• The dollar was generally lower this morning against the other G10 currencies. Oddly enough the weakness came during the Asian day this morning; during the European afternoon/US morning the dollar managed to hold onto its gains despite a slew of disappointing US economic indicators (Philadelphia, Chicago and Kansas City Fed indices; initial jobless claims; Markit US manufacturing PMI; and existing home sales all came below expectations, and most were worse than the previous month’s figure. Only the Conference Board leading index for April beat expectations and rose.) Yet Fed funds rate expectations for this year were largely unmoved and longer-dated expectations declined only slightly, indicating that the data made little difference to market estimates of the Fed’s intentions. It may be that the market believes the Fed is intent on tightening regardless of the level of growth so long as the employment situation is improving and inflation is likely to head back towards its 2% target over the medium term. Moreover, there’s not much chance of them tightening in June, so data for April and May isn’t necessarily relevant to the decision process.

  • Or it may be that investors are looking past the recent data towards what Fed Chair Janet Yellen may say about her expectations for Q2 and beyond when she speaks later today. The FOMC minutes after all refer to discussions that took place three weeks ago, and before various papers about the problems seasonally adjusting the GDP data were published. Her speech may give more up-to-date information on her thinking, including comments on the April CPI figures that come out a few hours before she speaks. In addition, with a holiday next Monday in the UK and US, investors may be hesitant to take on big positions.

  • Greek hopes dashed; no hopes now? Greek PM Tsipras met with German Chancellor Merkel and French President Hollande in Riga, Latvia last night. The press was filled with hints that something was afoot: the Guardian newspaper said “a bailout extension will be on the table for discussions,” the idea being to give Greece a four-month breathing space to work out a comprehensive list of reforms. This follows reports in a German newspaper that the Eurogroup is considering extending Greece’s program until the autumn (an idea that Greek Finance Minister Varoufakis has rejected). However, nothing of the sort happened. Following the talks, Germany and France issued a statement saying only that “it was agreed that the talks between the Greek government and the institutions will be continued.” Moreover, earlier hints about a possible special meeting of the Eurogroup at the end of May or early June – before the 5 June payment to the IMF that is likely to push Greece over the edge – were dropped. With only two weeks left before Greece defaults, it seems unlikely that the two sides can reach agreement in time. Is there time for Greece to call a referendum? Or for the German Bundestag to vote on further aid? It seems difficult. I expect this to be a major issue in the market next week and the dominant one the following week if nothing is resolved. If they can’t reach a compromise, Greece will probably have to freeze bank accounts, possibly confiscate bank deposits (as was done in Cyprus) and impose capital controls, which would be in effect a “soft” exit from the Eurozone. Needless to say, brinksmanship on the Greek issue is EUR-negative. On the other hand, it may be positive for JPY and CHF if it causes risk aversion. Short EUR/JPY or EUR/CHF may be the best ways to play the rising tension over Greece.

  • BoJ stands pat, as expected The Bank of Japan ended its two-day policy meeting with no change in policy, as expected. Its assessment of the economy was a bit more optimistic than before, with several qualifying phrases removed from the statement in order to emphasize the progress that’s been made. Against this background, one wouldn’t expect them to change policy any time soon. I would expect them to wait to take any more action at least until July, when the results of this year’s wage negotiation should be known and the MPC members update their forecasts again. October, when the next official outlook report comes out, is the most likely month for them to change their program.

  • Today’s highlights: During the European day, the main event will be the German Ifo survey for May. The weak ZEW indices on Tuesday increase the likelihood of soft Ifo indices as well. This could add to evidence that Eurozone’s growth engine is losing steam. Following the weak German preliminary manufacturing and service-sector PMIs on Thursday, this could weaken EUR somewhat. The final German Q1 GDP data confirmed the preliminary growth figure and showed that the economy grew at a mere 0.3% qoq pace in Q1, adding to the recent disappointing data.

  • In the US, we get the headline and core CPI rates for April. The headline figure is expected to dip further into deflation while the core rate is forecast to have slowed to +1.7% yoy. Since Fed Chair Janet Yellen speaks later in day, investors will be probably watching for how she views the current inflation outlook. Fed officials have made the case several times that they remain determined to tighten as long as they are confident that inflation will move back to their 2% objective over the medium term.

Fundamental Daily Market Analysis
  • We get the April CPI data from Canada as well. The headline figure is expected to decelerate from the previous month and fall towards the Bank’s lower boundary of 1%-3% target range, while the core rate is forecast to have remained unchanged. In a recent speech by the BoC Governor Poloz, he said that the Bank’s two policy pillars — an inflation target of 2% and economic output running at full capacity by the end of 2016 — remain on track. On top of the gyration of WTI crude oil around 60 in recent weeks, a positive surprise could add to the optimistic tone of the speech and push USD/CAD towards 1.2000 again. Canada’s retail sales are also coming out.

  • As for the speakers, in addition to BoJ Governor Kuroda and Fed Chair Janet Yellen, ECB President Draghi and BOE Governor Mark Carney speak. So it’s a big day for speeches.


The Market

EUR/USD trades virtually unchanged

EURUSD

  • EUR/USD traded virtually unchanged on Thursday, staying near the 200-period moving average and slightly above the 1.1100 (S1) line. Taking a look at our oscillators, I still expect the forthcoming wave to be positive. The RSI continued higher after rebounding from its 30 line, while the MACD has bottomed and crossed above its trigger line. A rebound near 1.1100 (S1) is likely to initially challenge our resistance of 1.1200 (R1). A break through that could set the stage for extensions towards 1.1280 (R2). As for the broader trend, the break above 1.1045 (S2) on the 29th of April signaled the completion of a possible double bottom formation, something that could carry larger bullish implications. I would treat the 15th – 20th of May decline as corrective move, at least for now. I would talk about the resumption of the prior downtrend if I see a clear close below the psychological figure of 1.1000 (S3).

  • Support: 1.1100 (S1), 1.1045(S2), 1.1000 (S3)

  • Resistance: 1.1200 (R1), 1.1280 (R2), 1.1330 (R3)

EUR/GBP falls below 0.7130

EURGBP

  • EUR/GBP tumbled yesterday, fell below the support (now turned into resistance) barrier of 0.7130 (R1), and found support at 0.7090 (S1). The fall below 0.7130 (R1) confirmed a forthcoming lower low on the 4-hour chart and shifted the short-term picture back negative. I would now expect a break below 0.7090 (S1) to open the way for the next support at 0.7035 (S2). However, our short-term oscillators provide signs that a minor bounce could be looming before the bears take charge again. The RSI exited its oversold territory and is pointing up, while the MACD has bottomed and looks able to move above its trigger soon. Switching to the daily chart, the decline that began on the 7th of May brought into question the completion of a failure swing bottom pattern. Therefore, I prefer to maintain a neutral stance with regards to the overall path of EUR/GBP.

  • Support: 0.7090 (S1), 0.7035 (S2), 0.7000 (S3)

  • Resistance: 0.7130 (R1), 0.7170 (R2), 0.7200 (R3)

USD/JPY pulls back after hitting resistance at 121.25

USDJPY

  • USD/JPY traded lower yesterday after hitting resistance at 121.25 (R1). During the European morning Friday, the rate is trading slightly above the support barrier of 120.70 (S1). A downside violation of that barrier would be likely to open the way for the next support at 120.30 (S2). Our momentum studies support further declines. The RSI moved lower after exiting its overbought territory, while the MACD has topped and fallen below its trigger line. Nevertheless, although we may experience further bearish extensions, the short-term outlook is positive, in my view. On the 19th of May, the rate emerged above the upper bound of a triangle formation that had been containing the price action since the 20th of March. Therefore, I would treat any further declines as a corrective move before the bulls take control again. On the daily chart, the rate is trading above the 50-day moving average and well above the 200-day one. This keeps the overall trend of USD/JPY to the upside. However, a clear close above 122.00 (R3) is needed to confirm a forthcoming higher high on the daily chart and signal the resumption of that trend.

  • Support: 120.70 (S1), 120.30 (S2), 120.00 (S3)

  • Resistance: 121.25 (R1), 121.50 (R2), 122.00 (R3)

Gold finds support marginally above 1200

Gold

  •  Gold traded lower on Thursday after hitting resistance near 1212 (R1), and found support marginally above the psychological figure of 1200 (S1) and the 200-period moving average. Bearing in mind the inability of the bulls to drive the metal above the 1212 (R1) area, but also that the price is still trading above the round figure of 1200 (S1), I would adopt a flat stance as far as the short-term bias is concerned. On the daily chart, Monday failed to close above 1226 (R3). I believe that a decisive close above that barrier is needed to turn the medium-term outlook to the upside. For now, I will maintain my neutral stance as far as the overall picture of the yellow metal is concerned. This is also supported by our daily oscillators. The 14-day RSI is back near its 50 line, while the MACD, although positive, has topped and could be headed back near its zero line.

  • Support: 1200 (S1), 1195 (S2), 1190 (S3)

  • Resistance: 1212 (R1), 1220 (R2), 1226 (R3)

WTI finds resistance near 60.80

WTI

  • WTI surged on Thursday, but the rally was halted around 60.80 (R1). The short-term outlook is back to the upside in my view since the rebound on the 19th of May occurred near the 23.6% retracement level of the 18th of March – 13th of May advance. A clear break above 60.80 (R1) is likely to signal the continuation of the short-term uptrend and perhaps pave the way for our next hurdle, at 61.70 (R2). Nevertheless, our hourly oscillators give evidence that a pullback may be in the works before the next positive leg. The RSI exited its above-70 territory, while the MACD has topped and fallen below its signal line. As for the broader trend, the break above 55.00 on the 14th of April signalled the completion of a double bottom formation, something that could carry larger bullish implications in the not-too-distant future. As a result, I would treat the 13th – 19th of May decline as a corrective move.

  • Support: 60.25 (S1), 59.85 (S2), 59.30 (S3)

  • Resistance: 60.80 (R1) 61.70 (R2), 62.45 (R3)


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