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Daily Pivots: (S1) 1.4716; (P) 1.4801; (R1) 1.4872; More...

Intraday bias in EUR/AUD remains neutral for the moment. On the downside, below 1.4687 minor support will argue that rebound from 1.4318 has completed at 1.5053 already. Intraday bias will be back on the downside for retesting 1.4318 low. On the upside, break of 1.5053 will target 61.8% retracement of 1.6223 to 1.4318 at 1.5495.

In the bigger picture, fall from 1.9799 is seen as a long term impulsive move. 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). Some support could be seen there to bring interim rebound. But overall, break of 1.5354 support turned resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish in case of recovery.

Daily Pivots: (S1) 1.0182; (P) 1.0212; (R1) 1.0235; More....

EUR/CHF is losing some downside momentum but there is no sign of bottoming yet. Intraday bias remains mildly on the downside. Fall from 1.0369 is seen as the third leg of the corrective pattern from 1.0400. Deeper decline could be seen to 1.0086 support. On the upside, above 1.0289 minor resistance will turn intraday bias neutral first. Further break of 1.0400 resistance will resume the rebound from 0.9970 to 1.0610 structural resistance instead.

In the bigger picture, long term down trend from 1.2004 (2018 high) is still in progress. Next target is 100% projection of 1.2004 to 1.0505 to 1.1149 at 0.9650. In any case, sustained break of 1.0505 support turned resistance (2020 low) is needed to be the first sign of medium term bottoming. Otherwise, outlook will remain bearish.

Key insights from the week that was.

In Australia this week, the market had a singular focus – inflation.

The Q1 CPI report did not disappoint, with both headline and trimmed mean core inflation coming in ahead of our top-of-the-market expectation. Highlighting the historic significance of the result, headline inflation’s 2.1% gain was the largest since the introduction of the GST more than two decades ago and took the annual rate from 3.5% to 5.1%. Trimmed mean core inflation’s 1.4% gain was similarly the largest since the ABS series began in 2002 and, on RBA historical estimates, the biggest rise since December 1990. Annual trimmed mean inflation now stands at 3.7%, also materially above the top of the RBA’s 2-3%yr medium-term target range.

Our bulletin on the release provides detail on the composition of prices pressures. Of particular note was not only the scale of energy and supply-chain shocks, but also the breadth of price increases overall. Of all the items in the CPI basket, the proportion seeing prices rise at an annual rate of 2.5%yr or more increased from 32% to 66% in March.

On the back of this report, Chief Economist Bill Evans outlined an adjustment to our near-term expectations for the RBA. Instead of forecasting a 40bp first increase in June, we now anticipate a 15bp increase in May followed by a 25bp rise in June. The remainder of our forecast profile is unchanged, with a run of 25bp increases to follow in July, August, October and November, taking the cash rate to 1.50% by end-2022. The final two hikes of the cycle are then expected in February and May 2023, resulting in a peak cash rate of 2.00%. Westpac’s forecast peak is materially lower than that of the market. The primary justifications for our view are Australian households high debt levels, giving each rate increase and outsized effect versus history, and the impact of elevated inflation on real incomes.

Turning to the US. In Q1, GDP surprised materially to the downside, a 1.4% annualised contraction reported against expectations of a 1.0-1.5% annualised gain. While a shock, the detail of the report make clear this is not an outcome that will dissuade the FOMC from normalising policy at pace. This is because the decline in activity came as a result of reduced inventory restocking and strength in imports, both stemming from buoyant household consumption and a jump in equipment investment in the three months to March. In contrast to the 1.4% annualised decline in GDP, domestic final demand instead rose at a 2.7% annualised pace – just above the 10-year average for the series.

The Q1 outcome will cause complications for assessing GDP’s momentum throughout 2022, and there is a material risk of another ‘surprise’ quarter. So, in assessing the outlook for growth, it is best to continue to focus on domestic demand. From a 3.0% annualised pace in the first half of 2022, we expect momentum to slow to trend in the second half (circa 2.5%); it is only in 2023 as the full effect of the FOMC’s rate hikes and the associated tightening of financial conditions are felt that domestic demand growth is likely to fall materially below trend, to around 1.5% by the second half of the year. Along with dissipating price pressures and risks, we expect this activity outturn to justify the FOMC stopping rate hikes at the December 2022 meeting at a fed funds rate of 2.375% and, come 2024, to cut twice back to 1.875% to sustain GDP growth near potential.

The Euro Area has seen little data of significance this week, with the April CPI and Q1 GDP reports still to come. In the meantime, the focus has remained on risks to growth from Russia’s invasion of Ukraine, particularly Russia’s threat to turn off the Euro Area’s gas supply. The ECB and the majority of private forecasters (including Westpac) continue to believe that activity growth will remain positive in 2022 even if gas supplies are impacted. However, it is important to recognise the immense uncertainty at play. Not only could energy shortages affect production and employment late in the year, but the hit to real incomes from persistent rapid inflation and the flow-on consequences for sentiment are a concern from now into 2023. Prices, activity and sentiment will need to be continuously assessed in the months ahead.

Key Highlights

• USD/JPY started a fresh surge and cleared the 130.00 resistance.
• It traded to a new multi-year high and spiked above 131.00.
• EUR/USD extended decline below 1.0550, and GBP/USD traded below 1.2500.
• The US GDP contracted 1.4% in Q1 2022 (Prelim).

USD/JPY Technical Analysis

The US Dollar remained well supported near the 127.00 zone against the Japanese Yen. USD/JPY started a fresh surge and broke the last swing high at 129.40.

Looking at the 4-hours chart, the pair gained pace above the 129.50 level. There was even a close above the 130.00 level, the 200 simple moving average (green, 4-hours), and the 100 simple moving average (red, 4-hours).

The pair spiked above 131.00 and traded to a new multi-year high. The current price action suggests high chances of more upsides above 131.00.

The next major resistance is seen near the 131.50 level, above which the pair could rise towards 132.80. If there is a downside correction, the pair might find support near 130.00. The next major support is near the 129.40 level. Any more losses may perhaps open the doors for a move towards the 127.00 support zone.

Fundamentally, the US Gross Domestic Product for Q1 2022 (Prelim) was released yesterday by the US Bureau of Economic Analysis. The market was looking for an increase of 1.1% in the GDP.

The actual result was disappointing, as the US GDP contracted 1.4% in Q1 2022 (Prelim) (according to the "advance" estimate released by the Bureau of Economic Analysis).

Looking at EUR/USD, the pair failed to recover losses and extended its decline below the key 1.0550 support zone.

Economic Releases

• German Gross Domestic Product for Q1 2022 (YoY) (Prelim) – Forecast 3.6%, versus 1.8% previous.
• German Gross Domestic Product for Q1 2022 (QoQ) (Prelim) – Forecast 0.1%, versus -0.3% previous.
• Euro Zone Gross Domestic Product for Q1 2022 (QoQ) (Prelim) - Forecast 0.3%, versus 0.3% previous.
• Euro Zone Gross Domestic Product for Q1 2022 (YoY) (Prelim) - Forecast 5.0%, versus 4.6% previous.
• US Personal Income for March 2022 (MoM) - Forecast +0.4%, versus +0.5% previous.

The Eurozone will update its CPI inflation and GDP growth readings on Friday at 09:00 GMT. While investors expect a firmer economic expansion and another upturn in inflation, the data could produce only temporary volatility as the war in Ukraine will remain the major, if not, the only driver for the battered euro in the short term.

Euro may shrug off new record inflation

The euro has been hammered badly this week, depreciating by more than 2.0% against the US dollar in the face of hawkish Fed rate hike talk and Russia’s gas supply cuts to NATO members Poland and Bulgaria. That is the largest damage since March 2020, but the week is not over yet and the common currency may have one more opportunity to rebound before the focus solely turns to the 2017 trough of 1.0339 as Friday’s preliminary CPI inflation and GDP growth data appear on the radar.

Looking first at CPI readings, there is growing speculation that global inflation is nearing a peak, as year-on-year comparisons with 2021 high levels could produce softer CPI figures. The ECB’s vice president Luis de Guindos reaffirmed his hopes for a peak in inflation today, though the forecasts for the Eurozone flash estimates for April suggest this phenomenon may arise at a later stage, as they point to a new record high of 7.5% y/y from 7.4% previously. Excluding volatile food and energy prices, the core measure is also projected to run beyond the central bank’s symmetrical 2.0% target, unlocking a fresh high at 3.4% y/y, up from 3.2% in March.

The above outcome or even a stronger-than-expected print could amplify calls for a July 25bps rate hike, which is currently almost fully priced in futures markets. However, whether the inflation data will provide the much-needed upturn in the euro remains to be seen.

Under normal circumstances, a continuous inflation spiral would raise the stakes for tighter monetary policy, stirring fresh bullish volatility in the currency as in the greenback's case. That said, another record CPI mark in the Eurozone may not be very surprising to investors after all. Stronger-than-expected German CPI figures have already foreshadowed this scenario. Also, the war in Ukraine and lately Russia's gas supply cuts could add more fuel to the already rocketing energy and food crisis in the coming months.

GDP growth may not help the euro either

Perhaps, the euro could recoup some lost ground if a potential upbeat inflation report is accompanied by firmer GDP stats. Analysts believe that the Eurozone economy has expanded at a faster annual pace of 5.0% y/y in Q1 versus 4.6% reported in the preceding quarter, and at a steady quarterly rate of 0.3%. Nevertheless, investors could again barely react to the data since Ukraine’s negative economic spillovers may become more evident in the next GDP releases.

Perhaps a sudden pullback in the US core PCE inflation index could give a second chance to euro bulls later on Friday, increasing the likelihood of a narrowing monetary divergence between the Fed and the ECB. But again, given the non-existing support from the recent negative US GDP print, as well as the short-lived impact from the ECB’s recent hawkish rate hike comments, it’s hard to see what can come to the euro’s rescue if not a ceasefire in Russia-Ukraine geopolitical tensions.

EUR/USD

From a technical perspective, the devastating loss in euro/dollar has opened the door for the 2017 trough of 1.0335 but traders may wait for a close below 1.0500 before they engage in additional selling activities. Beneath the crucial 1.0339 threshold, the pair will re-activate the 2008 downtrend, bringing the scenario of parity back into scope after two decades.

In the event of an upside reversal, there is a nearby resistance at 1.056, which the pair needs to claim to continue towards the 1.0750 – 1.0800 region. The 1.0900 round level could be the next obstacle and perhaps the green light for an acceleration towards 1.1045.

• NZDUSD broke long-term support level 0.6535
• Likely to fall to support level 0.6400

NZDUSD currency pair recently broke the long-term support level 0.6535, which has been repeatedly reversing the price from the end of 2020.

The breakout of the support level 0.6535 continues the active intermediate impulse wave (3) from last year.

NZDUSD can be expected to fall further toward the next support level 0.6400 (target price for the completion of the active impulse wave (3)).

• Silver broke support level 24.00
• Likely to fall to support level 22.00

Silver recently broke the support level 24.00, intersecting with the 38.2% Fibonacci correction of the upward impulse from the end of last year.

The breakout of the support level 24.00 accelerated the active intermediate ABC correction (2).

Silver can be expected to fall further toward the next support level 22.00 (target for the completion of the active ABC correction (2)) .

• FTSE 100 reversed from support level 7345.00
• Likely to rise to resistance level 7535.00

FTSE 100 index recently reversed up from the support level 7345.00, intersecting with the 38.2% Fibonacci correction of the upward ABC correction 2 from the start of March.

The upward reversal from the support level 7345.00 created the daily candlesticks reversal pattern Piercing Line.

FTSE 100 can be expected to rise further toward the next resistance level 7535.00 (former support from the start of April).

Short Term Elliott Wave View in FTSE suggests cycle from March 7, 2022 low ended at 7672.16 in wave (1). Internal subdivision of wave (1) unfolded as a 5 waves impulse Elliott Wave structure. Up from March 7 low, wave 1 ended at 7260.40 and pullback in wave 2 ended at 7075.82. Index then extended higher in wave 3 towards 7595.42, and dips in wave 4 ended at 7508.92. Final leg higher wave 5 ended at 7669.56 which completed wave (1).

Wave (2) pullback is in progress as a double three Elliott Wave structure. Down from wave (1), wave ((a)) ended at 7543.03 and rally in wave ((b)) ended at 7656.47. Wave ((c)) lower ended at 7339.53 which also completed wave W. Wave X corrective rally is now ongoing with internal subdivision as a flat. Up from wave W, wave ((a)) ended at 7463.15 and wave ((b)) ended at 7344.89. Expect wave ((c)) of X to end soon as 5 waves and the Index should then turn lower. Near term, as far as pivot at 7669.56 high remains intact, expect wave X rally to fail in 3, 7, 11 swing for further downside.

FTSE 30 Minutes Elliott Wave Chart

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