and tone. Ahead of the meeting, risk sentiment seems sour in thin trading in Asia as the Chinese and Japanese markets are closed. US 10y yields have reversed a bit after breaking 3% yesterday with EUR/USD has retreated back close to 1.05 levels.

New sanctions against Russia: The EU is expected to announce its sixth round of sanctions against Russia today. According to diplomatic sources, new sanctions will target oil imports, Russian banks and disinformation campaigns. The EU countries are expected to agree on a ban for Russian oil imports to be phased in by the end of this year. For an EU-wide decision, unanimity is needed, and hence, the deal is expected to offer exemptions for at least Slovakia and Hungary - the two countries that heavily rely on Russian oil. There are also speculations that Bulgaria and the Czech Republic could join Slovakia and Hungary in demands for exemptions. Meanwhile, according to FT, independent refiners in China, which is the third largest buyer of Russian oil, have been discreetly purchasing Russian oil at steep discounts.

Victory Day looms: With May 9 approaching, we believe Russia is in a hurry to achieve some concrete results in the war in Ukraine to celebrate with the domestic public on next Monday. Last week, we highlighted that the risk of escalation may be growing as the Victory Day is raising the sense of urgency, see Research Russia- Ukraine - Several signals point to an escalation in the war in Ukraine as Victory Day looms, 26 April. According to anonymous sources close to Kremlin, Russia is planning to install occupation governments, order locals to pay with roubles and to set up referendums in some areas to open way for full annexation. Despite the disappointing performance of the Russian army, Kremlin officials remain confident that Russia will secure control over the Donetsk and Luhansk regions. Moscow is also seeking a tighter grip over the southern Kherson and Zaporizhzhia - regions already to some extent controlled by Russians. Securing control of these four regions would leave about fifth of Ukraine's territory and most of its coast under Russian control.

FI: The main event today is the FOMC meeting, where the Federal Reserve is expected to hike rates by 50bp as well as releasing more detail regarding QT. The 50bp hike is fully priced in but the risk of a 75bp rate hike is expected to be small even though it has been called for by Fed governor Bullard. The market reaction will very much depend on the communication from the Federal Reserve and whether the Federal Reserve will increase the front-loading of the rate hikes as well as stepping up the pace on the QT.

FX: EUR/USD is likely to go even lower from here and downside risk to our 12M target at 1.05 seems very relevant to consider. Today, the FOMC meeting will be the key event.

Credit: Credit markets benefitted from the bettering of risk sentiment, which caused iTraxx Xover to tighten 8bp and Main almost 2bp. This took the indices to 419.6bp and 88.3bp, respectively.

Nordic macro

Finnish and Swedish Prime Ministers Sanna Marin and Magdalena Andersson met for a second day of talks with the German Chancellor Olaf Scholz on Tuesday (see Yle news). After the meeting, Finnish PM Marin praised the quality of the talks and said the timing was perfect. She also said Finland and Sweden share the same security environment with their choices being interdependent. Marin hopes the two countries share the same direction and can move in tandem. The Finnish Social Democratic Party, led by PM Marin, is expected to officially announce their NATO stance on May 14, and Finland is expected to proceed in applying for a NATO membership before summer.

Daily Pivots: (S1) 0.7045; (P) 0.7097; (R1) 0.7146; More...

Intraday bias in AUD/USD remains neutral as consolidation from 0.7029 temporary low is extending. Further decline is still expected as long as 0.7228 minor resistance holds. As noted before, fall from 0.7660 is seen as the third leg of the larger correction from 0.8006. Below 0.7029 will target 0.6966 low first. Firm break there will confirm this bearish case and target 0.6756 medium term fibonacci level next. Nevertheless, considering bullish convergence condition in 4 hour MACD, break of 0.7228 should indicate short term bottoming, and turn bias back to the upside for stronger rebound.

In the bigger picture, price actions from 0.8006 are seen as a corrective pattern to rise from 0.5506 (2020 low). Fall from 0.7660 should be the third leg of this pattern. Break of 0.6966 will target 50% retracement of 0.5506 to 0.8006 at 0.6756. On the upside, break of 0.7660 will revive that case that the correction has already completed at 0.6966.

Overall, the markets are pretty quiet as focuses turns to Fed's rate hike and guidance today. Dollar is consolidating in tight range, preparing for the next move. For now, Aussie and Loonie are the stronger ones for the week, but they only have a slim advantage over the greenback. Sterling is the worst, followed by Swiss Franc and Kiwi. Yen is mixed, also awaiting the next move in treasury yields.

Technically, main focuses will be on Dollar pairs today. In particular, break of 1.0470 support in EUR/USD, 1.2410 support in GBP/USD, 0.7029 support in AUD/USD, and 131.24 resistance in USD/JPY would confirm that Dollar buying is back. It would be a strong sign of underlying strength in Dollar if these levels are taken out simultaneously.

In Asia, at the time of writing, Hong Kong HSI is down -1.23%. Singapore Strait Times is down -0.05%. Japan and China are on holiday. Overnight, DOW rose 0.20%. S&P 500 rose 0.48%. NASDAQ rose 0.22%. 10-year yield dropped -0.036 to 2.960.

ECB Schnabel: Rate increase in July is possible

In an interview, ECB Executive Board member Isabel Schnabel "a rate increase in July is possible in my view." But she added, "We of course have to wait and see how the data evolve up to the time of the decision. The first interest rate hike will in any case not take place until after the end of net asset purchases; we have committed to that."

Schnabel also noted that energy is "not the only factor" for the current high inflation. Core inflation also "climbed strongly to 3.5%". So, "we are seeing that inflationary pressures are becoming more broad-based."

"There can be no doubt that we will see higher wage demands if inflation remains so high over a prolonged period. We need to prevent high inflation from becoming entrenched in expectations. Talking is no longer enough, we need to act," she said.

NZ unemployment rate unchanged at 3.2%, high wage inflation

New Zealand employment rose 0.1% qoq in Q1, matched expectations. However, total actual weekly hours worked dropped slightly by -0.2%. Unemployment rate was unchanged at 3.2%, slightly above expectation of 3.1%. Participation rate dropped -0.1% to 70.9%.

Labor cost index rose 0.7% qoq, matched expectations. All sectors wage inflation rose 0.8% qoq. Annual rate jumped from 2.6% to 3.0%. "Wage inflation is at its highest level since the March 2009 quarter," business prices delivery manager Bryan Downes said.

Australia retail sales rose 1.6% mom to new record in Mar

Australia retail sales rose 1.6% mom to new record AUD 33.6B in March, well above expectation of 0.5% mom. Over the 12-month period, sales rose 9.4% yoy.

Director of Quarterly Economy Wide Statistics, Ben James, said the result was up 0.8% on the previous record level set in November 2021. This follows a 1.8% rise in February 2022, a 1.6% rise in January 2022 and a fall of -4.1% in December 2021.

"Rising prices, combined with the continued easing of restrictions across the country has led to rises in turnover in all three months of the March quarter.

Fed to hike 50bps today, but what next?

Fed is widely expected to raise federal funds rate by 50bps to 0.75-1.00% today. With markets pricing in 99.1% chance of that, there is no reason for Fed to rock the boat. Also, Fed is expected to announce the plan for runoff of its USD 9T balance sheeting, at a pace of roughly USD 95B per month (USD 60B in treasuries and USD 35B in MBS). That would be twice the speed of its quantitative tightening back in 2017.

Still, the main question is what next. Fed fund futures are currently pricing in 99.1% chance of another front-loading move in June to 1.50-1.75%. That is, a 75bps hike is near fully priced in for the next meeting. Markets would be eager to get some hints from Chair Jerome Powell on such expectations. But then, Powell is unlikely to give anything concrete.

Here are some previews on FOMC:

• Fed to Speed Up Rate Hikes, But How Far Will Powell Go?
• FOMC meeting preview – Hawkish, but will it be hawkish enough?
• FOMC Meeting Preview: 50bps a "Done Deal" but Balance Sheet Update Will be Key
• Fed Research – Preview: 50bp Rate Hike

In term of market reactions, the first two to note is whether EUR/USD would break through 1.0470 support to resume larger down trend. Second, attention is on whether 10-year yield would power through 3% handle.

Also, if Dollar is going to power up, Gold might re-accelerate downwards to 100% projection of 2070.06 to 1889.79 from 1998.23 at 1817.86, or even through it. Development in Gold would be used to confirm the underlying strength in Dollar.

Elsewhere

Germany trade balance, Eurozone PMI services final and retail sales, UK mortgage approvals and M4 will be featured in European session.

Later in the day, in addition to FOMC rate decision, US will release ADP employment, trade balance and ISM services. Canada will also release trade balance.

AUD/USD Daily Report

Daily Pivots: (S1) 0.7045; (P) 0.7097; (R1) 0.7146; More...

Intraday bias in AUD/USD remains neutral as consolidation from 0.7029 temporary low is extending. Further decline is still expected as long as 0.7228 minor resistance holds. As noted before, fall from 0.7660 is seen as the third leg of the larger correction from 0.8006. Below 0.7029 will target 0.6966 low first. Firm break there will confirm this bearish case and target 0.6756 medium term fibonacci level next. Nevertheless, considering bullish convergence condition in 4 hour MACD, break of 0.7228 should indicate short term bottoming, and turn bias back to the upside for stronger rebound.

In the bigger picture, price actions from 0.8006 are seen as a corrective pattern to rise from 0.5506 (2020 low). Fall from 0.7660 should be the third leg of this pattern. Break of 0.6966 will target 50% retracement of 0.5506 to 0.8006 at 0.6756. On the upside, break of 0.7660 will revive that case that the correction has already completed at 0.6966.

Economic Indicators Update

Fed is widely expected to raise federal funds rate by 50bps to 0.75-1.00% today. With markets pricing in 99.1% chance of that, there is no reason for Fed to rock the boat. Also, Fed is expected to announce the plan for runoff of its USD 9T balance sheeting, at a pace of roughly USD 95B per month (USD 60B in treasuries and USD 35B in MBS). That would be twice the speed of its quantitative tightening back in 2017.

Still, the main question is what next. Fed fund futures are currently pricing in 99.1% chance of another front-loading move in June to 1.50-1.75%. That is, a 75bps hike is near fully priced in for the next meeting. Markets would be eager to get some hints from Chair Jerome Powell on such expectations. But then, Powell is unlikely to give anything concrete.

Here are some previews on FOMC:

• Fed to Speed Up Rate Hikes, But How Far Will Powell Go?
• FOMC meeting preview – Hawkish, but will it be hawkish enough?
• FOMC Meeting Preview: 50bps a "Done Deal" but Balance Sheet Update Will be Key
• Fed Research – Preview: 50bp Rate Hike

In term of market reactions, the first two to note is whether EUR/USD would break through 1.0470 support to resume larger down trend. Second, attention is on whether 10-year yield would power through 3% handle.

Also, if Dollar is going to power up, Gold might re-accelerate downwards to 100% projection of 2070.06 to 1889.79 from 1998.23 at 1817.86, or even through it. Development in Gold would be used to confirm the underlying strength in Dollar.

Australia retail sales rose 1.6% mom to new record AUD 33.6B in March, well above expectation of 0.5% mom. Over the 12-month period, sales rose 9.4% yoy.

Director of Quarterly Economy Wide Statistics, Ben James, said the result was up 0.8% on the previous record level set in November 2021. This follows a 1.8% rise in February 2022, a 1.6% rise in January 2022 and a fall of -4.1% in December 2021.

"Rising prices, combined with the continued easing of restrictions across the country has led to rises in turnover in all three months of the March quarter.

Full release here.