Headlines:

• Latest inflation data points to worries that the BOJ is running out of time
• ECB’s Centeno: Interest rate reduction process is about to begin
• Fed’s Kashkari: No hurry to cut interest rates
• Fed would have benefited from earlier decision to taper, end QE in 2021 – Bowman
• Germany April wholesale price index +0.4% vs +0.2% m/m prior
• UK May CBI retailing reported sales 8 vs -44 prior
• China president Xi urges promoting high-quality and sufficient employment conditions
• Are precious metals set for a stronger bounce this week?

Markets:

• CHF leads, USD lags on the day
• European equities lower; S&P 500 futures up 0.1%
• US 10-year yields down 0.6 bps to 4.466%
• Gold down 0.2% to $2,345.41
• WTI crude up 1.4% to $78.84
• Bitcoin down 2.0% to $68,242

It was a quiet session for major currencies with the dollar keeping marginally lower on the day.

The euro and the franc gained slightly, with EUR/USD moving back up to retest the April high of 1.0885. But offers and large option expiries at 1.0900 is keeping a lid on things for now. Meanwhile, USD/CHF moved back down by 0.4% to test the 0.9100 mark.

Besides that, the aussie and kiwi are also just a touch higher but nothing to really shout about. AUD/USD is up 0.2% to 0.6667 as it continues to recoup losses from last week.

In the equities space, stocks were more optimistic early on with S&P 500 futures moving up by 0.3%. But as we look towards US trading now, we’re seeing those gains pared back to just 0.1%. In Europe, major indices also opened higher but are now trading lower as the risk optimism is tempered with slightly.

As for commodities, gold and silver are getting a bit of a check back following yesterday’s gains. It isn’t much but it speaks to some mixed flows on the day even with the dollar looking sluggish still.

US traders will be back from the long weekend and will have to contend with month-end flows before more key US data later in the week.

This article was written by Justin Low at www.forexlive.com.

• Inflation is under control

Once again, it just reaffirms that we will see a rate cut at next week’s meeting. It will be more interesting to see their comments after that is over and done with.

This article was written by Justin Low at www.forexlive.com.

RISK SENTIMENT

Sentiment can be
described simply as the mood of the market. Sentiment should be the primary
concern for short-term traders.

It can last an hour, a
session, a day or weeks depending on what is causing it and how much importance
the market gives it. Thus, you have to identify the reasons why the market
behaves in a certain way.

Risk sentiment can be
fickle. You will see sometimes the market focusing on something and moving
accordingly but then suddenly something else happens and the previous concern
is completely forgotten.

You should also take note
of which session is driving the sentiment, because if you get some risk off in
the European session due to some negative piece of news, it doesn’t mean it
will be taken as equally negative in the North American session.

This may be due to
further reports calming down the waters or just not in line with the prevailing
theme, so it may be actually traded in the opposite direction in the new
session with traders taking advantage of better prices.

These swings in risk
sentiment are generally triggered by fundamental catalysts. That’s why it’s
vital that you keep yourself updated on the latest developments because
sentiment can go against the big picture fundamentals and if you are trying to
enter in line with the fundamentals but against the current sentiment, you may
find yourself in trouble with prices that keep going against you.

It’s better to align
sentiment with big picture fundamentals for the best results.

RISK-ON/RISK-OFF

The two types of
sentiment are risk-on and risk-off.

• Risk-on is when the market doesn’t see
  risks and you will often see risk assets like equities, commodities and commodity
  currencies rallying. Basically, assets that give a high yield or more bang for
  the buck.
• Risk-off, on the other
  hand, is when the market does see risks and goes for safer assets, like
  bonds, safe-haven currencies and so on.

Generally speaking, positive
economic growth or expectation of more growth leads to risk-on sentiment while a
negative growth picture triggers the risk-off regime.

WHY IT’S IMPORTANT?

Knowing the risk sentiment regime is fundamental. For example, if someone
were to tell you that the S&P 500 is up 5% on the day, you could guess that
the Australian Dollar or copper were also up on the day without even looking at
the charts.

One of the main reasons for such correlation is the economic
interrelationship between the various assets, which got stronger and stronger
with financial globalization.

The concept of risk sentiment is also very important in selecting the
assets that will move the most during different types of sentiment. For example,
during risk-on, you will see lots of stocks rallying but some of them will increase
much more than others. In the FX space, you might see emerging market currencies
appreciating faster and providing you with great carry trades.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

• Prior -44

The good news for the UK is that the retail sales balance is seen rebounding strongly in May. The headline reading is the highest since December 2020. Adding to that, the quarterly measure of selling price inflation in retail is seen slowing to its lowest since August 2020. It will be a welcome relief, if translated to the hard data, after the poor April report as seen here.

This article was written by Justin Low at www.forexlive.com.

Headlines:

• Market holidays make for a slower start to the new week
• Germany May Ifo business climate index 89.3 vs 90.4 expected
• SNB total sight deposits w.e. 24 May CHF 461.2 bn vs CHF 467.4 bn prior
• ECB’s Rehn: The time is ripe to start cutting rates in June
• ECB’s Lane: There is enough in what we see to start interest rate cuts
• Japan maintains overall economic assessment for the month of May
• China’s Politburo says financial risks a major hurdle that must be overcome

Markets:

• NZD leads, USD lags on the day
• European equities a touch higher
• Gold up 0.4% to $2,343.61
• WTI crude up 0.6% to $78.18
• Bitcoin down 0.7% to $68,400

It was a quiet session for the most part as markets are having to deal with long weekends in both the UK and US later.

Major currencies are lacking much enthusiasm, with the dollar lightly changed across the board. It is marginally lower but the ranges for the day are leaving a lot to be desired still. Dollar pairs are only seeing 20-30 pips range across the board, so that says it all really.

USD/JPY was down earlier in Asia to 156.70 but has recovered a little to 156.88 currently. Meanwhile, the aussie and kiwi are lightly higher but nothing to really shout about. AUD/USD is up 0.3% to 0.6645 from around 0.6630 earlier while NZD/USD is up 0.3% to 0.6140 from around 0.6125 earlier in the day.

In other markets, precious metals are hoping to steady themselves after last week’s rough showing. Gold is up slightly to $2,343 while silver is seen up 1.6% to $30.85 after coming close to a test of $30 on Friday.

With it being a US holiday, don’t expect too much action in the day ahead. The actual trading week is likely to only kick off tomorrow.

This article was written by Justin Low at www.forexlive.com.

Over the last few weeks, the ECB has been clear in their messaging that they will cut rates in June. The decision at their policy meeting next week is all but a given and markets are now well prepared for that. The key question now though, is what comes next?

Inflation pressures have waned in the euro area and that has given the ECB the confidence to take the first step. But the hard part is really trying to get inflation from 3% back to the 2% target, as the Fed is also finding out in the last few months. That especially on the part of core prices.

In other words, the „easy“ part is over and done with. Now, this is where the real challenge begins for major central banks.

In that regard, the ECB is also looking to wages data to try and get a better sense of the outlook. The Q1 numbers here last week were less than ideal, but they do come with a big caveat.

The large contributor of higher wages in the last quarter was arguably from Germany, which surprised with a 6.2% reading. That exceeded expectations but it is arguably a one-off amid a delayed call to action to compensate workers for the higher cost of living.

If all goes according to plan, we should see those negotiated wage numbers fall in the next few quarters. And that will hopefully help the ECB gather more confidence on the inflation outlook.

Taking that into consideration, what are traders anticipating?

After June, there will be four more policy meetings for this year. But as things stand, traders are only expecting one more 25 bps rate cut after the one next week.

The ECB has already hinted that they are not keen on a back-to-back move. Thus, July can safely be ruled out at this stage.

That leaves either September, October, or December as the potential to follow up on the June move. With the earliest still being at least four months away, there’s still plenty of room for pricing expectations to shift around. Going into next week, traders are seeing 56 bps of rate cuts for the ECB in 2024.

It’s all going to come down to the data to vindicate or change up that outlook.

If the disinflation process stays the path in the months ahead, that will definitely afford the ECB room to work with to keep at least one more rate cut in their back pocket for this year.

This article was written by Justin Low at www.forexlive.com.

It’s well known that
currencies are closely linked to interest rates movements. The reason of this
relationship is pretty simple: higher interest rates tend to attract foreign
investment, increasing the demand and value of the currency. On the other hand,
lower interest rates tend to be less attractive for foreign investment and
decrease the currency’s value.

Currencies are traded in
pairs, for example EUR/USD, AUD/CAD, EUR/JPY and so on. So, in order to
visually see the relationship between interest rates and currencies you need to
take the difference between the respective country’s bond yields and the corresponding
FX pair.

Let’s see an example with
EUR/USD. Since you have the EUR as the base currency, you need to take the
yield on the German bond (which is used as benchmark for the Euro Area) and
since you have the USD as the quote currency, you take the US bond yield. The
difference between the yield on the German bond and the US one gives you the
yield spread.

Now you just need
to compare it with the EUR/USD price chart to see the relationship and you will
notice that the yield spread generally leads the price of EUR/USD.

On the chart below, you will see that the divergence between the yield spread and the
EUR/USD price chart often led to big swings as the exchange rate caught up with
the yield spread at some point. There can be many reasons in the short-term
affecting the currency pair but eventually the exchange rate generally follows the spread.

For example, the last divergence was caused by the aggressive Fed tightening in 2022 while the ECB enacted a much slower strategy. Moreover, the war between Russia and Ukraine weighed on the sentiment and increased the pressure on the Euro. The pair eventually bottomed once the market sensed the peak in the Fed’s hawkishness.

I personally prefer to use the spread between the 10y yields, but in this case, the spread between the 2y yields (which is more sensitive to monetary policy) would have given a better picture.

Don’t trade just
based on the charts and correlations though but look for reasons and keep yourself
informed on the latest developments to give you a better edge. When you start to see a
divergence, be prepared to strike as soon
as the picture changes.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

Fundamental
Overview

The USD got a boost last
week from the strong US PMIs which lifted Treasury yields and put in
question the rate cut in September. Once the market digested the report and saw
that there was more good news on the growth side than bad news on inflation,
the USD strength faded fast.

The AUD, on the other hand,
has been supported by a slightly more hawkish RBA after the latest hot CPI
data and the positive risk sentiment due to the pickup in global growth.

AUDUSD
Technical Analysis – Daily Timeframe

On the daily chart, we can
see that AUDUSD fell back below the key 0.6650 zone. The price is now retesting
the support-turned-resistance
and that’s where the sellers will likely step in with a defined risk above the resistance
to position for a drop into the 0.6464 level.

The buyers, on the other
hand, will want to see the price breaking higher to invalidate the bearish
setup and position for a rally into the 0.6870 high.

AUDUSD Technical Analysis – 4 hour Timeframe

On the 4 hour chart, we can
see that the price bounced just before the key support at 0.6580 where we had
the confluence of the previous swing low and the
38.2% Fibonacci retracement level. This is going to be the
first target for the sellers with a break below it opening the door for a fall
into the 0.6464 level.

If the price were to get
back into the 0.6580 support, the buyers will likely lean on it to position for
a breakout of the 0.6650 resistance with a better risk to reward setup.

AUDUSD Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can
see that we have the upper limit of the average
daily range (marked by the red line) right at the resistance. Therefore, it’s
unlikely that we will get a breakout today, but this zone will be key in the
next few days.

Upcoming
Catalysts

Tomorrow we get the US Consumer Confidence report where the focus will likely be
on the labour market details. On Thursday, we will see the latest US Jobless
Claims figures. Finally on Friday, we conclude the week with the US PCE report.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

This is a third month in a row that the above assessment is maintained. But the government did upgrade its assessment on factory output for the first time in a year, noting that it is showing signs of picking up as production may have bottomed out.

There were no revisions to the outlook for private consumption and capital expenditure.

This article was written by Justin Low at www.forexlive.com.

UPCOMING EVENTS:

• Monday: UK/US
  Holidays, German IFO.
• Tuesday:
  Australia Retail Sales, Canada PPI, US Consumer Confidence.
• Wednesday:
  Australia Monthly CPI, Fed Beige Book.
• Thursday:
  Switzerland GDP, Eurozone Unemployment Rate, US GDP 2nd
  Estimate, US Jobless Claims.
• Friday: Tokyo
  CPI, Japan Retail Sales and Industrial Production, China PMIs, Switzerland
  Retail Sales, Switzerland Manufacturing PMI, Eurozone Flash CPI, Canada
  GDP, US PCE.

Tuesday

The US Consumer Confidence is expected to
tick lower in May to 95.9 vs. 97.0 in April. The last
report missed expectations by a big margin
reaching the lowest level since July 2022. The Chief Economists at The
Conference Board highlighted that “Confidence retreated further in April as
consumers became less positive about the current labour market situation, and more
concerned about future business conditions, job availability, and income”.

She further added that “despite April’s
dip in the overall index, since mid-2022, optimism about the present
situation continues to more than offset concerns about the future.“ The
Present Situation Index will be something to watch as that’s generally a leading indicator
for the unemployment rate.

Wednesday

The Australian Monthly CPI Y/Y is expected
at 3.4% vs. 3.5% prior.
The RBA focuses more on the quarterly CPI readings, but the monthly
indicator is timelier and can be a guide for the trend, especially at
turning points. The Core measures will be more important but this report is
unlikely to change much for the central bank at the moment, although another
hot report is likely to trigger a hawkish reaction in the market.

Thursday

The Eurozone Unemployment Rate is expected
to remain unchanged at 6.5% vs. 6.5% prior. The rate has been hovering at the
record low for a year denoting a tight labour market. Moreover, the recent Eurozone
Negotiated Wage Growth for Q1 2024 came in
higher than the prior quarter, which was kind of a setback for the ECB even
though they “dismissed” it as a one-off because of the delayed action to raise
wages against inflation in Germany. Nonetheless, it will give them less
confidence regarding the rate cuts path following the one in June.

The US Jobless Claims
continue to be one of the most important releases to follow every week as it’s
a timelier indicator on the state of the labour market. This is because
disinflation to the Fed’s target is more likely with a weakening labour market.
A resilient
labour market though could make the achievement of the target more difficult.

Initial Claims keep on
hovering around cycle lows, while Continuing Claims remain firm around the
1800K level. This
week Initial Claims are expected at 218K vs. 215K prior, while there is no consensus at the
time of writing for Continuing Claims although the prior release showed an
increase to 1794K vs. 1794K expected and 1786K prior.

Friday

The Tokyo Core CPI Y/Y is
expected at 1.9% vs. 1.6% prior. The last report showed a big drop in the inflation
rate across all measures although it was attributed to a one-off factor as high school tuition in Tokyo was
effectively eliminated and took effect in April. Nonetheless, inflation in
Japan continues to ease and it doesn’t justify a rate hike from the BoJ
anytime soon.

The Chinese Manufacturing
PMI is expected at 50.5 vs. 50.4 prior, while the Services PMI is seen at 51.5
vs. 51.2 prior. We’ve got some disappointing data recently with industrial
output and retail sales missing expectations. This suggests that the economy is
still struggling to recover robustly amid weak domestic demand, lingering
deflation risk, and prolonged weakness in the property sector. If we
continue to see weakness, the PBoC will likely react by easing its policy further.

The Eurozone Headline CPI
Y/Y is expected at 2.5% vs. 2.4% prior, while the Core CPI Y/Y is seen at 2.7%
vs. 2.7% prior. This report is likely to influence the market’s expectations
for the rate cuts path beyond the June meeting. In fact, hot inflation data
after strong PMIs, wage growth and labour market reports will likely trigger a
hawkish repricing in interest rates expectations from the current 55 bps of
easing seen by year-end.

The US Headline PCE Y/Y is
expected at 2.6% vs. 2.7% prior, while the M/M measure is seen at 0.26% vs.
0.32% prior. The Core PCE Y/Y is expected at 2.75% vs. 2.8% prior, while the
M/M reading is seen at 0.24% vs. 0.32% prior. Forecasters can reliably estimate
the PCE once the CPI and PPI are out, so the market already knows what to
expect.

This report is unlikely
to change anything for the Fed as the central bank remains in a “wait and see” mode until September at
very least. In fact, despite calls of cuts in July or November, I’d say the Fed
will want to deliver the first cut on a meeting containing the SEP (barring a
quick deterioration in the labour market).

This article was written by Giuseppe Dellamotta at www.forexlive.com.