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.

Bank of Japan Governor Ueda and Japan finance minister Suzuki spoke over the weekend, at the conclusion of the G7 meeting in Italy.

Suzuki said he hadn’t had a one-on-one meeting with US Treasury Secretary Yellen. Which seems to indicate no discussion on co-ordinated yen intervention took place. Prior to the weekend Suzuki’s offsider, Vice MInister for International Affairs Masato Kanda (the official who will instruct the BOJ to intervene, when he judges it necessary) had basically said there was no need for a meeting.

Earlier this month Yellen was not encouraging of the idea:

• US support for Japan on intervention rightt now is only lukewarm

A few days later there was more cold shoulder from Yellen:

• Yellen didn’t sound unsupportive of Japan’s ‚rumoured‘ intervention, but she didn’t sound real keen either

Not to hammer this point too much but Yellen repeated the same just last week, that intervention should be rare and well-telegraphed in advance.

So, it was only a Suzuki and Ueda tag team show after the G7.

Suzuki:

• Reaffirmed the G-7 commitments on foreign exchange
• Said that many factors are making contributions to increase in yields
• Warned against maintaining rates above zero

And with rising rates in Japan he also

• called against maintaining rates above zero… „We must be acutely aware that the world of positive interest rates has come … we will make progress in restoring fiscal health with more sense of urgency than ever.”

Bank of Japan Governor Ueda seemed happy to let Suzuki handle the gnarly issues, shrugging it all off with:

• Long-term bond yields are determined by financial markets in principle
• Will monitor fixed interest markets

Ueda didn’t talk about the rate path ahead, nor did he specify much on the chances of trimming back on Japanese Government Bond bond purchases at the next policy meeting (this is in June).

Bank of Japan Governor Ueda and Finance Minister Suzuki.

—

G7 finance leaders met this Friday and Saturday in Stresa, Italy.

G7 member States are Canada, France, Germany, Italy, Japan, the UK, and the US. The EU participates in all discussions as a guest.

This article was written by Eamonn Sheridan at www.forexlive.com.

As Bank of Italy Governor, Fabio Panetta is also a member of the European Central Bank Governing Council. On Saturday he spoke at a news conference at the end of the G7 finance leaders meeting saying that he sees „a fairly general consensus has emerged on the possibility of a rate cut“.

We’ve certainly been getting a consensus out of ECB officials that a June cut is happening, these are from Friday:

• ECB’s Nagel: The probability of a June rate cut is increasingECB’s Nagel: The probability of a June rate cut is increasing
  • As Justin said on Nagel: For one of the more hawkish members, the headline comment is pretty much a concession that they will cut rates in two weeks‘ time.
• ECB’s Schnabel: A June rate cut is likely

ECB rates:

This article was written by Eamonn Sheridan at www.forexlive.com.

• NASDAQ index rises by over 1%. Dow Industrial Average average flat
• 77 Tories are standing down ahead of the general election
• Crude oil futures trade to new session highs
• Bakers Hughes oil rigs unchanged in the current week
• European indices close unchanged/down. Lower for the week.
• Japan’s Kanda: Excessive FX moves undesirable. Ready to take action if needed
• ECBs Nagel: Core and headline inflation are decelerating
• Atlanta Fed GDPNow growth estimate for Q2 falls to 3.5% from 3.6%
• University of Michigan consumer sentiment versus 69.1 estimate. Preliminary 67.4
• Fed Gov. Waller: US financing pressures may contribute to rise in longer run neutral rate
• Kickstart FX trading for May 24 w/a technical look at the EURUSD, USDJPY and GBPUSD.
• ECBs Muller: ECB must stay cautious as inflation can surprise to the upside
• Canada retail sales for March -0.2% versus 0.0% expected
• US durable goods orders for April 0.7% versus -0.8% expected
• The EUR is the strongest and the CHF is the weakest as the NA session begins
• ForexLive European FX news wrap: Dollar lightly changed in mixed trading
• NZDUSD Technical Analysis – The market is slowly fading the US Dollar strength
• ECB’s Nagel: The probability of a June rate cut is increasing
• ECB’s Schnabel: A June rate cut is likely

As the week comes to a close, the CAD is ending the day as the strongest of the major currencies. The CHF is the weakest. The USD is mostly lower with modest gains vs the JPY and CHF. The CAD moved higher despite lower than expected retail sales in March. However, the estimate for April was solid at 0.7% offsetting the -0.2% decline this month.

The USD moved lower helped by more favorable Michigan consumer confidence. Not only did the confidence, expectations and current situation increase, but the inflation expectations moved lower (click here for the full report). An analyst on CNBC today did warn of the reliability of the data due to political bias. GOP respondents tend to have an overly negative view of the economy and inflation vs Dem counterparts. Recall in the preliminary, the confidence fall sharply while inflation moved higher. Today’s data saw those trends reverse some of the large changes from the preliminary numbers. What do you believe?.

Also in the US today, the US Durable goods orders came in stronger than expectations at 0.7% vs -0.8%. However, this data is open to sharp revisions. The Factory Orders to be released in about 10 or so days,will show the durable goods revisions. Last month, the revisions were quite significant (from 2.6% originally reported to 0.8% final).

For the trading week, versus the major currencies the USD was higher. Below is a review of the weekly change of the major currencies vs the USD:

• EUR: + 0.17%
• JPY, .+0.82%
• GBP: -0.30%
• CHF: +0.72%
• CAD: +0.3%
• AUD: + 0.93%
• NZD unchanged

In the USD market today, yields are ending the day with mixed results:

• 2- year yield 4.940%, +1.5 basis points
• 5-year yield 4.527%, +0.2 basements
• 10 year yield 4.466%, -0.8 basis points
• 30-year yield 4.572%, -0.7 basis points

For the trading week, yields are higher with the sugar and moving up the most is the yield curve go flatter:

• 2-year yield +11.9 basis points
• 5-year yield, +8.1 base points
• 10 year yield +4.5 basis points
• 30-year yield +1.1 base points

The 2-10 years spread is at -47.9 basis points which is more negative by -.7.4 basis points

The 2-30 year spread is and -37.7 basis points which is more negative by -10.8 basis points

In other markets:

• Crude oil is trading at $77.70 up $0.83 or 1.05%. For the trading week the price of crude oil fell $-1.76 or -2.22%
• Gold fell by $-79.97 or -3.31%
• Bitcoin rose $2683
• Ethereum surged by $648 to $3738. That is a gain of nearly 21% on the back of expectations that an Ethereum ETF would be approved.

Monday is a holiday in the UK and the US. Hoping all have a great weekend.

This article was written by Greg Michalowski at www.forexlive.com.

The major US stock indices are all closing higher on the day, however with different variances.

• The Dow Industrial Average averages closing near unchanged at 39069.58 up 0.01%.
• The S&P index is closing up 36.86 points or 0.70% at 5304.71. A close short of its record close reached on Tuesday at 5321.42.
• The Nasdaq index is closing up 184.76 points or 1.10% at 16928.79.

The small-cap Russell 2000 rebounded 21.25 points today or 1.04% at 2069.6 X.

For the trading week, the major indices are closing with mixed results:

• Dow Industrial Average average fell -2.33%
• S&P index eked out a small gain of 0.03%. The gain was good enough for its fifth consecutive positive week
• NASDAQ and the rose 1.41% for its fifth weekly gain.
• Russell 2000 fell -1.24% snapping its 4 week up string.

Looking at individual stocks this week:

• Nvidia shares rose 15.13% after earnings beat expectations and the company announced a 10:1 stock split
• Meta Platforms, +1.34%
• Amazon, -2.14%
• Alphabet, -0.60% after closing at a record level last week
• Microsoft is closing at a record level and is up 2.37%
• Apple. rose 0.05%
• Tesla rose 1.0%
• Netflix rose 4.13%
• ServiceNow fell -3.47%
• Chipotle fell -1.92%
• Micron rose 3.35%
• Salesforce -4.66%
• Crowdstrike, rose 1.60%
• Dell rose 7.13%
• Gamestop fell -14.45%
• Trump Media, fell -10.03%

This article was written by Greg Michalowski at www.forexlive.com.