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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.

Full release here.

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.

Full interview here.

The Fed is almost certain to raise interest rates by half a percentage point and begin shrinking its enormous balance sheet when it concludes its meeting at 18:00 GMT Wednesday. Then on Friday, the employment report for April will hit the markets and is expected to reaffirm the strength of the US economy. Overall, the dollar will likely remain king until the economic outlook for Europe, China, and Japan begins to improve. 

Fed gets its wish

Fed officials have been talking a big game lately, preparing the markets for a series of rapid-fire rate increases to cool sizzling inflation. Their message has finally gotten across. Ten year real US yields turned positive after a long time as inflation expectations declined, which means that investors are starting to believe the Fed will get the job done.

A half percentage point rate increase is already fully priced in for this meeting, so the market reaction will boil down to the details around the balance sheet reduction process and Chairman Powell’s remarks during his press conference.

It won’t be easy for Powell and his colleagues to outgun market expectations even if they wanted to. The bar has been set quite high with a total of 200 basis points of rate hikes priced in until September. It’s difficult to go any faster than this, otherwise there’s a real risk something breaks - whether it’s the bond market, housing market, or a stock market swimming in leverage.

The Fed wants to avoid sparking panic. With economic growth losing steam, the dollar strengthening so much, and inflation expectations cooling a touch, there’s no great urgency for Powell to ‘go to war’ at this meeting. Instead he might strike a balanced tone, highlighting inflation worries but also noting the risks around growth, especially with Europe and China also slowing.

This may disappoint some US dollar bulls. In this case, euro/dollar could inch higher to test the 1.0635 zone.

Full employment ahead

Then on Friday at 12:30 GMT, the latest US employment report will be released. Nonfarm payrolls are expected to have risen by 400k in April, pushing the unemployment rate down one tick to reach 3.5%.

Such a low unemployment rate was only achieved for a few months before the pandemic - you have to go back to the 1960s to find similar readings. Wage growth is forecast to have remained almost unchanged but with the economy almost back to full employment, wages are likely to pick up soon.

As for any surprises, job market indicators generally favor a strong nonfarm payrolls print. The Markit PMI survey showed that the rate of job creation in April was the strongest in a year while initial jobless claims fell further during the survey week, both pointing to a solid print. A strong report overall could help euro/dollar move back down towards the 1.0470 zone.

There was some cause for concern from the ISM manufacturing survey, where the employment sub-index fell notably. That said, the manufacturing sector accounts for less than 10% of the US workforce, so this signal should be taken with a grain of salt.

Dollar remains king

As for the dollar, it may take a step back this week in case the Fed is not as hawkish as many investors expect, but the overall outlook remains positive. The dollar got here by riding a perfect storm of rising US rates, risk aversion, and storm clouds gathering over every other region.

An energy crisis has brought Europe to its knees, China remains committed to strict lockdowns that will hammer growth, the British pound is trading like a proxy for stock markets, and Japan wants a weaker currency.

Until the outlook for these regions begins to improve, it’s difficult to envision a trend reversal in the dollar - even if the Fed slightly under delivers relative to market expectations. There’s just no real alternative.

DXY:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance at 103.706 where the swing high resistance is from our 1st support at 102.900 in line with the 23.6% and 78.6% Fibonacci retracement. Alternatively, price may break 1st support structure and head for 2nd support where the 127.2% Fibonacci extension and 100% Fibonacci projection is is.

Areas of consideration:

• H4 time frame, 1st resistance at 103.706
• H4 time frame, 1st support at 102.900

XAU/USD (GOLD):

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from our 1st resistance at 1874 where the 38.2% Fibonacci retracement and pullback resistance is to our 1st support at 1849 in line with the horizontal swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal pullback resistance is.

Areas of consideration:

• H4 time frame, 1st Resistance at 1874
• H4 time frame, 1st Support at 1849

GBP/USD:

On the weekly, we expect price to potentially bounce from 1st support level of 1.23627 in line with 61.8% fibonacci retracement towards the 1st resistance level of 1.33634 in line with 50% fibonacci retracement.

On the daily, we expect price to potentially bounce from 1st support level of 1.24385 in line with 61.8% fibonacci retracement towards the 1st resistance level of 1.34739 in line with 78.6% fibonacci retracement.

On the H4, we have a bullish bias that price will bounce from 1st support level of 1.24099 which lines up with a major 61.8% fibonacci retracement towards the 1st resistance level of 1.28160 which lines up with 61.8% fibonacci retracement.

Areas of consideration:

• H4 1st resistance at 1.28160
• H4 1st support at 1.24099
• H4 2nd support at 1.22589

USD/CHF:

On the H4, we expect that price will potentially reverse from 1st resistance level of 0.97986 in line with a major 127.2% fibonacci extension towards the 1st support level of 0.96723 in line with 23.6% fibonacci retracement. Alternatively, price may head for 2nd resistance at our daily resistance.

Areas of consideration

• 1st support level at 0.96723
• 1st resistance level at 0.97986

EUR/USD :

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from our 1st resistance at 1.05826 where the 23.6% Fibonacci retracement is to our 1st support at 1.04814 in line with the horizontal swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the 127.2% Fibonacci extension is.

Areas of consideration :

• H4 1st resistance at 1.05826
• H4 1st support at 1.04814

USD/JPY:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance at 131.240 where the swing high resistance is from our 1st support at 129.374 in line with the horizontal pullback support and 50% and 78.6 Fibonacci retracement. Alternatively, price may break 1st support structure and head for 2nd support where the horizontal swing low support is.

Areas of consideration:

• H4 time frame, 1st resistance at 131.240
• H4 time frame, 1st support at 129.374

AUD/USD:

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from our 1st resistance where the 23.6%, 61.8% Fibonacci retracement is to our 1st support 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 0.71213
• H4 1st support at 0.70348

NZD/USD:

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from our 1st resistance where the 50% Fibonacci retracement is to our 1st support in line with the horizontal swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal pullback resistance and 78.6% Fibonacci retracement is.

Areas of consideration:

• H4 time frame, 1st support at 0.64197
• H4 time frame, 1st resistance at 0.65324

USD/CAD:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance at 1.29023 where the swing high resistance is from our 1st support at 1.27783 in line with the horizontal pullback support, 61.8% and 78.6% Fibonacci retracement. Alternatively, price may break 1st support structure and head for 2nd support where the horizontal swing low support is.

Areas of consideration:

• H4 time frame, 1st resistance at 1.29023
• H4 time frame, 1st support at 1.27783

OIL:

On the Weekly, with price moving above the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance where the swing high resistance is from our 1st support in line with the horizontal pullback support and 50% Fibonacci retracement. Alternatively, price may break 1st support structure and head for 2nd support where the horizontal swing low support is.

Areas of consideration:

• H4 time frame, 1st resistance of 106.99
• H4 time frame, 1st support of 101.15

Dow Jones Industrial Average:

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will drop from our 1st resistance at 33114 where the pullback resistance and 23.6% Fibonacci retracement is to our 1st support at 32559 in line with the horizontal swing low support. Alternatively, price may break 1st resistance structure and head for 2nd resistance where the horizontal pullback resistance and 38.2% Fibonacci retracement.

Areas of consideration :

• H4 time frame, 1st resistance at 33114
• H4 time frame, 1st support at 32559

Key Highlights

• AUD/USD declined sharply below the 0.7200 support zone.
• A major resistance is forming near 0.7200 and 0.7240.
• Gold price broke the $1,900 support to move into a short-term negative zone.
• The US ADP Employment could change 395K in April 2022, down from 455K.

AUD/USD Technical Analysis

The Aussie Dollar struggled to stay above 0.7400 against the US Dollar. AUD/USD declined heavily and traded below the key 0.7250 support zone.

Looking at the 4-hours chart, the pair extended decline below 0.7220. There was also a close below 0.7200, the 200 simple moving average (green, 4-hours), and the 100 simple moving average (red, 4-hours).

Finally, there was a move below the 0.7050 level and the pair traded to a new multi-month low at 0.7030. It is now consolidating losses above the 0.7050 level.

The pair tested the 23.6% Fib retracement level of the main decline from the 0.7458 swing high to 0.7030 low. The first major resistance is forming near the 0.7200 level. If there is an upside break above 0.7200, the pair could rise to 0.7240.

The 50% Fib retracement level of the main decline from the 0.7458 swing high to 0.7030 low is also near the 0.7245. A close above 0.7240 and 0.7250 could open the doors for a move towards the 0.7300 resistance.

If not, there is a risk of more losses below 0.7050. The next major support is near the 0.7000 level. Any more losses may perhaps push AUD/USD towards the 0.6920 support zone.

Looking at EUR/USD, the pair is struggling to recover above the 1.0600 level. Similarly, GBP/USD is facing an uphill task near the 1.2600 zone.

Economic Releases

• US ADP Employment Change for April 2022 - Forecast 395K, versus 455K previous.
• US ISM Services Index for April 2022 – Forecast 58.5, versus 58.3 previous.

Gold has headed lower for the past two consecutive weeks while remains in a selling momentum in the current, falling to a new 2-month low on the 2nd of May. Clearly Gold’s latest breach below known territory must signal a drastic change in sentiment among traders allowing us to detail some economic developments through this report. We aim to be precise and to the point as an interesting week unfolds with a number of crucial economic events posing as potential movers for the Gold market. Simultaneously, this report will present a technical analysis providing an insight on important technical levels and recent price action.

To make a start, Gold’s downward movement commenced on Friday the 29th of April and seems to persist until today the 3rd of May. In our view, the selling trendline may be correlated to the US economic releases of the previous Friday, which may have enacted a decent bearish interest among traders. On Friday the 29th we got the US Personal Consumption rate which rose to 0.2% from previous revised 0.1% and the Consumption Adjusted rate which jumped to the impressive 1.1% from previous revised 0.6%. At the same time, the Core PCE Price Index rates for March remained steady at 0.3% for the month while the yearly rate ticked down to 5.2%. Please note the Core PCE rates exclude energy prices thus these could be the first signs of good prices stabilizing instead of rising and the rates are optimistic for consumers as some stabilization maybe observed on the headline CPI rates incoming in the following weeks. It could be useful to note, that the Federal Reserve often refers to the Core PCE rates as guidance thus its appearance as a mediocre economic reading could be misleading. Expectations for lower inflation could have invited the sellers for Gold prices. On the contrary, the data is positive for the US economy and provided a temporary boost for the USD Index during the release. In this case, as the greenback received support Gold may have been pushed lower due to their adverse relationship.

Turning to the current week, on the 4th of May during the late US session we get the key economic event of the week with the Federal Reserve’s Interest rate decision meeting. This meeting will consist of the FOMC statement, the interest rate decision and later the FOMC press conference with Chairman J Powell going live. Currently FFF imply a probability of 93.9% for a rate hike of 50 basis points to be enacted sending the overnight rate to 0.875%. Market participants will be interested to know how the Fed will deal with the economy looking forward and how aggressive it is willing to be. In this case a hawkish tone could possibly favor the USD. Yet, due to the market’s anticipation for this important event, we could not rule out the scenario of Gold’s price action undertaking wide swings throughout the decision and press conference.

On Friday the 6th of May we get the important US employment report for April. The US job market had become extremely tight in the previous months and it will be very interesting to see if this notion continued in April. For the time being, the unemployment rate is expected to tick down to 3.5% while the NFP figure is estimated at 400K. This is an event that requires extra caution in our opinion, as the actual figures could create volatility waves across the board and especially for the Gold market.

Technical Analysis

XAUUSD Daily

Due to the incoming economic events mentioned and the increased chances for volatility, we have selected the Gold’s daily chart for today’s technical analysis. With the latest drop to lower grounds, Gold has moved towards the (S1) 1845 support level but has failed to breach it yet. In the scenario of further selling we could see Gold crossing into the lower range of our chart which is highlighted with a gray rectangle. Below the (S1) we note the (S2) 1820 level and lower the (S3) 1790 hurdle. Please note the gray rectangle was used from November 2021 to February and could act as a retesting of some previously familiar levels. If Gold comes under buying interest, we note the (R1) 1870 resistance as the most probable level to be engaged. In the scenario of a move even higher we point out the (R2) 1890 barrier as a possible next target for the bulls. The (R2) has been tested various times in the last days of April thus may be the treated as a make or break point for a bullish trend. In the scenario of a move above the (R2), we highlight the area noted with a blue rectangle which may signal bullish appetite for the precious metal. We would like to note the (R3) 1920 which was tested for the last time on the 29th of April. Finally, the RSI indicator below our chart has dropped below 50 confirming the selling momentum may still be in place. The overall trend in our opinion remains downwards but a possible breach into the blue rectangle area on our chart can change into a sideways trend with bullish tendencies.

Today the Reserve Bank Board raised the cash rate by 0.25% from 0.10% to 0.35%.

The Governor issued his usual Statement at 230 pm and conducted a Press Conference at 4 pm.

The Governor noted that now was the right time to begin withdrawing some of the monetary support that was put in place to help the Australian economy through the pandemic.

The Board has made some significant changes to the forecasts that were released in the February Statement on Monetary Policy (SOMP).

The forecast unemployment rate at year's end has been revised down from 3.75% to 3.5% and is expected to hold at that level throughout 2023. That is despite GDP growth expected to slow to a below trend pace of 2% (unchanged from February).

But of most significance was the upward revision in inflation. Underlying inflation is now forecast to reach 4.75% by end 2022 (currently 3.7%) compared to the SOMP forecast of 2.75% – a staggering uplift of 2 ppt's in forecast inflation.

Underlying inflation is then forecast to fall back to 3% by mid- 2024 compared to 2.75% in the SOMP.

The task of reducing underlying inflation over that 18 month period from 4.75% to 3.0% overwhelms the previously expected task of holding it steady over the period at 2.75%.

We do not know where the Board expects underlying inflation at end 2023 but it seems entirely reasonable that the detailed forecasts to be released on May 6 will indicate that underlying inflation by end 2023 will still be above the Board's target range of 2–3% (probably 3.25%)

This observation explains why the Board surprised today by lifting the cash rate a little further than the 15 basis points expected by the market and many analysts including Westpac.

It also signals that the Board should be prepared to "front load" its tightening cycle to convince households and business that it is committed to achieving that formidable goal of returning inflation back to the target band (admittedly to the outer limit) by mid-2024.

In the press conference the Governor revealed the interest rate path that was used to arrive at the forecasts.

He noted that the cash rate profile was 1.5%-1.75% by end 2022 and 2.5% by end 2023, most likely the base terminal rate.

He also noted that the choice of 25 basis points was a return to "business as usual" signalling that increments of 25 basis points might be considered the base case.

We are not convinced that the next move will be 25 basis points.

Consistent with our previous forecast that the Board would want to reach a cash rate of 50 basis points by June we expected 15 basis points in May to be followed by 25 basis points in June.

But that was before we saw the formidable challenge that the Board believes it has to return inflation to within the band over the next 2 years.

A larger increase in the cash rate than 25 basis points is likely to be seen by the Board as necessary to convince agents that it is serious about the challenge and to accelerate the unwinding of the emergency measures that saw 65 basis points of rate cuts in 2020.

We have chosen 40 basis points rather than 50 basis points purely because we expect that "business as usual" is increments of 25 basis points on a base of multiples of 25 basis points (in line with the practices of most other central banks).

It is better to slightly trim the largest expected increase in the cycle rather than reduce any subsequent moves to that 15 basis points that was rejected at today's meeting.

We continue to disagree with the Board's base case and the market's expectation that the tightening cycle will extend into the second half of 2023.

We are surprised that the Board's forecast is for the unemployment rate to hold at 50 year lows in the second half of 2023 despite growth slowing to a below trend 2% and continue to believe that the high leverage in the household sector will start to weigh on the economy as rates move above 150 basis points.

Apart from that large hike of 40 basis points in June to return the cash rate to 75 basis points we continue to expect the rate path we forecast before today's announcement.

That is increases of 25 basis points in July; August; October and November with the rate reaching 175 basis points by year's end instead of our previous 150 basis points.

That will be a level where the household balance sheet will come under some strain and the subsequent movements by the Board will be much more cautious – one hike of 25 basis points in February and another in May.

The Governor described a revised approach to assessing the outlook for wages.

He gave greatest emphasis not to the slow- moving Wage Price Index but to the results of the Bank's liaison with businesses- 40% of the businesses responding to the liaison assessments described wage increases of above 3%. He confidently declared that wage growth is finally picking up.

It does not appear likely that a "disappointment" with the Wage Price Index that prints on May 18 or even the wages data in the national accounts (June 1) could divert his attention from the urgency of lowering that inflation rate back to the target band in 2023.

In moderating our rate view we continue to use the key approach that near term rate decisions will be heavily influenced by current forecasts whereas decisions further out are going to be impacted by the evolution of the data. For that reason, we see the need for some urgency in the near stages of this cycle but caution around the base assumption of four rate hikes in 2023 (or significantly more from the market).

The Governor also clarified the Board's position on the balance sheet. It will allow maturing government bonds to run off without reinvesting the proceeds. It has not committed to accelerating the shrinking of the balance sheet by outright sales of bonds. Bear in mind that around $180 billion of term fund loans to the banks are due to be repaid in September 2023 (around $80 billion) and a further $100 billion in June 2024. That compares with around $350 billion of bond purchases during the pandemic. The Bank can reduce the build up in its balance sheet during the pandemic by around 35% without needing to sell bonds.

Conclusion

The Board is clearly on the path to winding back the extraordinary stimulus that accumulated during the pandemic and then moving rates back to a normal profile.

The Governor speculated that 2.5% cash rate (zero real) might be a reasonable target, but we will only know when we can assess the response of the economy to these policies.

Our view is that the early stages of the cycle are likely to indicate the Board's commitment to the formidable task of bringing underlying inflation back from 4.75% to 3% over the course of 2023 and 2024.

In the early stages it is "safer" to move at a faster pace than in later stages when the build-up in rates will start to impact households.

We think that can be achieved with a terminal rate of 2.25% which will be reached late in the first half of 2023.

The high sensitivity of household balance sheets to rising rates will be the key constraint on the need for rates to move any higher.

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The Euro extends consolidation above five-year low into fourth straight day, with sideways trading reflecting quiet mode ahead of Fed’s policy decision, due on Wednesday.

Bears are taking a breather after nearly 5% drop in April, with the single currency being strongly deflated by risk aversion and robust dollar on safe-haven buying and expectations for more aggressive Fed.

Repeatedly capped recovery in past four days, suggest that overall structure remains firmly bearish and the larger downtrend is likely to resume after a brief pause.

Near-term picture was further hurt by strong rise in European producer prices (Apr PPI 36.8% y/y from 31.5% in Mar and above forecast for 36.3% rise) that signals persisting price pressures and warns that inflation could rise further after hitting new record high last month.

The US central bank is widely expected to hike interest rate by 50 basis points to 1% at the end of two-day policy meeting on Wednesday, with increased hawkish stance signaling a number of hikes in coming months that makes the dollar more attractive to investors.

Continuation of larger EURUSD’s downtrend from Feb 2021 peak would look for test of key longer-term support at 1.0340 (Jan 2017 low), the last obstacle on the way towards targets at 1.0069 (Fibo 76.4% of 0.8225/1.2039, 2000/2008 ascend) and 1.0000 (parity).

Firmly bearish technical studies on all larger timeframes, support scenario, as 4-hr techs lose bullish momentum and add to warnings.

However, some analysts suggest that strongly elevated US dollar may provide very good levels for fresh shorts, on ‘buy the rumors – sell the facts’ scenario.

Res: 1.0580; 1.0648; 1.0700; 1.0746.
Sup: 1.0490; 1.0471; 1.0400; 1.0340.

• CADCHF reversed from resistance level 0.7620
• Likely to fall to support level 0.7535

CADCHF currency pair today reversed down from the key resistance level 0.7620, standing near the upper daily Bollinger Band and the resistance trendline of the daily up channel from February.

The downward reversal from resistance level 0.7620 stopped the previous short-term impulse waves (iii) and 3.

Given the strength of the resistance level 0.7620 and the bearish divergence on the daily Stochastic – CADCHF currency pair can be expected to fall further toward the next support level 0.7535.