- Swiss franc remains among the top performers in the currency market.
- ECB open doors to positive interest rates by end of Q3.
- USD/CHF keeps looking for support, bearish outlook.
After a short-lived recovery on Friday, the USD/CHF resumed the downside on Monday. Recently it printed a fresh monthly low at 0.9626. It is hovering around 0.9650, about to post the sixth daily loss out of the last eight days.
A broad-based correction of the US dollar triggered the slide of USD/CHF last week. The negative momentum intensify further with recent comments from Swiss National Bank officials warning about inflation.
On Monday, Andrea Meachler, a board member of the SNB said the central bank won't hesitate to raise interest rates if inflation remains outside of the target. Also on Monday, Christine Lagarde, president of the European Central Bank and other governing council members, suggested a possibility of positive interest rates by the end of the third quarter.
The dollar weakened further amid an improvement in market sentiment at the beginning of the week. The DXY is falling 0.87%, trading at 102.10, the lowest level since April 26.
The USD/CHF continues to look for support. Below 0.9625, the next barrier might be seen at 0.9595 and then 0.9525. Now the immediate resistance is located at 0.9695, followed by 0.9735.
- The GBP/USD snaps three days of consecutive weekly losses and begins with gains for the second straight week.
- Sterling rallies on risk appetite, a weaker greenback, and a more “hawkish” than expected BoE Governor Bailey.
- GBP/USD Price Forecast: Failure at 1.2600 to leave the major exposed to further selling pressure.
The British pound is extending its recovery after posting its first weekly gain in five and begins the beginning week on the right foot on Monday. At 1.2578, the GBP/USD reflects the upbeat market mood as European and North American investors shrug off concerns of an economic slowdown, as shown by equities edging up amidst a busy week with central bankers taking center stage.
The GBP/USD rallies in a favorable mood, and a soft US dollar
Additionally, as shown by its US Dollar Index, the greenback remains defensive, falling 0.82% and sitting at around 102.173, breaking below analysts’ so-called strong 103.000 level, a tailwind for the GBP/USD. Contrarily, US Treasury yields grind higher four basis points, sitting at 2.828%, regaining some strength after last week’s 4.69% fall.
Meanwhile, the GBP/USD opened the week near the 1.2470s area and, due to favorable market sentiment, rallied 100-pips, reclaiming the 1.2500 mark and closing at the 1.2600 price level, last seen on May 5.
An absent UK economic docket left the Bank of England’s (BoE) Governor Andrew Bailey as the catalyst for the day and sounded very “hawkish” aligned to most MPC members. He said that the central bank is ready to hike rates if needed and added that policymakers can and “must” take actions needed to return inflation to target over a period that avoids unnecessary volatility
Bailey said he rejected the argument that the BoE’s response let demand out of hand, thus stoking inflation.
Elsewhere, on the US front, the economic docket features the Chicago Fed National Activity Index for April, which rose by 0.47, higher than the 0.36 of the previous reading, and further, Fed speaking, with Atlanta’s Fed President, Raphael Bostic, crossing the wires.
GBP/USD Price Forecast: Technical outlook
According to the daily chart, the GBP/USD remains under downward pressure, despite recovering some 400-plus pips after reaching a year-to-date low at 1.2155. On Monday, the major attempted a break above 1.2600 but failed. Also, the Relative Strength Index (RSI) at 50.58, its slope is beginning to aim horizontal, signaling that the upward move is fading.
Upwards, the GBP/USD first resistance would be 1.2600. Break above would expose May 4 daily high at 1.2638, followed by the April 26 daily high at 1.2772. On the other hand, the major first support would be 1.2500. Latter’s breach would send the pair tumbling towards 1.2400, followed by the May 17 daily low at 1.2315 and the YTD low at 1.2155.
Some of the more hawkish European Central Bank policymakers are annoyed at the rate-hike timeline outlined by central bank President Christine Lagarde, Bloomberg reported on Monday citing sources, given some had preferred a faster option. Lagarde effectively signalled in a blog post on Monday that the bank would bring rates out of negative territory by the end of September, which the irked hawkish ECB policymakers have taken to imply two 25 bps rate hikes, effectively ruling out the option of a 50 bps rate hike in July.
- EUR/JPY is above 136.00 and eyeing last week’s highs following hawkish ECB commentary.
- The pair has formed a pennant and could break higher towards 140.00 should Eurozone yields kick on.
Hawkish interest rate guidance from European Central Bank President Christine Lagarde, who signaled that the bank is likely to have lifted interest rates out of negative territory by the end of September, boosted the euro against most of its G10 peers on Monday. That helped lift EUR/JPY to above 136.00 level, where it is now probing its 21-Day Moving Average, whilst bulls eye a test of last week’s highs in the upper 136.00s.
At current levels, around 136.10, the pair is trading with on-the-day gains of about 0.9%, with robust May German IFO survey data released earlier in the day likely contributing to the euro’s robust start to the week. Looking ahead, Eurozone business survey data remains in focus with the release of flash May Markit PMI survey data out on Tuesday. Survey data is being closely scrutinised at the moment with traders wanting to guage how the Eurozone economy is holding up amid the ongoing Russo-Ukraine war.
For now, ECB policymakers deem the Eurozone economy as still holding up well, with Bank of France head and European Central Bank governing council member Francois Villeroy de Galhau on Monday characterised growth as “resilient”, before saying that the deal on near-term rate hikes is probably done. Aside from Tuesday’s survey data, focus this week will remain on the various ECB and BoJ policymakers scheduled to speak. Given the policy divergence between the two, risks arguably remain tilted to the upside for EUR/JPY.
The pair is at present trapped within a pennant structure that has been in play since late April. A bullish breakout could see EUR/USD rally back towards annual highs in the 140.00 area, though such a move would likely need to be driven by further upside in Eurozone yields to drive the Eurozone/Japan rate differential higher.
Bank of France head and European Central Bank governing council member Francois Villeroy de Galhau said on Monday that a deal on rate hikes in the near term is probably done, reported Reuters. His remarks come after ECB President Christine Lagarde said in a Monday blog post that the ECB would likely lift rates out of negative territory by the end of September.
Villeroy added that Eurozone growth remains resilient, with the main short-term problem being inflation. Because of a broadening of inflationary pressures, he continued, the ECB must normalise monetary policy to get inflation back to 2.0%. The ECB is set to normalise policy, he emphasised, not tighten it.
Earlier in the day, the May German IFO survey came in stronger than expected.
- Oil prices are a little lower on Monday despite the weaker US dollar and stronger global equity markets.
- WTI remains within recent ranges near $110 as traders mull China Covid-19 and EU Russian oil embargo developments plus demand.
Oil prices stabilized within recent ranges on Monday amid a fairly quiet start to the week so far as crude oil relevant newsflow is concerned, with benchmarks broadly failing to benefit from a rally in global equities and a decline in the US dollar. As a risk-sensitive asset, strength in equities tends to help oil prices, while a weaker US dollar increases demand for USD-denominated commodities (like oil), as it makes it cheaper for the holders of international currency.
Front-month WTI futures were last pivoting on either side of the $110 level, midway between last week’s highs in the $115 area and lows in the $105 area. At current levels near $109.50, WTI is down about $1.0 on the day, which is a small intra-day move by WTI standards. Oil traders remain focused on familiar themes, including the Covid-19 lockdown situation in China. According to China’s NHC, the overall situation in the country is improving, though Beijing reported a record number of infections on Sunday. Lockdowns across many of the country’s largest cities, including Shanghai and Beijing, have dented Chinese crude oil demand in recent weeks, a tailwind for crude oil prices.
Elsewhere, analysts also noted strength in the US market for gasoline as the nation approaches its peak driving season, as reflected by US refineries ramping up output, as supportive for crude oil prices on Monday. According to analysts at Reuters, the peak driving season in the US lasts from the end of May (Memorial Day weekend) until September (Labor Day).
Whilst there have been fears that the surge in gasoline prices since the 2021 peak driving season might dent demand this year, analysts have over the last few weeks been citing high-frequency US mobility data as showing that this has thus far not been the case. A report from the Federal Highways Agency last week showed that vehicle miles traveled hit a record high for April this year, and high-frequency data from TomTom and Google show traffic climbing over the last few weeks.
Looking ahead, analysts will remain on the lookout for any headlines about whether the EU is getting any closer to a deal on ending Russian oil imports. The latest reports from Bloomberg suggest this isn't the case. That could act as another headwind making it more difficult for WTI to return to/break above last week’s $115ish highs. For now, though, robust demand (outside of China) and weak supply (as output from Russia/smaller OPEC nations struggles) should keep prices underpinned above last week’s $105ish lows, with the 21 and 50-Day Moving Averages in the mid-$100s also lending support.
Bank of England (BoE) governor Andrew Bailey said on Monday that the central bank is prepared to raise interest rates again in order to bring inflation down, reported Reuters. Policymakers can and must take the actions needed to return inflation to target over a period that avoids unnecessary volatility, he added.
The UK is facing a very big negative impact on real incomes caused by the rise in prices of imports, Bailey continued. Bailey added that he rejects the argument that the government's response to the Covid-19 pandemic and BoE's monetary policy let demand get out of hand and thus stoked inflation.
Deadlocked talks between European Union (EU) nations aimed at reaching an agreement on an embargo of Russian oil imports could extend into June, Hungary has signaled according to Bloomberg sources. Hungary is at present the main roadblock to a deal that would see the EU phase out most of its Russian oil imports within the next few months, as it continues to prioritize domestic energy security.
Analysts had previously touted an EU council summit meeting on 30-31 May as a god opportunity for leaders to come to an agreement on the embargo. The latest signals from Hungary will dampen expectations for a month-end breakthrough.
- USD/CAD dropped to over a two-week low on Monday amid heavy USD selling bias.
- Modest pullback in oil prices undermined the loonie and helped limit the downside.
- Recovery beyond the 1.2800 mark might confront resistance near the 38.2% Fibo.
The USD/CAD pair came under some renewed selling pressure on Monday and dropped to over a two-week low, around the 1.2770 region amid broad-based US dollar weakness. That said, a modest intraday pullback in crude oil prices undermined the commodity-linked loonie and helped limit any further losses, at least for the time being.
The USD/CAD pair was last seen trading just a few pips below the 1.2800 round-figure mark, still down nearly 0.40% for the day and remains at the mercy of the USD price dynamics.
From a technical perspective, bulls, so far, have managed to defend the 50% Fibonacci retracement level of the 1.2459-1.3077 strong move up. The said support should now act as a pivotal point, which, if broken decisively, will set the stage for an extension of the recent sharp pullback from the highest level since November 2020.
The USD/CAD pair might then accelerate the downfall towards testing intermediate support near the 1.2720-1.2715 region before eventually dropping to sub-1.2700 levels, or the 61.8% Fibo. level. The latter coincides with the 100-day SMA and is followed by the very important 200-day SMA, around the 1.2660-1.2665 zone.
Some follow-through selling would suggest that the USD/CAD pair has topped out in the near-term and prompt fresh technical selling. The subsequent decline has the potential to drag spot prices further towards the 1.2600 mark en-route the next relevant support near the 1.2560 horizontal zone.
On the flip side, attempted recovery back above the 1.2800 mark might now confront stiff resistance near the 38.2% Fibo. level, around the 1.2835-1.2840 region. Sustained strength beyond might trigger a short-covering bounce and allow bulls to reclaim the 1.2900 mark, though any further positive move seems elusive.
USD/CAD daily chart
Key levels to watch
- USD/TRY trades on the defensive below the 16.00 mark.
- Turkey Capacity Utilization improved to 78.0% in May.
- Turkey End Year CPI Forecast now seen at 57.92%.
USD/TRY trades in quite a volatile fashion always below the 16.00 mark at the beginning of the week.
USD/TRY shifts its focus to the CBRT
USD/TRY extends the choppy activity seen as of late, while further upside and a break above the key 16.00 barrier still remaining elusive for bulls.
The lira managed to regain traction and drag spot lower on the back of the generalized selling bias in the greenback and the consequent renewed inflows into the risk complex and the EM FX space.
In the domestic calendar, Turkey’s Capacity Utilization rose to 78.0% in May, while the
End Year CPI Forecast is now expected at 57.92% (from 46.44%). Additional data saw the Manufacturing Confidence down a little to 109.4 (from 109.7) in May.
In the meantime, the pair is expected to continue within the current consolidative theme ahead of the CBRT event on Thursday, where market consensus still expects the central bank to keep rates unchanged despite the rampant inflation.
What to look for around TRY
USD/TRY keeps the upside bias well and sound and trades at shouting distance from the 16.00 mark.
So far, price action in the Turkish currency is expected to gyrate around the performance of energy prices, the broad risk appetite trends, the Fed’s rate path and the developments from the war in Ukraine.
Extra risks facing TRY also come from the domestic backyard, as inflation gives no signs of abating, real interest rates remain entrenched in negative figures and the political pressure to keep the CBRT biased towards low interest rates remain omnipresent.
Key events in Turkey this week: Capacity Utilization, End Year CPI, Manufacturing Confidence (Monday) – Economic Confidence Index, CBRT Interest Rate Decision (Thursday).
Eminent issues on the back boiler: FX intervention by the CBRT. Progress (or lack of it) of the government’s new scheme oriented to support the lira via protected time deposits. Constant government pressure on the CBRT vs. bank’s credibility/independence. Bouts of geopolitical concerns. Structural reforms. Upcoming Presidential/Parliamentary elections.
USD/TRY key levels
So far, the pair is losing 0.13% at 15.8395 and a drop below 14.6836 (monthly low May 4) would expose 14.5458 (monthly low April 12) and finally 14.5136 (weekly low March 29). On the upside, the next barrier aligns at 15.9815 (2022 high May 20) seconded by 18.2582 (all-time high December 20) and then 19.00 (round level).
NZD/USD continues its strong upward advance, threatening to reach the May high at 0.6556/68. While below there, however, economists at Credit Suisse stay bearish over the medium-term.
Only a sustained break above 0.6556/68 would signal a false breakout
“We stay with our bearish medium-term view whilst below 0.6556/68, with only a sustained move above here threatening to negate the broader NZD/USD weakness.”
“Immediate support is thus seen at 0.6417/15 and then further below at the price low at 0.6310/.6288, a break below which is needed to weaken correction and put the market on track to retest the YTD low at 0.6227/13.”
“A stable close above the May high at 0.6556/68 would indicate a false breakout and see scope for sustained upside, with next notable resistance then seen at the 55-day moving average at 0.6684/90.”
- Gold is trading in the $1850s, up about 0.4% though lower versus early session highs in the $1860s.
- XAU/USD is trading over 3.5% higher versus last week’s lows amid a pullback in the US dollar.
- Key Fed events and US economic data present two-sided risks to the precious metal this week.
Spot gold (XAU/USD) has pulled back from earlier session highs in the $1860s per troy ounce after probing the 21-Day Moving Average at $1858, though prices are still higher by about 0.4% on the day (around $8.0) amid a soft start to the week for the US dollar. At present, XAU/USD is trading in the $1850s and is still in a bullish trend since its bounce from multi-month sub-$1790 lows printed this time last week. At current levels, gold is over 3.5% higher versus these lows.
The main driver of this recovery over the past week has been a weakening of the US Dollar Index (DXY), which has pulled sharply lower from multi-decade highs printed above 105.00 earlier in the month. Since these highs set ten days ago on 13 May, the DXY has dropped more than 2.5% to the low-102.00s. This drop came despite Fed policymakers sounding exceedingly hawkish last week in their intent to continue pressing ahead with rate hikes to tame rampant inflation, even in the face of a weakening economy/stock markets.
Given the Fed’s role as a key driver of upside in the buck over the last few months, analysts are not unsurprisingly questioning how much further this dollar pullback has to run. Surely dip-buyers will come back in at some point, they question. If there is a dollar recovery this week, that would be bad for XAU/USD.
This week's economic events arguably present two-sided risks for XAU/USD. On the one hand, there will be plenty of Fed speak as well as the release of the May meeting minutes and the tone is expected to be as hawkish as ever. On the other hand, US (and global) flash May PMIs on Tuesday plus Thursday’s second estimate of Q1 US GDP growth may combine to trigger fresh concerns about US (and global growth), which could offer silver some safe-haven support, especially if it is deemed as dampening long-term Fed tightening prospects.
S&P 500 posted a late bullish “hammer” reversal into the close on Friday to hold above the key 3,855/15 support cluster. This reasserts the potential for further short-term consolidation over the next few days, but the broader risk is still biased lower, in the view of analysts at Credit Suisse.
Eventual break under 3,855/15 can see support at 3,505/00
“S&P 500 has resultantly formed a bullish ‘hammer’ candlestick reversal and with a short-term bullish momentum divergence now in place, and with US Bond Yields and the USD stabilizing, all this reasserts the potential for a short-term phase of consolidation.”
“Key resistance is seen at the falling 13-Day Exponential Moving Average, now at 4,002. Whilst below this level, this will just stay seen as a low-level consolidation, with medium-term downside momentum staying strong. Therefore, the risk of an eventual breakdown stays seen as elevated, with the next key support level at the cluster of price lows around 3,723/3,694 and eventually down to 3,505/00.
“Key resistance stays at the aforementioned 4,002 13-day EMA. A break above here would open up a deeper corrective recovery, with resistance then seen at 4,091/4,128.”
- NZD/USD gained strong positive traction on Monday and shot to over a two-week high.
- The risk-on impulse undermined the safe-haven USD and extended support to the kiwi.
- Expectations for an additional 50 bps rate hike by the RBNZ provided an additional lift.
The NZD/USD pair prolonged its recent strong recovery from a nearly two-year low touched earlier this month and gained traction for the third successive day on Monday. This also marked the sixth day of a positive move in the previous seven and lifted spot prices to over a two-week high during the mid-European session.
As China prepares to reopen at the beginning of June after a two-month lockdown, investors turned optimistic amid hopes that loosening COVID-19 restrictions would boost the global economy. This was evident from a generally positive tone around the equity markets, which dragged the safe-haven US dollar to a fresh monthly low and benefitted the risk-sensitive New Zealand dollar.
The kiwi was further underpinned by expectations that the Reserve Bank of New Zealand would increase the Official Cash Rate by an additional 50 bps on Wednesday. The central bank is also anticipated to provide a clear signal that further tightening is forthcoming. The combination of factors pushed the NZD/USD pair further beyond last week's swing high, around the 0.6415-0.6420 region.
Hence, the momentum could also be attributed to some technical buying, though stalled just ahead of the 0.6500 psychological mark. The said handle should now act as a pivotal point ahead of the key central bank event risk and the release of minutes of the latest FOMC meeting on Wednesday. This will play an important role in determining the next leg of a directional move for the NZD/USD pair.
The markets already seem to have fully priced in at least 50 bps Fed rate hike move over the next two policy meetings. Investors, however, will look for clues about the possibility of a jumbo 75 bps rate hike in June. Apart from this, important US macro data scheduled during the latter part of the week will influence the USD and further provide some meaningful impetus to the NZD/USD pair.
In the meantime, a goodish pickup in the US Treasury bond yields could lend some support to the buck. Moreover, absent relevant market moving economic releases from the US warrants some caution before placing fresh bullish bets around the NZD/USD pair. This makes it prudent to wait for sustained strength beyond the 0.6500 mark before positioning for any further appreciating move.
Technical levels to watch
- Silver has pulled back to the $22.00 area from an earlier failed test of the 21DMA at $22.20.
- XAG/USD is still up over 1% on the day and more than 7.5% versus recent lows in the mid-$20.00s.
- Dollar weakness is driving the ongoing rebound, though there could be a recovery this week amid more expected Fed hawkishness.
Spot silver (XAG/USD) has pulled back from earlier session highs in the $22.20 per troy ounce area after failing a test of the 21-Day Moving Average, though continues to trade with gains of about 1.2% on the day (over 25 cents) amid a continued weakening of the US dollar at the start of the week. For now, XAG/USD is holding onto the $22.00 level and the uptrend that has been in play over the past ten days that has seen the precious metal bounce more than 7.5% from multi-month lows in the mid-$20.00s remains intact.
The main driver of this recent recovery has been the US Dollar Index’s (DXY) sharp pullback from the multi-decade highs it printed above 105.00 earlier in the month. Since 13 May, the DXY has dropped more than 2.5% from these highs to the low-102.00s, despite Fed policymakers sounding exceedingly hawkish last week in their intent to continue pressing ahead with rate hikes to tame rampant inflation, even in the face of a weakening economy/stock markets.
Given the Fed’s role as a key driver of upside in the buck over the last few months, analysts are not unsurprisingly questioning how much further this dollar pullback has to run. Surely dip-buyers will come back in at some point, they question. If there is a dollar recovery this week, that would be bad for XAG/USD. Its failure to get above its 21DMA may prove pivotal (failure at a major moving average is often seen by technicians as a bearish sign.
This week's economic events arguably present two-sided risks for XAG/USD. On the one hand, there will be plenty of Fed speak as well as the release of the May meeting minutes and the tone is expected to be as hawkish as ever. On the other hand, US (and global) flash May PMIs on Tuesday plus Thursday’s second estimate of Q1 US GDP growth may combine to trigger fresh concerns about US (and global growth), which could offer silver some safe-haven support, especially if it is deemed as dampening long-term Fed tightening prospects.
- EUR/USD advances further north and flirts with 1.0700.
- Further up now aligns the 55-day SMA at 1.0788.
EUR/USD pushes higher and prints new May peaks just ahead of the 1.0700 mark on Monday.
Considering the pair’s ongoing price action, the continuation of the rebound appears likely in the very near term at least. That said, the next up barrier now appears at the 55-day SMA, today at 1.0788 before the 3-month resistance line around 1.0860.
The breakout of this area should mitigate the selling pressure and allow for a probable move to the weekly high at 1.0936 (April 21).
EUR/USD daily chart
- The Chicago Fed's National Activity Index rose to 0.47 in April from 0.36 in March.
- It has remained stable in the mid-0.0s since the start of the year.
- There was no market reaction to the latest Chicago Fed data.
The US National Activity Index rose to 0.47 in April from 0.36 in March, data released by the Federal Reserve Bank of Chicago revealed on Monday. The National Activity Index is a monthly index designed to gauge overall economic activity and related inflationary pressure. The index has been relatively stable in the mid-0.0s since the start of the year, suggesting a modest but consistent growth rate.
There was no market reaction to the latest Chicago Fed data.
Over the past five days, the New Zealand dollar has been the second-best performing G10 currency after the Swiss franc. The guidance from the Reserve Bank of New Zealand (RBNZ) this week will be key to determinging its future direction. In the opinion of economists at Rabobank, the kiwi is vulnerable to lower rates.
The peak in RBNZ rates could be lower than previously expected
“If the RBNZ starts to signal the peak in rates is likely to be lower and come sooner, the NZD could be vulnerable.”
“Despite the improved tone of NZD/USD in recent sessions, we expect further upside may be difficult on a 1-to-3-month view.”
“We see the potential for further safe-haven demand to boost the USD in the month ahead. This view stems from concerns over the pace of global growth.”
“We see risk of another dip to the NZD/USD 0.63 area in the weeks ahead with a moderate recovery in the currency pair on a 6-month view dependent on a broad-based softening in the value of the USD.”
EUR/USD has held key support at 1.0341 and the daily MACD has turned higher. Furthermore, the break above 1.0642 confirms a base and analysts at Credit Suisse are looking for a move to 1.0758/90.
EUR/USD looks likely to confirm a near-term base
“This morning’s break above the 23.6% retracement of the fall from February and May high at 1.0620/42 should confirm a near-term base and provide the platform for a deeper recovery to the 38.2% retracement, 55-day average and mid-April lows at 1.0758/90.
“We expect a much tougher barrier at 1.0758/90 and for the medium-term downtrend to reassert itself from here, with medium-term momentum ultimately still very strong.”
“Support moves to this morning’s breakout point at 1.0608/0599, with 1.0532 now needing to hold to maintain an immediate upside bias. A break below here and then 1.0460 can clear the way for a retest of 1.0350/41.”
Swiss National Bank governing board member Andrea Maechler said in an interview published in Swiss newspaper Bilan on Monday that the central bank won't hesitate to raise interest rates if inflation remains outside of target.
"If the inflation we expect does not come down in the medium term to a range between 0% and 2%, we will not hesitate to tighten policy," Maechler said.
The headline rate of annual Consumer Price Inflation (CPI) rose to 2.5% in April in Switzerland, data released earlier this month showed, above the bank's zero to 2.0% target range. The fact that the European Central Bank has announced to take its policy rate out of negative territory this year removes some pressure on the SNB to maintain rates at their present -0.75% level.
EUR/CHF’s decline has paused around the 55-day moving average (DMA) at 1.0278. Nevertheless, analysts at Credit Suisse stay oriented lower and expect a test of 1.0189/69 in due course.
Resistance at 1.0360 set to hold to maintain the strong downward pressure
“With daily MACD turning lower and with the recent sharp drop in mind, we maintain our long-held bearish view and see scope for further downside, with support seen at 1.0263/53 initially, and then further below at the late April lows at 1.0189/69.
“A closing break below the late April lows at 1.0189/69 would look to promote further weakness to 1.0133, ahead of the April low at 1.0086.”
“Resistance remains at 1.0360, which ideally holds to maintain the strong downward pressure. Whilst a break above here would likely look to test 1.0403 as well, only a move above the 200-DMA and recent high at 1.0480/0515 would threaten the medium-term downtrend, though our base case is that this level will continue to hold if reached.”
GBP/USD looks likely to see a deeper corrective recovery. Nonetheless, the broader view of the Credit Suisse analyst team stays bearish, with key resistance at 1.2633/51.
Support is seen at 1.2338/29
“Although our broader outlook stays negative, with daily MACD momentum having turned higher we continue to look for a corrective recovery/consolidation phase to emerge. “
“Beyond the next key resistance at the May high and 23.6% retracement of the entire fall from 2021 at 1.2633/51 would trigger an even deeper correction, with the next resistance at the 38.2% retracement of the 2022 at 1.2766, then the crucial 55-day average at 1.2843, where we would have greater confidence in a ceiling for a resumption of the broader downtrend.”
“Support is seen at 1.2447/39 initially, with 1.2338/29 now needing to hold to maintain an immediate upside bias. A break would end the corrective recovery phase, with support seen next at 1.2218 and more importantly at 1.2167/57.”
EUR/USD is trading at the highest since April 26 near 1.0680. Economists at BBH expect the pair to test the April 21 high near 1.0935 on a break past 1.0710.
Lagarde signals interest rate turnaround
“A break above 1.0710 would set up a test of the April 21 high near 1.0935.”
“European Central Bank President Christine Lagarde said the ECB is likely to exit negative rates by the end of Q3. This supports current market pricing for liftoff on July 21 with a 25 bp hike, followed by another 25 bp on September 8 which would result in a zero deposit rate. Follow-up hikes on October 27 and December 15 are fully priced in that would take the deposit rate to 0.5% by year-end.”
“To be clear, market pricing for the ECB has not shifted after Lagarde’s remarks and yet the euro got another leg higher. At some point, the subdued ECB outlook should weigh on the euro but for now, the FX market is happy to take the dollar lower.”
The US Dollar Index (DXY) is trading near 102.144, the lowest since April 26. A break under 101.08 would open up additional losses below 100 but the dollar is set to resume its uptrend eventually, economists at BBH report.
Pendulum of market sentiment is likely to swing back in the dollar’s favor
“Key level to watch is 101.80 as a break below would set up a test of the April 21 low near 99.818.”
“We still view this as a correction within the longer-term dollar rally but confess surprise at how far the dollar has fallen from the early May peak.”
“At some point, the pendulum of market sentiment is likely to swing back in the dollar’s favor but for now, the market is seeing very little resistance as it takes the dollar lower.”
“We believe that as the US outlook improves, yields will resume rising and that should help the dollar get some traction in the coming days.”
- USD/JPY edged lower on the first day of the week amid broad-based USD weakness.
- The risk-on impulse undermined the safe-haven JPY and helped limit further losses.
- The Fed-BoJ policy divergence also held back traders from placing fresh bearish bets.
The USD/JPY pair witnessed some selling on the first day of a new week, though managed to find some support ahead of the monthly low, around the 127.00 mark touched last Thursday. The pair remained on the defensive through the mid-European session and was last seen trading just a few pips above mid-127.00s.
The US dollar added to last week's heavy losses and dropped to its lowest level since April 26 amid a strong pickup in demand for the shared currency. Moreover, a 50 bps Fed rate hike move over the next two policy meetings is fully priced in the markets. The combination of factors dragged the USD Index to its lowest level since April 26, which, in turn, exerted some downward pressure on the USD/JPY pair. That said, a combination of factors acted as a headwind for the Japanese yen and helped limit any deeper losses, at least for the time being.
Investors turned optimistic amid hopes that loosening COVID-19 lockdowns in China would boost the global economy. This was evident from a generally positive tone around the equity markets, which tends to undermine the safe-haven Japanese yen. The risk-on flow was reinforced by a goodish pickup in the US Treasury bond yields. This, along with a big divergence in the monetary policy stance adopted by the Bank of Japan and the Fed, acted as a tailwind for spot prices. This, in turn, warrants caution before placing fresh bearish bets around the USD/JPY pair.
It is worth recalling that the BoJ has vowed to keep its existing ultra-loose policy settings and promised to conduct unlimited bond purchase operations to defend its near-zero target for 10-year yields. In contrast, the US central bank is anticipated to take more drastic action to bring inflation under control. Hence, the focus will remain on the minutes of the latest FOMC monetary policy meeting, due for release on Wednesday. This, along with key US macro data scheduled during the latter part of the week, would provide a fresh directional impetus to the USD/JPY pair.
In the meantime, the USD price dynamics might continue to play a key role in influencing spot prices amid absent relevant market moving economic releases from the US. Traders might further take cues from the broader market risk sentiment and the US bond yields to grab short-term opportunities around the USD/JPY pair.
Technical levels to watch
Economist at UOB Group Ho Woei Chen, CFA, reviews the latest decision by the PBoC to lower the 5-year LPR.
“The People’s Bank of China (PBoC)’s benchmark 5Y Loan Prime Rate (LPR) was fixed lower by a record 15 bps to 4.45% today (Bloomberg est: 4.55%), signaling stronger support for the real estate market. The rate was last cut by 5 bps in Jan. This could be followed by further measures to ease property market curbs.”
“The 1Y rate was unchanged at 3.70% (Bloomberg est: 3.65%), following decision by the PBoC to keep the 1Y medium-term lending facility (MLF) rate steady at 2.85% on Mon (16 May).”
“New loans have tumbled in Apr as a result of COVID curbs in a number of Chinese cities and persistent weak sentiment in the real estate market. Despite the cut in 5Y LPR, a recovery in credit demand could remain hampered by economic uncertainties in the near-term.”
“Domestic interbank liquidity has remained ample, leaving room for the PBoC to maintain a very measured pace of monetary policy easing. While the government may expect economic activities to bounce back quickly as COVID containment measures are being eased, we think a more aggressive monetary policy support would still be needed to bring full-year growth even close to 5%. Thus, there is room for the 1Y LPR to move lower to 3.55% by end-3Q22. As for the 5Y LPR, it has reached our target for 15 bps cut. Whether the 5Y rate will be further reduced depends on the outlook for the property market.”
- DXY comes under further pressure and flirts with 102.00.
- Immediately to the downside comes the 55-day SMA.
DXY extends further the leg lower and puts the 102.00 support to the test of Monday.
The index remains under scrutiny and therefore extra losses should not be ruled out for the time being. Against that, a breach of 102.00 should put the index en route to a probable visit to the 55-day SMA, today at 100.84.
Looking at the broader picture, the current bullish stance in the index remains supported by the 3-month line around 100.30, while the longer-term outlook for the dollar is seen constructive while above the 200-day SMA at 96.59.
DXY daily chart
- GBP/USD has extended on recent gains on Monday and is trading in the upper 1.2500s.
- BoE’s Bailey will be speaking soon after UK labour and inflation data last week boosted the case for more tightening.
- Cable is eyeing a test of monthly highs as UK & US PMIs, Fed meeting minutes, US GDP and US Core PCE data looms.
GBP/USD is on Monday benefitting from a wave of US dollar weakness and was last trading in the upper 1.2500s, its highest levels in more than two weeks and not far below monthly highs in the mid-1.2600s. Cable’s 0.7% gain on Monday has taken the pair’s rebound since mid-month lows in the mid-1.2100s to an impressive 3.5%.
Whilst the latest leg of strength is being attributed to US dollar weakness, with some citing optimism about China lockdown easings as spurring weakness in the safe-haven buck, sterling was supported last week after UK labour market and consumer price inflation supported the case for further tightening from the BoE, even as evidence continues to build that the UK economy is suffering amid its worst cost-of-living squeeze in decades.
BoE Governor Andrew Bailey will probably elaborate on some of these themes in a speech at 1615:GMT on Monday, which will be the main event of the day for GBP/USD traders. Focus then turns to UK and US flash PMI business survey data for May which will be released on Tuesday, ahead of a speech from Fed Chair Jerome Powell. Fed minutes, the second estimate of US Q1 GDP growth and US April Core PCE inflation data will then be released later in the week.
As a result, the themes of Fed tightening and high inflation will remain in focus, and some analysts doubt how legs the recent pullback in the US dollar has to run. GBP/USD is above its 21-Day Moving Average (in the mid-1.2400s) and if it can break above monthly highs, has a shot at testing its 50DMA just above 1.2800. But any further rally may be too much to ask given the comparative strength of the US economy versus the UK and the Fed’s more hawkish stance.
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