CFD Markets News and Forecasts — 03-05-2022

• The shared currency bulls have cushioned around 1.0500 but the downside is still favored.
• Formation of a Bearish Pennant chart pattern signals continuation of a downtrend.
• Slippage of the RSI (14) below 40.00 will trigger a bearish bias ahead.

The EUR/USD pair is displaying back and forth moves in the early Tokyo session ahead of the Fed’s policy, which is likely to stretch its interest rates to tame the galloping inflation. A range-bound move in mid-1.0500s is signaling a contraction in the standard deviation, which will be followed by wild moves going forward.

On an hourly scale, EUR/USD is forming a Bearish Pennant chart pattern that displays the continuation of a bearish move after a consolidation phase. Usually, a consolidation phase after a bearish momentum denotes short buildups from those investors who prefer to enter a trade when a bearish bias sets in. The asset is consolidating in a tad wider range of 1.0490-1.0578.

The 200-period Exponential Moving Average (EMA) at 1.0608 is still scaling lower, which adds to the downside filters while the asset is hovering around the 50-EMA at 1.0525, which dictates a consolidation phase.

Meanwhile, the Relative Strength Index (RSI) (14) is oscillating in a 40.00-60.00 range, which signals a directionless move that will be followed by wider ticks and volumes.

Should the asset drops below last week’s low at 1.0471, a bearish trigger will drag the asset towards the round level support and 2017’s low at 1.0400 and 1.0340 respectively.

On the flip side, euro bulls can regain strength if the asset oversteps Friday’s high at 1.0593 decisively. This will send the asset towards April 27 high at 1.0655, followed by the round level resistance at 1.0700.

EUR/USD hourly chart

US inflation expectations, as per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, snapped a two-day fall with a recovery move to 2.83% by the end of Tuesday’s US session.

In doing so, the inflation gauge bounced off the lowest levels since April 13 as traders brace for the key Federal Open Market Committee (FOMC).

The key economic precursor rose to a record high during late April before easing from 3.02%. Even so, the rate remains well in support of the Fed’s anticipated hawkish move.

Read: Fed May Preview: 'Less hawkish' is the new dovish

It’s worth noting, however, that the quote’s latest uptick joins the pre-Fed cautious mood to weigh on the market’s moves, as well as help the US dollar to regain. As a result, commodities and Antipodeans witness pressure before the crucial event, namely the Fed meeting.

• The US 10-year Treasury yield has jumped since April 27, 30-bps.
• Expectations of a 50-bps rate hike by the Fed keep US Treasury yields upward pressured.

On Tuesday, the US 10-year Treasury yield registered losses of one basis point and finished around 2.979% amidst a choppy trading session ahead of the Federal Reserve May meeting.

The 10-year benchmark note began Tuesday’s session around 2.990% and reached a daily high at around 3.010%, but retreated from the YTD highs and settled around 2.979%.

Wednesday’s Federal Reserve monetary policy decision had kept US Treasury yields in the driver’s seat since April 27, as investors expect at least a 50-bps rate hike by the Fed, alongside the beginning of the reduction of the $8.9 trillion balance sheet.

Also read: Gold Price Forecast: XAU/USD bears reclaimed the 100-DMA and targets the 200-DMA at around $1835

US 10-year Treasury Yield Forecast: Technical outlook

From a technical analysis perspective, the 10-year benchmark note is upward biased. However, it faces solid resistance around the 3% threshold, a level not reached since December 2018. The Relative Strength Index (RSI) at 67.44 aims lower, contrary to the 10-year graph, which means that negative divergence between the yield/oscillators could drag yields lower.

With that said, on the downside, the US 10-year T-note yield first support would be the 2.80% threshold. A break below would expose March’s 2019 2.77% high, followed by April 27 lows at 2.717%. In the event of yields plunging lower, the next stop would be March’s 28 highs at around 2.557%.

To the upside, the US 10-year T-note yield first resistance would be 3.00%. A breach of the latter would expose November 7, 2018, highs at around 3.252%.

The Reserve bank of New Zealand governor, Adrian Orr, is speaking at a press conference and says that the central bank's ''aim is to keep inflation expectations from growing.'' He added that they cannot rule out a worldwide recession in the coming months.

Earlier, the Reserve Bank of New Zealand released its May 2022 Financial Stability Report. Reuters posted key notes from the reports follows:

''The New Zealand financial system remains well placed to support the economy.''

''If interest rates need to increase more than currently anticipated to contain inflationary pressure, this could lead to a softening in the labour market over time.''

''A slowdown in global growth, increasing trade protectionism, or further sanctions could amplify trade impacts in NZ.''

Meanwhile, the NZD has been drifting in markets and is doing little despite the jobs data coming in line with expectations as a rate hiking prospect for this month's meeting. 

• NZD/USD remains stuck around 0.6440 on a steady NZ Unemployment Rate at 3.2%

• GBP/USD remains sidelined, stays pressured despite the previous day’s corrective pullback.
• Clear break of ascending triangle, sustained trading below 200-HMA keeps sellers hopeful.
• Fortnight-old falling trend line offers immediate support ahead of the multi-month low marked last week.

GBP/USD aptly portrays the pre-Fed trading lull while taking rounds to 1.2500 during Wednesday’s Asian session.

The cable pair printed mild gains the previous day as a pullback from 1.2567 reversed the early Tuesday’s upbeat performance. In doing so, the quote broke an ascending triangle to the south and favored bears ahead of the key day.

Bearish MACD signals and the GBP/USD pair’s sustained trading below 200-HMA also keep the sellers hopeful.

That said, the previous resistance line from April 21, around 1.2460 by the press time, offers immediate support to the pair ahead of the latest multi-month low near 1.2410.

It’s worth noting that the GBP/USD weakness past 1.2410 will be tested by the 1.2400 threshold before directing bears towards the June 2020 bottom of 1.2251.

Alternatively, the aforementioned one-week-old triangle’s upper line, around 1.2600-2610, will restrict the quote’s short-term rebound ahead of the 200-HMA level surrounding 1.2635.

Even if the GBP/USD crosses the 200-HMA hurdle, the buyers remain cautious until witnessing a clear upside past the 1.2975-80 region comprising mid-April lows.

GBP/USD: Hourly chart

Trend: Bearish

• AUD/NZD stays firmer after NZ Q1 2022 jobs data fails to impress sellers.
• New Zealand Employment Change, Unemployment Rate match market forecasts.
• RBA’s more-than-expected rate hike, pre-Fed consolidation previously favored bulls before NZ GDT Price Index.
• Australia Retail Sales for March will offer immediate direction but FOMC will have a higher say.

AUD/NZD remains mostly sidelined around 1.1035, mildly up of late, following the release of the New Zealand jobs report on early Wednesday in Asia.

As per the latest New Zealand (NZ) employment report from the Statistics New Zealand, the first quarter (Q1) 2022 Employment Change and Unemployment Rate figures match 0.1% and 3.2% respective market forecasts. Details suggest that the Participation Rate eased to 70.9% versus 71.1% expected and prior whereas Labour Cost Index met the 3.1% YoY expectations compared to 2.8% prior readouts.

Read: New Zealand Employment Report leaves NZD sidelined ahead of Fed

Earlier in the day, NZ GDT Price Index registered fourth consecutive slump with -8.5% figure, the most since 2015, versus -0.3% expected and -3.6% previous readings. Following that, the Reserve Bank of New Zealand (RBNZ) Financial Stability Report (FSR) praised the economic transition.

Read: RBNZ: The New Zealand financial system remains well placed to support the economy.

It’s worth noting that the Reserve Bank of Australia’s (RBA) higher-than-expected rate lift, as well as robust inflation and hopes of tighter monetary policy from other major central banks added strength to the AUD/NZD prices the previous day. However, pre-Fed caution seems to have tested the bulls afterwards.

Moving on, Australia’s Retail Sales for March, expected 0.6% versus 1.8% prior, will offer immediate direction to the pair but major attention will be given to the market’s mood ahead of the Federal Open Market Committee (FOMC).

Technical analysis

A daily closing beyond the August 2020 top surrounding 1.1045 becomes necessary for the AUD/NZD bulls to rule out a pullback towards a seven-week-old support line near 1.0850.

• NZD/USD has faced barricades around 0.6440 on the flat jobless rate and Employment Change.
• This has bolstered the odds of a rate hike by the RBNZ.
• Fed’s policy is in the spotlight and a jumbo rate hike looks certain.

The NZD/USD pair has not displayed any firmer move as Statistics New Zealand has reported the Unemployment Rate at 3.2%. The jobless rate is in line with the market consensus and prior print of 3.2%. The NZ jobless rate at 3.2% signals the continuation of a tight labor market in the kiwi area, which signals a wage-price hike going forward. Also, the Employment Change has been printed at 0.1% similar to the market consensus and prior print of 0.1%.

This has improved the expectations of one more rate hike by the Reserve Bank of New Zealand (RBNZ) on May 25. The market participants should be aware of the fact that the RBNZ raised its interest rates by a hefty 50 basis points (bps) resulting in a 1.5% Official Cash Rate (OCR) in the second week of April.

Meanwhile, the US dollar index (DXY) is facing barricades at 103.50. The asset is displaying exhaustion ahead of the interest rate decision by the Federal Reserve (Fed). The DXY has witnessed a dream rally last month after surging around 4% on expectations of an aggressive hawkish tone from the Fed. Apart from the rate hikes, investors are also expecting the announcements of balance sheet reduction and hawkish guidance for the remaining year.

Although the Fed’s policy will remain in the spotlight, investors will also focus on the release of ISM Services PMI, which is seen at 58.5 against the prior print of 58.3.

• On Tuesday, gold rose some 0.26%, though it remains below the 100-DMA.
• The yellow-metal gains were capped by falling crude oil prices and choppy trading ahead of the FOMC meeting.
• Gold Price Forecast (XAU/USD): Given that gold bears achieved a daily close below the 100-DMA, a move towards the 200-DMA is on the cards.

Gold spot (XAU/USD) slid below the 100-day moving average (DMA) at $1881.38 and recorded a daily close nearby on Monday, ahead of Wednesday’s Federal Reserve monetary policy decision, widely expected to hike rates by 50-bps, amid a scenario of high global inflation, courtesy of the Ukraine-Russia war, alongside an ongoing Covid-19 crisis in China, which threatens to disrupt the supply chain. At $1868.09, the yellow metal records minimal gains of 0.01%.

Sentiment in the financial markets is positive, as shown by gains in US equities amidst a choppy trading session ahead of the FOMC’s meeting. Asian futures are set to open higher while crude oil prices fell, a lid on precious metals gains.

The US Dollar Index fell for the second time in the last four days but clings to the 103 mark, at 103.455, registering a loss of 0.14%. Additionally, US Treasury yields dropped, led by the 10-year benchmark note, which sat at 2.979%, and fell two basis points, undermining the greenback.

On Tuesday, the Fed’s May meeting began. Furthermore, the US economic docket featured US Factory Orders for March, which grew by 2.2% m/m, beating the 1.1% foreseen. In the meantime, US JOLTs Job Openings for March rose to 11.549M, worst than the 11M estimations, illustrating a tight US labor market.

Despite mixed US data, the Federal Reserve is expected to lift rates by 50-bps on Wednesday and could begin reducing its balance sheet by $95 billion. Still, money market futures have also priced in additional 50-bps increases in June, July, and September meetings, which means that the Federal Funds Rate would be lying at the 2.25-2.50% range around that time.

Gold Price Forecast (XAU/USD): Technical outlook

The XAU/USD’s daily chart depicts the yellow metal as neutral biased. Furthermore, XAU/USD bears achieved a daily close below the 100-day moving average (DMA), lying at $1881.38, paving the way for XAU/USD’s further losses.

On the downside, gold’s first support would be the 200-DMA at $1835.08. A break below would expose an upslope trendline around $1810-15, followed by a renewed test of $1800.

Upwards, XAU/USD’s first resistance would be the 100-DMA at $1881.38. A breach of the latter would expose $1890, followed by $1900, and then April’s 29 daily high at $1919.77.

The first quarter labour market data for new Zealand has arrived and has little effect n the price of NZD with the Unemployment Rate coming in as expected at 3.2%. The focus is on the Federal Reserve. 

Employment Report

Unemployment rate 3.2 pct (Reuters poll 3.2 pct).

Q1 s/adj jobs growth +0.1 pct QoQ (Reuters poll +0.1 pct).

Q1 participation rate 70.9 pct (Reuters poll 71.1 pct).

Q1 lci private sector wages (ex-o'time) +0.7 pct on pvs qtr (Reuters poll +0.7 pct).

Q1 lci private sector wages (ex-o'time) +3.1 pct on year ago (Reuters poll +3.1 pct).

Some may have been a touch disappointed that the Unemployment Rate did not come in lower vs Q4, 3.2%. However, markets will continue to expect tightness in the labour market and a need for the central bank to tighten rates at this month's meeting. A 50bp OCR hike is on the cards as it is evident that the Reserve Bank of Nzezealand is eager to get on top of inflation expectations. 

NZD/USD update

The price is testing a weekly demand area and a correction higher could be on the cards, although this will depend on the Fed in the near term and then the RBNZ.

The price, from an hourly perspective, remains within a sideways channel. 

Meanwhile, the focus is on the Federal Reserve and ''if the Fed frames near term aggressive hikes as likely to limit the terminal rate, that could slow the USD’s ascent near term,'' analysts at ANZ Bank argued. 

About the Unemployment Rate

The Unemployment Rate released by the Statistics New Zealand is the number of unemployed workers divided by the total civilian labor force. If the rate is up, it indicates a lack of expansion within the New Zealand labor market. As a result, a rise leads to weaken the New Zealand economy. A decrease of the figure is seen as positive (or bullish) for the NZD, while an increase is seen as negative (or bearish).released by the Statistics New Zealand is the number of unemployed workers divided by the total civilian labor force. If the rate is up, it indicates a lack of expansion within the New Zealand labor market. As a result, a rise leads to weaken the New Zealand economy. A decrease of the figure is seen as positive (or bullish) for the NZD, while an increase is seen as negative (or bearish).

• USD/CAD grinds lower after the biggest daily fall in two weeks.
• US dollar pares recent gains ahead of the key FOMC.
• BOC’s Rogers teased higher rates but strong US data, hawkish expectations from Fed challenge further downside.
• US ISM Services PMI, Canadian trade numbers will add to the economic docket for a watch.

Having dropped the most in a fortnight, USD/CAD holds lower grounds near 1.2830 during the initial Asian session on Wednesday as bears take a breather ahead of the key data/events.

The Loonie pair’s pullback on Tuesday could be linked to the US dollar’s consolidation ahead of the Federal Reserve (Fed) monetary policy decision. Also favoring the USD/CAD prices were the comments from the Bank of Canada (BOC) policymaker Carolyn Rogers, not to forget firmer equities.

It’s worth noting, however, that the oil prices fail to cheer softer USD and ended posting daily losses, which in turn restricted the USD/CAD pair’s immediate downside due to Canada’s reliance on oil exports. Also challenging the quote were strong US JOLTS Job Openings and Factory Orders for March.

Moving on, USD/CAD prices are likely to remain pressured amid the pre-Fed anxiety. Though, the south-run will have a bumpy road unless the Fed chose to disappoint markets, either via rate actions or comments suggesting a softer approach to deal with robust inflation.

Other than the Federal Open Market Committee (FOMC), monthly prints of the US ISM Services PMI for April and Canadian International Merchandise Trade data for March will be crucial to watch for short-term directions.

Technical analysis

USD/CAD bears attack a fortnight-old rising trend line, around 1.2835 by the press time, after failing to cross March month’s high of 1.2900 on a daily closing basis. Given the RSI’s pullback from the nearly overbought zone and bullish MACD signals, the Loonie pair is less likely to extend the south-run.

• The DXY is struggling to sustain above 103.50 amid uncertainty over the Fed’s policy announcement.
• In addition to a rate hike, investors are expecting quantitative tightening and hawkish guidance.
• Inflation may inch further as commodities have not shown any sign of exhaustion yet.

The US dollar index (DXY) is failing to find any direction as investors have squeezed their positions significantly amid uncertainty over the release of the monetary policy by the Federal Reserve (Fed). The DXY has remained on the seventh heaven for a few trading weeks on bolstered odds of a jumbo rate hike by the Fed.

Expectations from the Fed in the monetary policy meeting

An announcement of interest rate elevation by 50 basis points (bps) is on the cards. The Fed is going to bring a healthy stretch in the interest rates to corner the inflation mess.  Apart from that, the galloping balance sheet demands a serious reduction now, therefore investors should brace for quantitative tightening. Lastly, more rate hikes by half a percent for the remaining year could be announced by the Fed. The Fed is determined to return to the neutral rate culture by the end of this year and for the happening of the event, bulk rate hikes are highly required.

On the front of the economic indicators, the Fed could dictate that inflation is expected to bring more upside to the table as commodity and fossil fuel prices have not shown any kind of exhaustion yet. Also, the tight labor market will stay for longer and the economy is much more solid to face the heat of liquidity contraction going forward.

Key events this week: ISM Services PMI, Initial Jobless Claims, Nonfarm Payrolls (NFP), Unemployment Rate.

Eminent issues on the back boiler: Russia-Ukraine Peace Talks, Fed interest rate decision, Bank of England (BOE) interest rate announcement.

New Zealand quarterly employment report overview

Early Wednesday in Asia, at 22:45 GMT Tuesday the world over, the global market sees the first-quarter (Q1) 2022 employment data from Statistics New Zealand.

With the Reserve Bank of Australia’s (RBA) higher-than-expected rate lift, as well as robust inflation and hopes of tighter monetary policy from other major central banks, today’s jobs report becomes crucial for the NZD/USD traders, mainly due to the wage prices index data.

Market consensus suggests no change in the headline Unemployment Rate of 3.2% and the Employment Change figure of 0.1%. Further, the Participation Rate may also remain unchanged at 71.1% but the Labour Cost Index could rise to 3.1% from 2.8%.

Ahead of the data, ANZ said,

On the same line Westpac mentioned,

How could it affect the NZD/USD?

NZD/USD edges lower towards 0.6400, fading the previous day’s bounce off the lowest levels since June 2020, as traders await the key NZ jobs report, as well as the Fed’s verdict.

As the pre-Fed anxiety gains momentum, the NZD/USD prices weaken. However, firmer inflation data at home, coupled with the RBNZ’s readiness to faster normalizing rates, strong employment data will back the consensus of a 0.50% rate hike in the next move, which in turn could offer immediate strength to the Kiwi pair. Even so, the upside momentum is likely to be less impressive considering the market’s cautious mood.

Technically, a descending trend line from August 2021, around 0.6370, lures NZD/USD bears unless the quote rises successfully beyond January’s low near 0.6530.

Key Notes

NZDUSD steady above 0.6400 ahead of NZ employment data, Fed’s decision

NZ Employment Preview: Forecasts from four major banks, another record low

About New Zealand unemployment rate and employment change

The quarterly report on New Zealand's unemployment rate and employment change is being released by Statistics New Zealand.

The unemployment rate is the number of unemployed workers divided by the total civilian labor force. If the rate is up, it indicates a lack of expansion within the New Zealand labor market. As a result, a rise leads to weaken the New Zealand economy. A decrease of the figure is seen as positive (or bullish) for the NZD, while an increase is seen as negative (or bearish).

On the other hand, employment change is a measure of the change in the number of employed people in New Zealand. Generally speaking, a rise in this indicator has positive implications for consumer spending which stimulates economic growth. A high reading is seen as positive (or bullish) for the NZ dollar, while a low reading is seen as negative (or bearish).

• The AUD/JPY edges high for the second-consecutive day, though it remains trapped in the 91.90-92.60 range.
• A positive market mood could not trigger a strong rally for the Australian dollar, despite the RBA hiking rates by 25-bps.
• AUD/JPY Price Forecast: The outlook remains constructive, though a break above 94.00 would open the door for further gains; otherwise, a test of April’s lows at around 90.43 is on the cards.

The AUD/JPY prints modest gains on Tuesday after the Reserve Bank of Australia pulled the trigger and hiked “surprisingly” interest rates by 25-bps for the first time since November 2010. At 92.34, the AUD/JPY failed to rally sharply, as the next central bank expected to tighten monetary conditions, the Federal Reserve, would unveil its decision on Wednesday.

Investors’ mood remains positive, as shown by US equities advancing ahead of the Fed’s May meeting. The Australian dollar is the strongest currency in the FX complex, while the safe-haven peers, the CHF, JPY, and the greenback, are the laggards.

Factors like China’s coronavirus crisis threaten to derail the global economic recovery. Furthermore, developments around the Ukraine-Russia conflict, like the oil embargo and Russia’s demand for natural gas being paid in roubles, keep energy prices upward pressured, though they seem to weigh less in the market mood.

AUD/JPY Price Forecast: Technical outlook

The AUD/JPY is still upward biased, despite the dip from YTD highs around 95.74, to April 27 daily lows at 90.43. The daily moving averages (DMAs) below the exchange rate confirm the aforementioned. The MACD-line, as shown by its histogram, begins to aim towards the signal-line, meaning that “some” buyers could be adding long positions in the AUD/JPY.

With that said, the AUD/JPY’s first resistance would be the downslope trendline drawn from the YTD tops that pass around the 92.80-93.20 area. A breach of the latter would expose the 94.00 mark, followed by the March 28 daily high at 94.32, and then the 95.00 figure.

On the other hand, if the AUD/JPY breaks below the April 28 daily low at 91.33, that would open the door for a test of April 27 at 90.43, but first, AUD/JPY bears would need to overcome some hurdles on the way down. The following support after 91.33 would be 91.00, followed by April’s 27 low.

Key Technical Levels

• AUD/USD sits in sideways consolidation in anticipation of the Fed. 
• The RBA spike was shorted lived as traders move to the sidelines. 

AUD/USD stuck to a sideways drift on Tuesday following an initial spike on the back of a hawkish Reserve Bank of Australia. AUD/USD traded between 0.7150 highs and a low of 0.7080 in New York. 

The RBA surprises everyone with a 25bp move. Analysts at ANZ  Bank explained, ''in what might be termed a ‘goldilocks’ move, the RBA decided that 15bp was too small, 40bp too much whereas a 25bp lift in the cash rate was a return to 'business as usual.'''

''In his post-meeting press conference, the Governor indicated that it was “not unreasonable to expect” the cash rate to eventually get to 2.5%. This is in line with our expectation for mid-2023, though we continue to think the cash rate will eventually need to move into the 3s – albeit not for some time after next year. Lowe also said that the RBA was 'not inclined to deviate” from monthly moves of 25bp “unless there is a very strong argument to do so.' A lift in underlying inflation to almost 5% by the end of this year might be viewed by some as meeting that threshold.''

Meanwhile, looking at the greenback, the US dollar came under pressure against a basket of currencies on Tuesday, as investors start to move to the sidelines ahead of the Fed. The dollar index (DXY) was last at 103.47, down 0.13% on the day, after reaching 103.93 on Thursday, the highest since December 2002. With inflation running at its fastest pace in 40 years, DXY hit a 20-year high on expectations the US central bank will be more aggressive than its peers while expecting a stronger US economy than that of the eurozone. 

For the day ahead, investors are in anticipation of the Fed and expect the central bank to hike rates by 50 basis points at the end of a two-day meeting on Wednesday in order to combat soaring inflation. The markets are going to be listening closely to the comments by Chairman Jerome Powell for further clues on future rate hikes.

• USD/CHF looks to overstep 0.9800 as expectations of a hawkish tone by the Fed bolstered.
• An aggressive tight policy stance will shrink liquidity and growth rate going forward.
• The Swiss CPI is seen at 2.5% against the prior print of 2.4%.

The USD/CHF pair is attempting to test the round level resistance of 0.9800 after failing to kiss the same in the last New York session. Broad-based strength in the US dollar index (DXY) is supporting the asset to resume rallying higher.

The asset has printed a fresh yearly high at 0.9800 on Tuesday ahead of the announcement of the monetary policy by the Federal Reserve (Fed). A serious transition from an ultra-loose stimulus era into a tight liquidity phase is strengthening all the greenback-dominated currencies. Tight monetary policy in the US economy will keep the greenback in the grip of bulls for a prolonged period. The Fed is highly expected to announce a rate hike by 50 basis points (bps), which will shrink liquidity and henceforth have a significant impact on the growth rate.

The DXY is oscillating in a narrow range of 103.44-103.51 in the early Tokyo session and has been displaying high volatility since Tuesday. Meanwhile, the 10-year US Treasury yields are moving higher to recapture the psychological resistance of 3%.

On the Swiss front, investors are eyeing the release of the Consumer Price Index (CPI), which is due on Thursday. A preliminary reading shows a tad improvement in the inflation figure at 2.5% against the prior print of 2.4%.

The Reserve Bank of New Zealand released its May 2022 Financial Stability Report. Reuters posted key notes from the reports follows:

The New Zealand financial system remains well placed to support the economy.

House prices remain above sustainable  levels despite recent declines.

Rising global interest rates have put downward pressure on the prices of assets such as equities; housing.

Expect to see a slowdown in high-DTI lending over the coming months.

While gradual adjustment in house prices to a more sustainable level is desirable for the stability of the financial system, larger correction remains a possibility.

If interest rates need to increase more than currently anticipated to contain inflationary pressure, this could lead to a softening in the labour market over time.

Expect the increasing trend in capital ratios will continue during the next few years as the remaining elements of capital review are implemented.

Proceeding to design a framework for operationalising DTI restrictions.

Our 2022 stress test programme investigates risk for banks from higher interest rates & falling house prices.

Underlying weaknesses in some industries may be revealed as targeted fiscal support is removed.

Intend to have the framework for operationalising DTI restrictions finalised by late 2022.

A slowdown in global growth, increasing trade protectionism, or further sanctions could amplify trade impacts in NZ.

Meanwhile, the NZD has been drifting in markets on Tuesday ahead of key employment data but it erased most of yesterday’s gains made before the larger than expected hike by the Reserve Bank of Australia.

• USD/JPY bears are seeking a deeper correction. 
• The 50% mean reversion level is holding up, guarding a 61.8% retracement. 

USD/JPY ended the day flat on Wall Street around as markets moved into consolidation ahead of the Federal Reserve.  At the time of writing, USD/JPY is trading at 130.16 and has traded between 129.69 and 130.29. The pair is correcting a bullish impulse in the daily charts that was made when the US dollar rallied to 20-year highs last week. 

The following illustrates the price in the daily chart and prospects of a deeper retracement:

USD/JPY daily chart

The W-formation is a reversion pattern and so far, the price has corrected into a 50% mean reversion area which is holding up as support. A break of here would be expected to see the price challenge the old highs and presumed support near a 61.8% golden ratio of around 128.60. 

What you need to take care of on Wednesday, May 4:

Financial markets were in a better mood on Tuesday, with global indexes managing to post gains, resulting in less demand for the safe-haven dollar.

However, spiraling inflation, tensions in Europe amid the Russian war on Ukraine and a rising number of coronavirus contagions, not only in China, anticipate a long road ahead towards economic stability and kept investors in cautious mode.

At the same time, central banks have started draining markets from easy money meant to provide support in the early stages of the pandemic. The Reserve Bank of Australia hiked the cash rate by 25 bps early on Tuesday. The US Federal Reserve and the Bank of England will announce their decisions in the upcoming days, and both could pull the trigger by 50 bps.

The yield on the 10-year US Treasury note peaked at 3% on Monday, while the German note yielded over 1% for the first time since 2015, both easing on Tuesday and putting some pressure on the greenback.

Global indexes edged higher, although Wall Street trimmed most of its gains ahead of the close, giving the dollar a chance to recover some ground.

The American dollar is still the strongest, as Tuesday's losses were modest, and the currency holds on to most of its yearly gains. EUR/USD hovers around 1.0510 early in the Asian session, while GBP/USD cannot sustain gains beyond the 1.2500 figure. Commodity-linked currencies posted modest gains against their American rival, with AUD/USD now trading around0.7090 and the USD/CAD pair around 1.2840.

Gold ticked higher, now trading at around $1,866 a troy ounce. Crude oil prices eased, with WTI changing hand at $102.75 a barrel.

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• EUR/USD is holding up despite the Fed expectations. 
• Traders are moving to the sidelines in anticipation of the Fed's announcements. 

EUR/USD is regaining some territory into the Wall Street close as the greenback continues to be faded, unable to break higher as traders start to move to the sidelines ahead of the Federal Reserve. In contrast to the expectations the Fed, however, the European Central Bank's tightening expectations remain subdued which has given the US dollar a boost over the euro of late. 

At the time of writing, at 1.0522, the euro is some 0.18% higher at and has travelled from a low of 1.0492 to a high of 1.0577 so far. The markets are pausing in the trade of between the ECB and Fed. However, the divergence favours the greenback with the ECB WIRP suggesting odds of liftoff June 9 are now around 25% vs. 30% at the start of this week and 40% at the start of last week, while liftoff July 21 remains fully priced in, as analysts at Brown Brothers Harriman noted. By stark contrast, a hawkish outcome is expected for the months ahead.

ECB eyes on troubling data 

Meanwhile, data has been released which do not paint the best looking picture for the eurozone. Eurozone reported March PPI and Unemployment. The PPI climbed 36.8% YoY vs. 36.3% expected and a revised 31.5% (was 31.4%) in February, while the Unemployment Rate arrived in at the expected 6.8% vs. a revised 6.9% (was 6.8%) in February. Germany also reported Unemployment at -13k vs. -15k expected and -18k in February, with the Unemployment Rate firm at 5.0%. 

''The PPI readings are worrisome as the acceleration implies further upside pressure on CPI in the coming months,'' analysts at BBH explained. 

As for the Fed, while consecutive rate hikes of at least 50bps are expected, the analysts at BBH also explained that the ''March minutes also showed that “the Committee was well placed to begin the process of reducing the size of the balance sheet as early as after the conclusion of its upcoming meeting in May.” If the Fed stays true to form, then a plan close to the one outlined here will be announced Wednesday and implemented on May 15.''  Traders will be looking to the comments by Chairman Jerome Powell for further clues on future rate hikes. 

Looking to the US dollar, the greenback came under pressure against a basket of currencies on Tuesday, as investors start to move to the sidelines ahead of the Fed. With inflation running at its fastest pace in 40 years, DXY hit a 20-year high at the end of last week's business on expectations the US central bank will be more aggressive than its peers while expecting a stronger US economy than that of the eurozone. 

However, supporting the euro on Tuesday, a gauge of global equity markets rose slightly on Tuesday. MSCI's gauge of stocks across the globe (IACWI) gained 0.23% and the pan-European STOXX 600 index (.STOXX) rose 0.09% after surviving a "flash crash" on Monday in Nordic markets caused by a sell order trade by Citigroup. 

• The New Zealand dollar continues its eight-day free fall from 0.6800s to 0.64000.
• The Federal Reserve began its two-day monetary policy meeting, expected to hike rates by 0.50% and start reducing the balance sheet.
• A positive Q1 New Zealand employment data increased the odds of a 50-bps rate hike by the Reserve Bank of New Zealand.

The NZD/USD slides for the eighth consecutive day amidst a risk-on market sentiment that usually favors the kiwi. However, as the Federal Reserve meeting started today, market players remain at bay, awaiting Wednesday’s US central bank decision. At 0.643s, the NZD/USD is trading near fresh 22-month lows at the time of writing.

Positive sentiment fails to lift the kiwi

Sentiment-wise, European and US equities are rising on Tuesday, despite investors’ concerns about China’s zero-tolerance Covid-19 program, which threatens to reimpose strict restrictions in Shanghai, while Beijing continues testing millions of people in desperation to control the crisis. Regarding the aforementioned, Fitch Ratings cut China’s GDP prospects for 2022, which initially were 4.8% to 4.3%, and blamed the potential delay in the easing of current curbs. China is expected to follow its strictly Covid Zero strategy until 2023.

Aside from this, US economic data revealed on Tuesday failed to boost the prospects of the greenback, as shown by the US Dollar Index, losing 0.16%, sitting at 103.443. March’s US Factory Orders grew faster than the 1.1% estimated, to 2.2% m/m; contrarily, the JOLTs Job Openings rose to 11.549M, almost 600K higher than the 11M estimated, reflecting the tightness of the US labor market.

Meanwhile, on Wednesday, the Federal Reserve is expected to hike rates by 50-bps for the first time in decades. Also, market participants estimate that the Quantitative Tightening (QT) aiming to reduce the Fed’s balance sheet would start after the May meeting at a $95 Billion pace.

In the week ahead, important New Zealand data would cross the wires on Wednesday. New Zealand employment figures, alongside the Reserve Bank of New Zealand Stability Reports, would be reported. Analysts at TD Securities wrote in a note that they expect the labor market to tighten further in Q1 while the Unemployment Rate would fall to 3%.

They added that “we remain cognizant of downside risk posed by the Omicron disruption on the labor market. On wages, we expect a 0.8% q/q increase in the Labour Cost Index, which would bring the annual growth rate to 3.2% y/y, the highest since Q4’08. A strong Q1 labor market print will support our call for the RBNZ to continue with its “stitch-in-time” approach and aggressive tightening stance, hiking by 50bps in May.”

Key Technical Levels

• Gold bulls are stepping in at a weekly demand area. 
• The Fed is anticipated for the week ahead and is keeping traders sidelined. 

At $1,871.10, the gold price is firmer on Tuesday, rising from a low of $1,850.47 to a high of $1,878.14 so far. The price has upheld the bid in synch with a slight retreat in US Treasury yields and the US dollar ahead of this week's Federal Reserve went.

The US benchmark 10-year Treasury yields drifted away from the 3% level on Tuesday,  marking a low of 2.915% so far. Meanwhile, the dollar index, DXY, was down 0.16%, making bullion less expensive to other currency holders.

All eyes on the Fed

Investors are in anticipation of the Fed and expect the central bank to hike rates by 50 basis points at the end of a two-day meeting on Wednesday in order to combat soaring inflation.  Traders will be looking to the comments by Chairman Jerome Powell for further clues on future rate hikes.

If the outcome of the FOMC meeting is more hawkish than expected, gold could come under pressure again while a more dovish than expected outcome and ongoing concerns for geopolitics could see the safe haven quality of gold appealing to investors. 

Analysts at TD Securities argued that ''gold prices are still vulnerable to a positioning squeeze, with both CTA trend followers and technicians set to liquidate additional length below the $1840/oz range.''

''The bar is low for additional outflows in the yellow metal, but tomorrow's knee-jerk reaction may also whipsaw traders with the Fed's move well telegraphed, notwithstanding the elevated anxiety levels,'' the analysts concluded. 

As for the greenback, it came under pressure against a basket of currencies on Tuesday, as investors start to move to the sidelines ahead of the Fed. With inflation running at its fastest pace in 40 years, DXY hit a 20-year high at the end of last week's business on expectations the US central bank will be more aggressive than its peers while expecting a stronger US economy than that of the eurozone. 

Additionally, a gauge of global equity markets rose slightly on Tuesday. MSCI's gauge of stocks across the globe (IACWI) gained 0.23% and the pan-European STOXX 600 index (.STOXX) rose 0.09% after surviving a "flash crash" on Monday in Nordic markets caused by a sell order trade by Citigroup. nevertheless, it is a bit more of a chop on Wall Street in late mid-day trade with both the NASDAQ and Dow Jones in the red while the S&P 500 is just about hanging on in the green. 

Gold technical analysis 

The gold price has been pressured this week to below a weekly structure which could turn out to be significant for the days ahead:

As illustrated, the price has moved below the weekly structure to test the demand area which is so far holding up. Should the bulls take control, there will be prospects of the resistance are holding that could result n a downside extension towards the trendline support. 

• The EUR/JPY recovers some ground but remains defensive as a head-and-shoulders pattern, put a lid on higher prices.
• Market sentiment is positive, though it is worth noting that China’s Covid-19 battle could outweigh risk appetite and shift sentiment negatively.
• EUR/JPY Price Forecast: The head-and-shoulders clouds the prospects of a higher EUR.

The EUR/JPY remains trapped in the 136.50-138.00 range for the third consecutive trading session, though it snaps two days of successive losses and prints decent gains of 0.19% in the North American session. At 137.01, the EUR/JPY reflects a positive market sentiment across the board.

Global equities pushed higher on Tuesday, while bond yields rose, except for US Treasuries. In the commodities segment, precious metals rise, and crude oil falls. China remains under pressure as the Covid-19 outbreak lasts longer than foreseen, as Shanghai authorities could reinstate stricter measures again. Furthermore, Fitch Rating cut China’s growth prospects from 4.8% to 4.3% amidst the zero-tolerance program imposed by Beijing.

Meanwhile, the EUR/JPY remains capped by the EUR/USD major’s action, which remains confined to the 1.0500-70 range, ahead of a crucial Fed monetary policy meeting.

EUR/JPY Price Forecast: Technical outlook

The EUR/JPY remains threatened by a head-and-shoulders chart pattern in the daily chart. Although it could be invalidated, once the EUR/JPY pushes above 140.00, that scenario is unlikely as central banks linked to them remain accommodative. Also, the JPY’s presence in the cross leaves it subject to market sentiment, which could send the pair lower if it turns negative.

With that said, the EUR/JPY first support would be the 137.00 mark. If EUR/JPY bears break that level, that will expose the 136.00 figure, followed by the head-and-shoulders neckline around 135.00-20.

Key Technical Levels

• On Tuesday, GBP/USD records minimal gains below the 1.2500 region.
• GBP/USD remains confined to the 1.2410-1.2600 range ahead of important Fed-BoE monetary policy meetings.
• GBP/USD Price Forecast: To remain downward pressured below 1.2600.

Amidst an upbeat market mood, as illustrated by global equities rising, the GBP/USD post modest gains, despite retreating from daily highs around 1.2567 towards the 1.2490s area, ahead of key monetary policy announcements by the Federal Reserve and the Bank of England, the former on May 4, while the latter at May 5. At the time of writing, the GBP/USD is trading at 1.2504.

A weak US dollar and high UK yields, a tailwind for GBP/USD

Wall Street’s record gains in the North American session. In the FX space, broad US dollar weakness keeps the greenback pressured, as shown by the US Dollar Index, falling some 0.20%, currently at 103.406. Meanwhile, high UK bond yields lifted Cable’s prospects though it failed to break the 1.2600 ceiling of the 1.2410-1.2600 range.

During the day, the UK economic docket featured April’s Manufacturing PMI, which was upward revised and came higher than the March reading. On Thursday, the Bank of England (BoE) would meet to decide its monetary policy. Money market futures expect a 25-bps interest rate increase, but some BoE members of late expressed “some” concerns regarding a slower pace of the UK economy, which has consumers suffering amid the worst cost-of-living squeeze in decades.

Regarding the US, the docket featured US Factory Orders for March, which grew by 2.2% m/m, higher than the 1.1% estimates. At the same time, March’s US JOLTs Job Openings came at 11.549M, beating expectations of 11M, showing the tightness of the US labor market.

Despite mixed US economic data, the Fed is expected to lift rates by 50-bps on Wednesday and could begin reducing its balance sheet by $95 billion. Also, money market futures have priced in additional 50-bps increases in June, July, and September meetings, which means that the Federal Funds Rate would be lying at 2.25-2.50% range by that time.

GBP/USD Price Forecast: Technical outlook

The GBP/USD remains defensive, though price action in the last four trading sessions consolidated in the 1.2410-1.2600 area. The MACD indicator shows that downward pressure seems to wane as the histogram approaches zero. However, as long as the distance between the MACD-line and its signal-line remains aiming lower, some selling pressure remains, so the GBP/USD is skewed to the downside.

The GBP/USD first support would be 1.2500. A breach of the latter would expose April’s 29 daily low at 1.2445, followed by the YTD low at 1.2411.

The Bank of Canada Governor Senior Deputy Governor Carolyn Rogers says the labour market is a really strong indicator right now of excess demand in the Canadian economy.

Key comments

We don't target components of inflation, we target the overall level of inflation.

We need higher rates to moderate demand including demand in the housing market.

Housing price growth is unsustainably strong in Canada, it would not be a bad thing for the economy for the growth in housing prices to moderate a bit.

We do expect that housing price growth will moderate as rates go up.

We think the technology that underlines digital currencies has some potential.

It's completely realistic that Canadians are going to want a digital Canadian dollar at some point.

Meanwhile, USD/CAD has been consolidating in bullish territory but is down by some 0.28% at the time of writing, moving sideways within a 1.2825/93 range on Tuesday. 

European Central Bank member, Isabel Schnabel, told a German newspaper Handelsblatt on Tuesday that the ECB may need to raise interest rates as soon as July to stop high inflation from getting entrenched.

Reuters quoting the news:

"Now it's not enough to talk, we have to act," Schnabel was quoted as saying. "From today's perspective, I think a rate hike in July is possible."

''Before then the ECB must end its bond purchase scheme, probably at the end of June, Schnabel added, warning inflation is becoming increasingly broad.''

EUR/USD is higher on the day by some 0.23% yet has not reacted to the comments, sticking to the 1.0530s.

• The Aussie dollar gains some 0.72% on Tuesday, following the RBA’s 0.25% rate hike.
• The RBA’s also noted that it would begin its Quantitative Tightening.
• AUD/USD Price Forecast: Failure at 0.7165 paved the way for further losses.

The Australian dollar registers solid gains after the Reserve Bank of Australia (RBA) delivered a “surprisingly” rate hike of 25 bps earlier during the day to lift rates to the 0.35% threshold. However, after recording a daily high at 0.7147, the AUD/USD retreats as the Federal Reserve May meeting looms and, at the time of writing, trades at 0.7091.

RBA hiked rates by 25 bps to 0.35%

During the Asian session, the RBA surprised market participants with its monetary policy decision. In its statement published with the decision, the RBA said, “The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level than expected.” It’s worth noting that the bank pulled the trigger ahead of knowing the Wage Price Index, which was the reason holding back the central bank, before committing to tightening monetary policy. Regarding the aforementioned, the RBA stated, “There is also evidence that wages growth is picking up.” Additionally, the RBA began its Quantitative Tightening (QT) as it decided not to reinvest any maturing proceeds of its balance sheet.

On the macroeconomic front, the US  docket featured US Factory Orders for March, which grew by 2.2% m/m, higher than the 1.1% estimates. At the same time, March’s US JOLTs Job Openings came at 11.549M, beating expectations of 11M, showing the tightness of the US labor market.

The mixed data would not derail the Federal Reserve from delivering the so-telegraphed 50 bps rate hike on Wednesday. Of late, as the Fed decision looms, the AUD/USD has retreated from daily highs.

Sentiment-wise, China keeps struggling trying to contain the Covid-19 spread. However, its zero-tolerance of the coronavirus is hurting its economy, as Fitch Ratings cut its forecast for China’s 2022 GDP to 4.3% from 4.8%. Furthermore, the Ukraine-Russia tussles seem to desensitize market players, and unless market-moving events develop, it will remain in the backseat.

Meanwhile, the US Dollar Index, a measurement of the greenback’s value against its speers, slumps 0.08%, sitting at 103.526, also weighed by falling US Treasury yields. The 10-year US Treasury yield sits at 2.946%, retreated five bps from the YTD high at 3%, reached on Monday.

AUD/USD Price Forecast: Technical outlook

The AUD/USD failure to break March’s 15 daily low-turned-resistance at 0.7165 opened the door for further losses, meaning that the Aussie dollar is trading back below 0.7100. With that said, the AUD/USD first support would be February’s 4 cycle low at 0.7051. Once cleared, the following line of defense would be  0.7000, followed by the YTD low January’s 28 swing low at 0.6967.

The recent sharp depreciation of the Chinese Renminbi (RMB) was in line with the expectations of the BBVA Research Team at the beginning of the year amid the unsynchronized monetary policy cycle between China and the US. They predict RMB to USD exchange rate at 6.6 at end-2022 with upside risks. 

Key Quotes: 

“Depreciation is unavoidable amid the contrast monetary policy measures between China and the US when we talk about RMB exchange rate trend till end-2022. We predict the RMB to USD exchange rate at end- 2022 to be 6.6 with some upside risk, while a macro analytical framework is more important to understand the underlying logic and make the forecasting. In addition, policy intentions of Chinese central banks on exchange rate need to be carefully considered and evaluated.”

“In the medium-to-long term, the PBoC is willing the RMB exchange rate to display some two-way fluctuation around its equilibrium level, and they will certainly intervene the FX market if the RMB exchange rate displays some one-way trending, either one-way appreciation or depreciation. That means, China’s monetary authorities are likely to stick to their pledge of keeping the CNY stable on a trade-weighted basis.”
 

• US dollar corrects lower across the board, short-term trend still bullish.
• USD/MXN in a consolidation range between 20.30 and 20.50.
• Above 20.50, the next resistance emerges at 20.70.

The USD/MXN is falling on Tuesday, moving in a consolidation range. The pair bottomed at 20.28, the lowest intraday level in a week and quickly rebounded back above 20.30. It is hovering around 20.36, looking again at the 20.40 level.

The main trend keeps pointing to the upside, although technical indicators on the daily chart, like the RSI, are turning to the downside. Price is around the 100 and 200-day Simple Moving Average, which stand around 20.45. A horizontal resistance is seen at 20.50, so a consolidation clearly above 20.50 should open the doors to more gains, initially targeting the 20.70 area.

Risks still appear to be tilted to the upside, but USD/MXN needs to break above 20.50 over the next sessions. A firm slide below 20.30 would strengthen the Mexican peso. The next support stands at 20.20 and then comes the 20-day Simple Moving Average at 20.13. Below this latter, the short-term bias will change to bearish.

USD/MXN daily chart

Technical levels

• XAU/USD rises after finding support at the $1850 area.
• FOMC meeting kicks off, US yields retreat.
• US dollar drops modestly across the board, DXY drops by 0.25%.

Gold printed a fresh daily high during the American session at $1878.20 on Tuesday boosted by a recovery in Treasuries and a weaker US dollar. The metal is holding onto gains, recovering from monthly lows.

Earlier, XAU/USD bottomed at $1850, the lowest level since mid-February and then turned to the upside. The recovery gained support above $1860 and boosted gold further.

On the day before the FOMC decision, US yields are pulling back from multi-year highs. The US 10-year stands at 2.92% after hitting on Monday 3% for the first time since 2018. The Fed is expected to announce an increase in interest rates by a half percentage point that would be the first one by such magnitude in more than 20 years. Market participants also expect the central bank to start shrinking its balance sheet by USD95 billion per month from June.

What the Fed signals about the futures, will likely trigger volatility across financial markets. “Our base case remains that the Fed will follow up next week’s 50bp hike with 50bp increases in June and July before switching to 25bp as quantitative tightening gets up to speed. We see the Fed funds rate peaking at 3% in early 2023”, said analysts at ING.

Next resistance at $1880

If XAU/USD keeps rising, it will face resistance at the $1880 level and then at $1890. Even if it hits $1900 the outlook will remain negative. A recovery back above $1915 would weaken the bearish bias.

On the flip side, a slide back under $1860 would expose the $1850 critical area that is the recent low and also a medium-term level. Below at $1833 awaits the 200-day Simple Moving Average.

Technical levels

• The Loonie recovers some ground vs. the greenback and gains some 0.28%.
• US dollar bulls take profits ahead of the Federal Reserve meeting.
• Fitch Ratings cut China’s growth from 4.8% to 4.3%, weighing on market sentiment.
• USD/CAD Price Forecast: Remains upwards, though a slump towards 1.2777 is on the cards.

The USD/CAD slid as the greenback weakens ahead of the Federal Reserve’s monetary policy decision, to be known on Wednesday, as USD bulls book profits and get to the sidelines to assess the direction, pace of QT, and how many 50-bps hikes would the Fed deliver in the year. At the time of writing, the USD/CAD is trading at 1.2854, recording decent losses of 0.17%.

The US dollar weakens ahead of the Fed

Meantime, the US Dollar Index, a gauge of the greenback’s value, slumps 0.25%, sitting at 103.346, also weighed by falling US Treasury yields. The 10-year benchmark note sits at 2.920%, retreated eight bps from the YTD high at 3%, reached on Monday.

The fluctuation of European and US equities reflects a mixed sentiment. Additionally, China’s zero-tolerance Covid-19 threatens to slow the global economic recovery after authorities could probably reinstate strict measures in Shanghai. Meanwhile, according to Bloomberg, Fitch Ratings cut its forecast for China’s 2022 gross domestic product growth from 4.8% to 4.3% due to Covid-19 lockdowns that have hobbled the economy.

On the macroeconomic front, the Canadian docket would feature the Bank of Canada Governor, Rogers. On the US front, US Factory Orders for March rose by 2.2% m/m, higher than the 1.1% estimates. At the same time, March’s US JOLTs Job Openings came at 11.549M, beating expectations of 11M, showing the tightness of the US labor market.

That said, USD/CAD traders would need to be aware that once the Fed hikes 0.50%, both countries will have interest rates at 1%, which could favor the USD in the long term. Why? Because, as Brown Brothers Herriman (BBH) analysts noted, World Interest Rates Probabilities (WIRP) “suggests three more 50 bp hikes in June, July, and September that would take the Fed Funds rate up to 2.25-2.50%. After that, two 25 bp hikes are priced in for November and December that would take the Fed Funds rate up to 2.75-3.0%.” They added that “there is a greater than 50% chance of a final 25 bp hike in February that would take Fed Funds up to 3.0-3.25%.”

USD/CAD Price Forecast:  Technical outlook

The USD/CAD is upward biased, though Tuesday’s price action illustrates how the greenback’s bulls take profits ahead of the Fed’s meeting. After the USD/CAD reached a YTD high at 1.2913, it is threatening to dip towards the 1.2800 mark, further confirmed by the slope of the Relative Strength Index (RSI) aiming downwards, shy of reaching overbought territory at 63.85.

With that said, the USD/CAD first support would be 1.2800. A break below would expose April’s 27 daily low at 1.2777, followed by April’s 29 swing low at 1.2718.

• GBP/JPY continues to trade in a stable fashion and pivot either side of the 163.00 level.
• The pair is in wait-and-see mode ahead of this week’s pivotal BoE meeting on Thursday.
• For now, the 21DMA at around 163.50 is offering strong resistance.

GBP/JPY continues to trade in a stable fashion and pivot either side of the 163.00 level, as has been the case since the start of the week, as traders keep their powder dry ahead of key risk events later this week. At current levels in the 162.60 area, GBP/JPY is trading flat on the day and a tad in the red on the week, with the 21-Day Moving Average just above 163.50 continuing to act as a ceiling, as has been the case since last Thursday.

The BoE will be announcing policy on Thursday, with a 25 bps rate hike expected by analysts. Given continued insistence from the BoJ that it remains premature to discuss moving away from their ultra-dovish policy stance just yet, Thursday’s rate hike from the BoE will mark a further divergence in the monetary policy stance of the two banks.

Whilst some might argue this supports GBP/JPY upside, the BoE’s guidance on the outlook for future rate hikes and tone on the economy will likely be more important than the expected rate hike itself. The BoE has been sounding more dovish on the economy in recent weeks as the UK struggles through its worst cost-of-living crunch in decades and, with recent data showing the punishing impact that this is having on consumption and consumer sentiment, the BoE may well soften its tone on the need for further rate hikes.

GBP/JPY traders will also be watching how trends in broader risk appetite evolve over the course of the week with Fed tightening and US jobs data also in focus. Sentiment in the global equity space, to which GBP/JPY is typically quite sensitive, remains ropey and any further downturn could push the pair back towards last week’s sub-160.00 lows and towards its 50DMA at 159.37.

The US Federal Reserve will announce its monetary policy decisions on Wednesday, May 4 at 18:00 GMT and as we get closer to the release time, here are the expectations as forecast by analysts and researchers of 18 major banks. 

The FOMC is widely expected to hike its policy rate by 50 basis points (bps) following the May policy meeting. The Fed is also expected to start shrinking its balance sheet by USD95 billion per month from June.

Danske Bank

“We expect the Federal Reserve to hike the target range by 50bp. We expect the Fed to signal that more 50bp rate hikes are likely in coming months in order to get quicker back to neutral. We expect the Fed to announce the balance sheet runoff to start in mid-May. We expect the cap to be set at USD95bn as outlined in the minutes. Our current Fed call is that the Fed will hike by 50bp in May, June and July and 25bp in September, November and December (a total of 225bp). We still see risks skewed towards faster rate hikes, as monetary policy remains too accommodative.”

ANZ

“We expect the Fed to raise rates by 50bp and simultaneously announce quantitative tightening, which will result in an asset reduction of around USD95bn per month. Based on current levels of excess demand evident across many sectors of the economy, we expect a period of restrictive interest rates will be necessary. We have raised our fed funds path by 50bp, including back-to-back 50bp hikes in June and July, and now expect the top end of the fed funds target range to hit 2.75% by year-end, in line with our estimate of neutral. We also expect a terminal rate of 3.75% to be reached by June 2023, which is 50bp higher than our previous forecast.”

Commerzbank

“Because of high inflation, the Fed is now resorting to more drastic measures. The key interest rate will probably be raised by half a percentage point, and further steps are likely to follow.” 

Westpac

“Heading into the May meeting, members of the FOMC are singularly focused on the historic pace of inflation and associated risks. A 50bp hike in the fed funds rate at this meeting is therefore anticipated along with a clear signal that the rapid tightening of rates will continue in June and be paired with a quick ramping up of quantitative tightening through mid-year. While unlikely at the May meeting, from June/July the FOMC’s view on risks will again broaden to include activity. Assuming inflation pressures are by then showing signs of easing, the July meeting is likely to see a return to 25bp increases in the fed funds rate, taking the policy rate to a peak of 2.375% at year-end.” 

ABN Amro

“We to expect 50bp rate hikes in May and June, with the Fed to continue hiking in 25bp steps thereafter. This would take the target range for the fed funds rate to 2.5-2.75% by early 2023. Thereafter, we expect the Fed to pause, with inflation likely to be materially lower by that point, and pipeline pressures such as wage growth also likely to have eased.”

ING

“The Fed is widely expected to raise its policy rate by 50 basis points 8%+ inflation and a tight labour market trump the surprise 1Q GDP contraction attributed to temporary trade and inventory challenges. That said, the weakness in GDP makes it less likely that we will hear the Fed explicitly making the case for a more aggressive 75bp hike at the June or July FOMC meetings. We are open to the possibility, but that would probably require a decent set of consumer spending numbers over the coming months and some very solid jobs gains that contribute to further wage pressures. Our base case remains that the Fed will follow up next week’s 50bp hike with 50bp increases in June and July before switching to 25bp as quantitative tightening gets up to speed. We see the Fed funds rate peaking at 3% in early 2023.”

Deutsche Bank

“We believe the Fed will kick tightening up a notch, lifting the fed funds target range by +50bps. The market agrees, and then some, with +51.8bps of tightening priced for the meeting, suggesting some market participants believe there’s still some risk of an even larger hike. We believe the Chair will signal this is but the first of a series of potential +50bp hikes, as the Fed tries to get policy to neutral as quickly as possible in light of historic inflation. With the question of how fast the Fed needs to raise rates generally understood (answer: very), focus will shift to how far they need to hike rates to tighten financial conditions adequately. That task will be augmented by balance sheet rundown, as the Fed has also signaled they will announce the beginning of QT, with the first assets likely rolling off the Fed’s portfolio in June. Our estimates are that QT will proceed through next year, adding around three additional +25bp hikes of tightening, only to stop once the economy careens into recession at the end of 2023.”

CE

“We expect the Fed to hike interest rates by 50bp and to launch its quantitative tightening, with the cap on maturing principal allowed to roll off each month quickly rising to USD95bn.”

Rabobank

“The Fed is not going to be deterred by the unexpected decline of GDP in Q1, because consumption and investment remained solid. Instead, the focus is on fighting inflation, which is well above target. We expect a 50 bps rate hike and the launch of balance sheet reduction. Further ahead, we expect the Fed to slow down its hiking cycle to 25 bps per meeting as soon as consumption and investment slow down. However, as the wage-price spiral has already started, the Fed will have to continue hiking well into restrictive territory. This will most likely lead to a recession in the second half of next year. This also means that the Fed will have to cut rates again before the end of 2023.”

TDS

“A likely 50bp hike in the Funds rate at the May FOMC meeting has been widely telegraphed by a number of Fed officials, including Chair Powell. We believe the focus for markets will lie elsewhere, particularly on any guidance regarding the Fed's policy path in the near term. Balance-sheet runoff plans will also be in the spotlight. We now expect the Fed to deliver 3 consecutive 50bp hikes (in May, June, and July) and subsequently hike rates by 25bp per meeting until they reach a terminal funds rate of 3.25% by March 2023.”

SocGen

“We look for a 50bp hike in the fed funds target range to 0.75-1.00% and a faster move to neutral, which Fed officials see at 2.40%. The Fed is likely to consider 25bp or 50bp increases at future meetings, depending on the data, with the goal of reaching the neutral level even earlier than guidance from March. We expect the Fed to announce the run-off of its balance-sheet holdings of Treasury and mortgage-backed securities.”

RBC Economics

“The Fed is expected to accelerate the withdrawal of monetary policy stimulus. A 50 basis point increase in the fed funds target range is expected following this week’s FOMC meeting, building on the 25 bp hike in March. We expect that to be followed by an additional 150 bp in rate hikes this year – with the risk that those hikes come sooner rather than later.”

NBF

“The Fed is poised to continue to withdraw the extraordinary monetary policy stimulus provided over the past two years. Following March’s 25 basis point rate increase, the Fed looks set to accelerate its pace of tightening; a 50-bp hike is now fully anticipated by the market. With this outcome all but guaranteed, we’ll be more focused on the tone of the statement and what it implies for the size of rate hikes going forward. We’ll be interested to see if Chairman Jerome Powell affirms the market’s hawkish outlook in his post-decision press conference. As a reminder, the Fed’s March dot plot signaled an end-of-year fed funds target of 1.75%-2.00% – well below current expectations. We should also get some details on quantitative tightening, a process which could begin as soon as mid-May.”

Citibank

“A 50bp hike is all but a done deal, taking the Fed Funds rate to 0.75-1.00%. What will be more relevant to follow is guidance for future rate hikes, especially after the strong ECI print on Friday. The market is pricing a high probability of 50bp hikes in the next four meetings. Also important to follow will be the decision regarding balance sheet reduction with a likely announcement to start on May 10, with the caps starting at USD30bln/mth and ramping up to USD95bln/mth. A series of FOMC members including Williams, Bostic, Bullard and Waller are expected to speak on Friday as well. They may give a sense of how flexible balance sheet plans may be given that reduction will have been announced at the May 4 meeting.”

CIBC

“While there are no sure things in economics or sports, a 50 basis point rate hike from the Fed seems to be a lock at this point, with the accompanying statement brushing aside the first quarter GDP decline.”

Wells Fargo

“Despite the 1.4% annualized rate of contraction in Q1 real GDP, we look for the Federal Open Market Committee to raise its target range for the federal funds rate by 50 bps. A 50 bps rate hike is completely priced into markets. We also look for the Committee to announce the commencement of balance sheet reduction, which would also act as a form of monetary tightening.”

Nordea

“We expect the Fed to deliver a 50bp hike at the May meeting without making any technical adjustments to the Reverse Repo Rate (RRP) or Interest on Reserve Balances (IORB). We expect Chair Powell to bring home the message that the Committee is ready to deliver additional 50bp hikes over coming meetings in order to combat inflation. This will likely be enough to contain market pricing and keep the dollar bid. We also expect the Fed to officially announce Quantitative Tightening (QT), which will consist of a 3-month phase-in period and run-off caps of USD 60bn on US Treasuries (USTs) and USD35bn mortgage-backed securities (MBSs), effectively lowering the Fed’s balance sheet by 670bn this year.”

Barclays

“We expect the Fed to lift the target range for the federal funds rate by 50bp to 0.75%-1.00%. Given the broad parameters for balance sheet normalization laid out in the March meeting minutes, we expect the monthly run-off caps to ramp up from USD35bn in June (USD20bn for treasuries, USD15bn for agency MBS), to USD65bn in July (USD40bn/USD25bn) and then to the maximum pace of USD95bn/month from August. In the press conference, we expect much of the discussion to revolve around the speed at which the committee is prepared to lift its policy rate to neutral, with markets now pricing in 50bp hikes in every meeting through September. We continue to expect 50bp hikes in May and June, with the committee slowing the pace to 25bp per meeting from July onward as it sees signs of slowing inflation.”

• WTI is consolidating in the mid-$104.00s, near the middle of its recent short-term $100-$108ish range.
• Traders continue to juggle the bearish theme of China lockdown worries with the bullish theme of an EU/Russia oil embargo.

Since the start of Tuesday’s European session, front-month WTI futures have been swinging between lows in the $103.00 per barrel area and highs in the $105.00 area, as traders weigh the prospect of an impending EU embargo on Russian oil imports against China lockdown concerns. At current levels in the mid-$104.00s, WTI is trading ever so slightly in the red on the day and is around the midpoint of its $100-$108ish ranges of the past five or so sessions.

The news coming out of China suggests that authorities are continuing to struggle to get a Covid-19 outbreak in Beijing under control, with a further 51 infections reported on Tuesday. Restaurants in the Chinese capital are now closed for indoor dining, apartment blocks where cases are being picked up are being put under quarantine, residents of the city are being encouraged not to leave and the reopening of schools has been postponed for at least a week after the Labour Day holidays, local press reported.

If Beijing follows down the same path as Shanghai, i.e. goes into a strict city-wide lockdown, this will further dent already diminished crude oil demand in China, a big downside risk that WTI traders must monitor. However, traders must juggle this against an announcement of an EU-wide embargo on Russian oil imports that is likely to be confirmed later this week. According to Internation Energy Agency forecasts, Russian output has likely already fallen by 3M barrels per day this month versus prior to the country’s invasion of Ukraine as a direct result of Western sanctions.

“A potential EU-wide oil embargo could significantly undermine the already diminishing availability of Russian barrels,” said one analyst at oil broker PVM. For now, Russia output fears are preventing WTI from falling back below $100 due to China demand woes. Aside from the aforementioned themes, WTI traders will also be watching upcoming US Private Weekly API crude oil inventory data out at 2130BST on Tuesday ahead of official US inventory numbers on Wednesday. Attention will then turn to the broader macro backdrop, with oil traders likely to monitor how risk appetite responds to this week’s Fed meeting and US jobs report.

There were 11.549M job openings in the US at the end of March, the latest JOLTs Job-Opening data release on Tuesday by the US Labour Department revealed, a new record high. That was higher than the 11.344M job openings at the end of February (an estimate which had been revised up from 11.266M previously) and well above the expected decline to 11M. 

Market Reaction

FX markets do not seem to have reacted to the latest JOLTs report, even though it reaffirms the idea that demand for labour in the US economy is currently very high, with the number of job openings far exceeding the total number of unemployed persons. Indeed, this labour market tightness is a key reason, alongside sky-high inflation, why the Fed is expected to get on with aggressive monetary policy tightening in 2022, with a 50 bps rate hike and quantitative tightening announcement in the pipelines on Wednesday. 

• EUR/USD has rebounded back to the 1.0550 area and is eyeing a test of short-term range highs near 1.0600.
• But trade in FX markets remains cautious ahead of this week’s Fed meeting and official US jobs report release.
• Against the backdrop of aggressive Fed tightening relative to the slower moving ECB, EUR/USD risks remain tilted to the downside.

Profit-taking in the US dollar ahead of the start of Tuesday’s US trading session has given EUR/USD a moderate lift, with the pair rebounding from earlier lows in the 1.0500 area back to the north of the 1.0550 mark. At current levels in the 1.0560s, the pair is trading with gains of about 0.6% and is eyeing a test of last Friday’s highs just under 1.0600, a level that marks the top of the pair’s recent short-term range.

But a barrage of upcoming risk events later in the week, most notably the Fed policy announcement on Wednesday and release of the official US labour market report on Friday, likely mean that a break back into the 1.0600s is unlikely to happen just yet. Traders/market participants tend to err towards keeping their powder dry ahead of big events in order not to get caught on the wrong side of a big move.

Technicians have marked out the 2020 lows in the 1.0630 area as a key area of resistance to keep an eye on. Against the backdrop of aggressive Fed tightening (they will lift interest rates by 50 bps this week and signal more similar-sized moves ahead) and a still very tight US labour market (as this week’s JOLTS and official jobs data will likely show), betting on a weakening US dollar seems unwise at this point.

Amid expectations that the ECB tightening will not tighten monetary policy not nearly as much as the Fed in 2022, EUR/USD risks remain tilted to the downside, strategists continue to argue. Some highlighted comments by ECB Vice President Luis de Guindos over the weekend, who spoke about interest rates not being on a “predetermined” path, which some saw as dovish.

In terms of upcoming risk events, ECB President Christine Lagarde was scheduled to speak earlier in the day and, though she hasn’t said anything on policy yet, may do later in the day. Meanwhile, the March JOLTs Job-Opening report will be released at 1500BST later on Tuesday and could trigger some short-term volatility in FX markets.

• DXY meets intense selling pressure and approaches 103.00.
• US yields reverse the initial upside and refocus on the downside.
• Factory Orders, JOLTs Job Openings come next in the docket.

The greenback fades Monday’s uptick and recedes to the 103.00 zone when gauged by the US Dollar Index (DXY) on Tuesday.

US Dollar Index weaker on yields, looks to FOMC

The index comes under downside pressure and gives away gains recorded at the beginning of the week, although the 103.00 region seems to have held the downside well enough so far on Tuesday.

The knee-jerk in the buck comes on the back of the equally corrective move in US yields along the curve, where the 10y note appears to have met quite a tough nut to crack around the key 3.0% level.

In the US data space, Factory Orders and JOLTs Job Openings/Quits, both releases for the month of March, are due next in the NA session.

What to look for around USD

The dollar trades on a negative fashion although it manages well to remain above the 103.00 mark so far on Tuesday and ahead of the key FOMC gathering (Wednesday). The Fed’s more aggressive rate path continues to be the main driver behind the robust bullish stance in the dollar, which also appears reinforced by the current elevated inflation narrative and the solid health of the labour market. Collaborating with the latter appear bouts of geopolitical tensions as well as the move higher in US yields.

Key events in the US this week: Factory Orders (Tuesday) – Mortgage Applications, ADP Report, Balance of Trade, Final Services PMI, ISM Non-Manufacturing, FOMC Meeting (Wednesday) – Initial Claims (Thursday) – Nonfarm Payrolls, Unemployment Rate, Consumer Credit Change (Friday).

Eminent issues on the back boiler: Escalating geopolitical effervescence vs. Russia and China. Fed’s rate path this year. US-China trade conflict. Future of Biden’s Build Back Better plan.

US Dollar Index relevant levels

Now, the index is retreating 0.39% at 103.19 and faces the next support at 99.81 (weekly low April 21) seconded by 99.57 (weekly low April 14) and then 97.68 (weekly low March 30). On the upside, the breakout of 103.92 (2022 high April 28) would open the door to 104.00 (round level) and finally 105.63 (high December 11 2002).

Gold Price has slumped to the $1,850 level. Strategists at TD Securities note that the demand for the yellow metal is waning ahead of Wednesday’s Federal Reserve meeting.

Gold bugs are staring down the barrel of a hawkish Fed

“As the massive demand impulse for gold associated with the war in Ukraine runs out of steam, prices are collapsing.”

“Shanghai traders are liquidating their gold length at a fast clip, removing a major pillar of support for demand. Indeed, our tracking of the top SHFE traders' net length highlights continued and substantial liquidations from this cohort, as lockdowns impact jewelry sales.”

“Gold bugs are staring down the barrel of a hawkish Fed, with this week's FOMC likely to feature a 50bp hike and the start of quantitative tightening, which in turn drives liquidity risk premia for all asset prices.” 

“The bar is low for additional outflows in the yellow metal, but tomorrow's knee-jerk reaction may also whipsaw traders with the Fed's move well telegraphed, notwithstanding the elevated anxiety levels.”

In a call with French President Emmanuel Macron earlier in the day, Russian President Vladimir Putin said that Russia is still open to dialogue with Kyiv, reported Russian state-run news agency Interfax as cited by Reuters. Putin added that the West could help end atrocities by Ukrainian Security Forces, Interfax reported. 

Progress in Russo-Ukraine peace talks have ground to a halt in recent weeks, with Russia refocusing its invasion efforts into securing more territory in Ukraine's south and east. Peace talks have been mired by a growing mountain of accusations being levied against Russian military forces, who are being accused of committing war crimes against Ukrainian civilians, with the massacre in Bucha the highest-profile event. 

Russia is also reportedly planning what Western officials are calling a "sham" referendum in Ukraine's southern Kherson region, which is also likely to weigh heavily on the prospect of any progress in peace talks in the coming weeks.  

USD/JPY uptrend is starting to lose momentum. Support at 128.44/34 needs to hold to suggest the immediate risk stays seen higher for next resistance at the 78.6% retracement of the 2002/2011 fall at 132.20, economists at Credit Suisse report.

Holding above support at 128.44/34 critical to keep the immediate risk higher

“We suspect we may be approaching a near-term peak. Support is seen at 129.70/60 initially, then 129.31, with key near-term support seen at the rising 13-day exponential average and price support at 128.44/34. This needs to hold on a closing basis for a touch more strength yet above 131.25/35 to the 78.6% retracement of the 2002/2011 fall to 132.20. We would look for this to then cap at first for an overdue consolidation phase.” 

“A close below 128.34 would suggest a consolidation phase is underway with support seen next at 127.36 ahead of the 126.95 recent low. Only beneath this latter level though would warn of a near-term top and deeper setback.”

GBP/USD weakness has stalled at next key support at the 61.8% retracement of the 2020/2021 uptrend at 1.2494. Analysts at Credit Suisse see scope for a temporary pause here ahead of further weakness to 1.2251. 

Resistance seen at 1.2615, then 1.2697/1.2705

“Our bias remains to continue to look for a near-term pause around the 61.8% retracement of the 2020/2021 uptrend and psychological barrier at 1.2500/1.2494 for some consolidation and potentially a short-term tactical recovery.” 

“With the market remaining clearly below falling medium-term moving averages, and with weekly MACD momentum remaining very strong, we see no reason not to look for a sustained break of 1.2500/2494 in due course, with support seen next at 1.2251, ahead of 1.2072 and then the 78.6% retracement at 1.2017.” 

“Resistance is seen at 1.2615 initially, above which can see a recovery back to the 38.2% retracement of the most recent phase of the sell-off at 126.71, potentially the 13-day exponential average and price resistance at 1.2697/1.2705, but with sellers expected here if reached.”

GBP/USD is climbing back from sub-1.25 levels yesterday to trade as high as the mid-figure zone. Still, economists at Scotiabank expect cable to struggle to post further gains.

The pound remains caught in a relatively broad consolidation band

“The pound remains caught in a relatively broad consolidation band while showing limited signs of a notable reversal of its steep losses over the past eight sessions.”

“With yesterday’s low and the recent low of 1.2412, the GBP has formed a minor upward trend but the intraday price action shows a more neutral picture.”

“Support is the 1.25 area and yesterday’s low of 1.2474 followed by the mid-figure and 1.2412.”

“Resistance is 1.2555 (intraday high) followed by the 1.26 figure zone.”

NZD/USD has broken the next major support at 0.6467. Analysts at Credit Suisse look for further weakness, with the next support at 0.6374, below which would open up 0.6231.

Immediate resistance is seen at the daily high at 0.6475

“With the RSI momentum still in an ‘oversold’ condition, we remain wary of a potential short-term corrective bounce higher, though we are biased for the 0.6385/74 level to eventually be removed.” 

“Below 0.6385/74 would open the door for a more sustained and quicker downmove to the 61.8% retracement of the 2020/21 uptrend at 0.6231/30, which we would expect to serve as a more formidable challenge for any additional downside.”

“Immediate resistance is seen at the daily high at 0.6475 and next at 0.6543/48, with a move above the 13-day moving average at 0.6586/91 needed to relieve the immediate downside.”

S&P 500 saw an intraday break of the 4115 YTD low but with the market then holding next flagged support from the May 2021 lows at 4061/57. With the FOMC tomorrow, economists at Credit Suisse suspect the market pauses for now, but with the broader risk still seen lower.

Resistance for recovery is seen at 4170 initially

“With daily RSI momentum not confirming the latest move to new lows and with the market managing to close back above 4115 together with the key FOMC announcement on Wednesday we suspect we probably see the market hold in for now. Indeed, we wouldn’t rule out a fresh consolidation phase.” 

“Bigger picture, our bias stays lower and we look for a sustained break of the 4115 Q1 low in due course for a fall back to 4063/57. Beneath here can see support next at the 50% retracement of the rally from October 2020 at 4026 and eventually we think the 38.2% retracement of the entire 2020/2021 uptrend at 3855/15.” 

“Resistance for recovery is seen at 4170 initially, above which can see strength back to 4208, then the 38.2% retracement of the sell-off from late April at 4235. Tougher resistance will be expected at the 13-day exponential average and recent price gap at 4270/88.”

• Though trading weaker on Tuesday, silver is holding up above $22.50 for now as bears eye sub-$22.00 annual lows.
• Macro strategists are warning more downside is likely as the Fed embarks on aggressive monetary tightening.

Though prices have been able to fend off a retest of Monday lows in the $22.12 area and annual lows just under the $22.00 per troy ounce level for now and still trade to the north of the $22.50 mark, spot silver (XAG/USD) continues to trade with a negative bias on Tuesday as traders brace for monetary tightening from the Fed later this week and for a barrage of tier one US data released.

At current levels in the $22.50s, XAG/USD is trading with losses of about 0.4% on Tuesday, taking its losses since the start of the week to about 1.0% and its losses since mid-April highs above $26.00 to roughly 14%. Silver’s run of poor recent form is not surprising given the macro backdrop which has seen the US dollar and US yields advance to multi-year highs.

The DXY, while a tad lower on Tuesday, continues to trade in the 103.00s, not far from multi-year highs printed last week near 104.00 and up from around 100 as recently as mid-April. Meanwhile, US 10-year yields continue to flirt with multi-year highs around the 3.0% level, up from under 2.50% at the start of April.

A stronger US dollar makes USD-denominated commodities like XAG/USD more expensive for international buyers, while higher yields raise the opportunity cost of holding non-yielding, hence the negative correlation of both to silver. Macro strategists are warning that recent strength in the buck and buoyancy in US yields may continue this week, with the Fed expected to lift interest rates by 50 bps on Wednesday, signal rates hitting roughly 2.5% by the year’s end and announce quantitative tightening plans.

Some have said that with so much hawkishness from the Fed already priced into markets, risks are tilted towards Fed Chair Jerome Powell not living up to the hype, and a subsequently dovish market reaction. While that might be the case, any XAG/USD rebound is likely to be short-lived, with a recovery back above the 200-Day Moving Average near $23.80 not looking likely. Indeed, as long as the Fed seems intent with pressing ahead with rapid monetary tightening, risks seem tilted towards the precious metal testing Q4 2021 lows in the mid-$21.00s.

• USD/TRY’s upside bias faltered around 14.90 on Tuesday.
• Markets in Turkey are closed due to the Eid al Fitr holiday.
• Turkey inflation figures will take centre stage on Friday.

The Turkish lira meets some buying interest on the back of the renewed offered stance in the greenback and motivates USD/TRY to made a U-turn after hitting multi-week peaks around 14.90 earlier in the session.

USD/TRY now focuses on the YTD high near 15.00

USD/TRY posted gains in eleven out of the last thirteen sessions on the back of the relentless march north in the greenback and the persistent outflows from the EM FX space.

Indeed, prospects of further tightening by the Federal Reserve keep the FX universe under intense downside pressure, falling in line with the generalized sentiment hitting the risk complex.

In the Turkish debt market, the 10y government bond yields bounce off recent lows in the 20% area and retake the 21% mark and beyond.

Moving forward, Turkish markets are expected to return to the normal activity towards the end of the week, when key inflation figures for the month of April are due along with Producer Prices and the Manufacturing PMI.

What to look for around TRY

The lira keeps the range bound theme unchanged vs. the greenback, always in the area below the 15.00 neighbourhood for the time being. 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: Inflation Rate, Producer Prices, Manufacturing PMI (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 retreating 0.19% at 14.8375 a drop below 14.6150 (monthly low April 1) would expose 14.5136 (weekly low March 29) and finally 14.4915 (55-day SMA). On the other hand, the next hurdle turns up at 14.9889 (2022 high March 11) seconded by 18.2582 (all-time high December 20) and then 19.00 (round level).

• El AUD/USD continúa oscilando cerca de 0.7100, más alto en un margen sustancial en el día, pero por debajo de los máximos posteriores a la subida del RBA.
• El RBA sorprendió a los mercados con una subida mayor de lo esperado y una orientación agresiva, lo que impulsó al dólar australiano.
• Pero en un contexto macroeconómico desfavorable, muchos analistas advierten que no se espera una recuperación sostenida del AUD/USD.

Como ha sido el caso desde el inicio del comercio europeo, el AUD/USD continúa oscilando cerca del nivel de 0.7100, muy por debajo de sus máximos posteriores al aumento de la tasa de RBA más alto de lo esperado en 0.7145, pero subiendo aproximadamente un 0.8% en el día. En resumen, el dólar australiano recibió un impulso durante la sesión asiática después de que el RBA elevara la tasa de interés en 25 pb a 0.35% frente a un aumento esperado de la tasa de 15 pb, y señaló la posibilidad de movimientos aún mayores en el futuro.

Los analistas ahora especulan que el banco podría aumentar las tasas de interés en 40 pb en junio, mientras que los mercados monetarios continúan cotizando la tasa de interés de referencia del RBA alcanzando el 2.5% para fines de año. El comienzo más rápido de lo esperado del ciclo de ajuste ampliamente anticipado del RBA provocó una reacción agresiva en los mercados de bonos del gobierno australiano, lo que ayudó a impulsar al dólar australiano, aunque los estrategas de FX advirtieron que podría ser demasiado pronto para apostar por un rebote más duradero del AUD/USD.

Los técnicos dijeron que el hecho de que el par no haya probado los mínimos de marzo en los 0.7160 fue una señal bajista y sugirió que el apetito por vender en los repuntes sigue siendo fuerte. En términos más generales, el apetito por el riesgo en los mercados bursátiles mundiales sigue siendo fuerte, los rendimientos de los EE.UU. continúan subiendo y el dólar estadounidense sigue bien respaldado con el DXY aún cerca de los máximos de varios años. Esto refleja un mercado que se prepara para un rápido ajuste de la Fed, dijeron los analistas, lo que es un mal augurio para la perspectiva del AUD/USD.

Recuerde que el dólar australiano también tiene que preocuparse por los bloqueos en China, que parecen continuar reforzándose ahora también en Beijing, y la desaceleración económica allí como resultado. Es probable que los bajistas del AUD/USD continúen apuntando a una prueba de mínimos anuales por debajo de 0.7000 en el futuro cercano, independientemente de la nueva y más agresiva postura del RBA.

Niveles técnicos 

• GBP/USD is a little higher on Tuesday and trading in the low 1.2500s upon the return of UK market participants.
• But the pair remains locked well within 1.2400-1.2600ish ranges ahead of this week’s key Fed and BoE meetings.
• Analysts are warning of downside risks to the pair as a result of Fed/BoE policy divergence.

The return of UK market participants from a long weekend has not resulted in a substantial uptick in sterling volatility. As currency markets brace for this week’s key Fed and BoE policy announcements plus a barrage of tier one US data releases, GBP/USD is trading within Monday’s intra-day 1.2470-1.2600ish ranges.

At current levels in the 1.2520s, cable is trading higher by about 0.3%, with some citing a jump in the long-term UK yields upon the reopening of UK bond markets on Tuesday as moderately supportive. Technicians have marked out last Friday’s highs just above 1.2600 and last Thursday’s multi-month lows just above 1.2400 as the range that GBP/Usd is likely to be confined to in the run-up to this week’s risk events.

FX strategists have cautioned that Fed/BoE policy divergence means GBP/USD faces downside risks this week. The Fed is expected to lift interest rates by 50 bps on Wednesday, signal rates hitting roughly 2.5% by the year’s end and announce quantitative tightening plans and many think all this hawkishness will offer further support to the already super strong US dollar.

Meanwhile, with the BoE much more concerned about UK economic weakness as consumers suffer amid the worst cost-of-living squeeze in decades, analysts are betting on a more modest 25 bps rate hike, and a more dovish tone on the need for future rate hikes. A break below 1.2400 on policy divergence could see GBP/USD extend lower to test June 2020 lows in the 1.2250 area.

• AUD/USD continues to oscillate near 0.7100, higher by a substantial margin on the day, but below post-RBA hike highs.
• The RBA surprised markets with a larger than expected hike and hawkish guidance, boosting the Aussie.
• But against an unfavourable macro backdrop, many analysts caution against expecting a sustained AUD/USD recovery.

As has been the case since the start of European trade, AUD/USD continues to oscillate near the 0.7100 level, well below its post-larger than expected RBA rate hike highs in the 0.7140s, but still higher by about 0.8% on the day. To recap, the Aussie got a lift during the Asia Pacific session after the RBA lifted interest rate by 25 bps to 0.35% versus an expected 15 bps rate rise, and signaled the possibility of even larger moves ahead.

Analysts are now speculating that the bank might raise interest rates by 40 bps in June, while money markets continue to price the RBA’s benchmark interest rate reaching 2.5% by the end of the year. The quicker than expected start to the RBA’s widely anticipated tightening cycle triggered a hawkish reaction in Australian government bond markets, helping boost the Aussie, though FX strategists have warned that it may be too soon to bet on a longer-lasting AUD/USD rebound.

Technicians said the pair’s failure to test March lows in the 0.7160s was a bearish sign and suggested the appetite to sell rallies remains strong. More broadly, risk appetite in global equity markets remains ropey, US yields continue to nudge higher and the US dollar remains well supported with the DXY still close to multi-year highs. This reflects a market bracing for rapid Fed tightening, analysts have said, which bodes poorly for AUD/USD’s outlook.

Recall that the Aussie also has to worry about lockdowns in China, which appear to continue to tighten now in Beijing too, and the economic slowdown there as a result. AUD/USD bears will likely continue to target a test of sub-0.7000 annual lows in the near future, regardless of the RBA’s new and more hawkish stance.

• Gold is trading with a negative bias, even after rebounding to near $1860 from multi-month lows near $1850.
• XAU/USD bears continue to eye a test of the 200DMA in the mid-$1830s as the US dollar/US yields remain buoyant.
• The main focus of the week will be Wednesday’s Fed meeting.

Spot gold (XAU/USD) prices hit their lowest levels since mid-February on Tuesday just above the $1850 mark. While support in this area is holding up for now and XAU/USD has since rebounded to closer to $1860, that still leaves it trading with a slightly negative bias on the day. Gold bears are still eyeing a potential test of the 200-Day Moving Average in the mid-$1830s in the near future.

Gold prices are suffering as a result of the negative backdrop of buoyant global yields and a still very robust US dollar as markets brace for more central bank tightening this week (primarily from the Fed) after the RBA’s larger than expected rate hike during Tuesday’s Asia Pacific session. The Fed is expected to lift interest rates by 50 bps on Wednesday, signal rates hitting roughly 2.5% by the year’s end and announce quantitative tightening plans.

Ahead of the Fed’s policy announcement, the US 10-year yield, though a few bps lower on the day, continues to flirt with the 3.0% level, its highest point since late 2018. The Dollar Index (DXY), meanwhile, continues to eye a test of last week’s multi-year highs near the 104.00 level as is consolidates just above 103.50. Higher yields represent a higher “opportunity cost” of holding non-yielding assets such as precious metals.

Meanwhile, a stronger US dollar makes USD-denominated commodities (such as XAU/USD) more expensive for purchase by the holders of international currency. If the 10-year yield was to break definitively above 3.0% and the DXY test/break above 104.00 once again, that could coincide with a break below $1850 in gold and a test of the 200DMA.

• EUR/USD extends the inconclusive price action around 1.0500.
• A visit to the YTD low at 1.0470 should not be ruled out .

EUR/USD trades within a tight range in a context dominated by pre-FOMC cautiousness among investors.

The offered stance in the pair remains well and sound and the door stays open to another probable visit to the YTD low around 1.0470 (April 28) sooner rather than later. The breach of the latter should put the pair en route to a potential visit to the 2017 low at 1.0340 (April 21).

In the meantime, while below the 3-month line around 1.0970, extra losses in the pair are likely.

EUR/USD daily chart

• DXY meets some selling interest around 103.70 on Tuesday.
• The resumption of the upside could see the YTD high revisited.

DXY partially fades Monday’s moderate advance and comes under downside pressure around 103.40.

Price action in DXY remains supportive of the resumption of the uptrend in place since the beginning of the year. In that scenario, the next up barrier is at the 2022 peak just below the 104.00 yardstick (April 28) prior to 105.63 (December 11 2002 high).

The current bullish stance in the index remains supported by the 8-month line near 96.80, while the longer-term outlook for the dollar is seen constructive while above the 200-day SMA at 95.81.

DXY daily chart

FX option expiries for May 3 NY cut at 10:00 Eastern Time, via DTCC, can be found below.

- USD/JPY: USD amounts                     

• 127.00 860m
• 127.25 330m
• 129.75 640m
• 130.50 373m

- USD/CHF: USD amounts        

• 0.9550 380m

- USD/CAD: USD amounts       

• 1.2680 409m
• 1.2900 585m

• USD/JPY buyers look to fight back control amid firmer yields.
• Fed/BOJ divergence is likely to keep any downside in check.
• Daily RSI is flirting with overbought territory, more gains in the offing?

USD/JPY is treading water above 130.00, fluctuating between gains and losses, as markets remain indecisive ahead of the critical Fed interest rate decision.

Although the Treasury yields hovering near three-year highs is lending support to the spot while the upside remains capped by the US dollar weakness.

The Fed is on track to hike the interest rates by 50 bps at its May meeting. Meanwhile, the BOJ came out ultra-dovish last week, widening the monetary policy divergence and the underpinning currency pair.

Technically, USD/JPY’s daily chart shows that the 14-day Relative Strength Index (RSI) is off the extremely overbought region just above the 70.00 level, suggesting that there could be a fresh leg higher in the offing.

USD/JPY: Daily chart

If buyers regain momentum, then a fresh advance towards the rising trendline resistance at 131.75 will be inevitable.

Ahead of that, the 131.00 round figure could challenge the bearish commitments.

On the downside, the pair could retest the daily low of 129.85. Friday’s low of 129.31 will be next on the sellers’ radars.

USD/JPY: Additional levels to consider

• EUR/JPY trades in an inconclusive note below 137.00 on Tuesday.
• Further side-lined trading remains in the pipeline near term.

EUR/JPY extends the bearish start of the week and drops to the sub-137.00 area on Tuesday.

The cross has likely moved into a consolidative phase awaiting for further catalysts in the short term. The continuation of the uptrend is a likely scenario in case the cross manages to surpass the 138.00 area. That said, the immediate hurdle still emerges at the 2022 high around 140.00 (April 21) prior to the June 2015 high at 141.05.

In the meantime, while above the 200-day SMA at 130.76, the outlook for the cross is expected to remain constructive.

EUR/JPY daily chart

• GBP/USD off the highs but strongly bid above 1.2500 amid USD pullback.
• Probability of a larger BOE rate hike has risen but not that much for the Fed.
• Markets remain cautious heading into the Fed and BOE policy meetings.

GBP/USD has stalled its rebound near 1.2560 but remains strongly bid above 1.2500, mainly driven by Fed and BOE expectations.

The latest uptick in the US dollar across the board has fuelled a bout of fresh selling in cable, as investors move back to the safe-haven greenback amid increased anxiety heading into the critical Fed and BOE policy announcements due later this week.

Despite the retreat from higher levels, GBP/USD sustains a part of the recovery gains on increasingly hawkish expectations from the BOE following the RBA surprise rate hike of 25 bps.

The probability of a larger than expected 50 bps hike from the BoE on Thursday has risen to 30%, according to a Refinitiv measure based on interest rate futures. In contrast, there is only a 6% chance of the Fed raising rates by 75 bps this week.

The Fed’s guidance on the future course of monetary policy, however, could underscore the divergence between the Fed and BOE, reviving the selling interest around the pair.

Meanwhile, traders await the US Factory Orders and JOLTS job openings for fresh trading opportunities in cable.

GBP/USD technical levels to watch

The Eurozone Unemployment Rate dropped to 6.8% vs. 6.7% expected and 6.9% reported in February, the latest data published by the Eurostat showed on Tuesday.

The Producer Price Index (PPI) in the bloc rose to 5.3% MoM in March vs. 5% expected and 1.1% previous.

On an annualized basis, the PPI surged 36.8% in March, beating expectations of a 36.3% increase and 31.5% last.

Market reaction

EUR/USD is losing the recovery momentum on the mixed Eurozone data releases. The spot was last seen trading at 1.0499, down 0.05% so far.

Gold is already under pressure again this morning – albeit only moderately. Economists at Commerzbank expect the yellow metal downtrend to continue weighing on silver.

Silver unlikely to manage to reverse the trend of its own accord

“One reason for the price slide is the firm US dollar, which is trading close to its highest level since 2002 on a trade-weighted basis. What is more, bond yields have risen further. This has pushed real interest rates back into positive territory for the first time in over two years, which makes gold less attractive as a non-interest-bearing alternative investment.” 

“We expect the Fed to decide tomorrow to raise interest rates by 50 basis points. This should come as no surprise to the market by now, however, and is also fully priced in according to the Fed Fund Futures, so it should no longer weigh on the gold price.” 

“Silver has been under pressure in gold’s slipstream for days. It has also fallen noticeably more sharply than gold. For as long as gold continues to face headwind, silver is unlikely to manage to reverse the trend of its own accord. After all, silver has long had virtually no life of its own.”

• Gold Price remains heavy amid firmer yields, ignore USD correction.
• Treasury yields hold at three-year highs on hawkish Fed expectations.
• US Factory Orders, JOLTS job openings eyed for fresh impetus.

Gold Price is trading in close proximity to fresh three-month lows just above $1,850, as sellers remain in charge despite the broad pullback in the US dollar from multi-year peaks. The US Treasury yields stabilize at the highest level in over three-year, keeping the downside pressure intact on the non-interest-bearing gold price.

The yields remain elevated, as investors remain hopeful for an aggressive stance from the Fed, as the world’s most powerful central bank is expected to raise the key rates by 50 bps on Wednesday. The central bank is also likely to begin trimming its balance sheet. The benchmark 10-year Treasury yields hit the highest since December 2018 at 3.004%, earlier on.

Further, demand concerns from the world’s biggest gold consumers, China and India, are also collaborating with the ongoing downtrend in the metal. China is grappling with the worst covid outbreak since Wuhan, which has forced the biggest cities back under lockdowns, hitting the demand for gold coins and bars.

Meanwhile, India’s appetite for gold has reduced due to the recent surge in prices, courtesy of the Russia-Ukraine war-driven safe-haven demand.

Also read: Gold Price Forecast: XAU/USD bulls could come up for last dance ahead of Fed

Looking ahead, the sentiment around the yields and the dollar will continue to have a significant bearing on gold price, as all eyes remain on the Fed decision for the next directional move.

In the meantime, the US Factory Orders and JOLTS job openings data will offer some fresh incentives to gold traders.

Gold Price technical levels to consider

• Unemployment Rate in Germany stayed unchanged at 5% in April as expected.
• EUR/USD clings to modest daily gains above 1.0500 in the early European session.

The data published by Germany's Federal Labour Office showed on Tuesday that the seasonally adjusted Unemployment Rate in April stayed unchanged at 5% in April, matching the market expectation.

Further details of the publication revealed that the number of unemployed declined by 13,000 to 2.287 million, compared to analysts' estimate for a decrease of 15,000.

Market reaction

EUR/USD continues to edge higher after this report and was last seen gaining 0.2% on the day at 1.0523.

The GBP has weakened sharply over the past week after cable broke below support at the 1.30 level. Will the Bank of England policy update reinforce case for a weaker GBP? In the view of economists at MUFG Bank, GBP weakness would be reinforced if the BoE signals that rate hikes could be paused sooner in response to weaker growth. 

A cautious message from the BoE should support a weaker GBP

“Unsurprisingly technical indicators are signalling that the GBP is now heavily oversold against the USD in the near-term which increases the likelihood of a temporary relief rally.”

“There appears to be little to no light at the end of tunnel for the Ukraine conflict keeping risks titled to the downside for the UK economy and GBP.”

“We expect the BoE to maintain a more cautious outlook over the need for further tightening as it finely balances upside risks to inflation against downside risks to growth when setting policy. GBP weakness would be reinforced if the BoE signals that rate hikes could be paused sooner in response to weaker growth.”

“The GBP could face further selling pressure following local elections scheduled later this week on 5th May. If the Conservative party performs even more poorly than expected, the results will increase the likelihood that Prime Minister Boris Johnson faces a vote of no confidence. A pick up in political uncertainty would add to current bearish sentiment towards the GBP.”

The Bank of Japan (BoJ) announced that it will conduct unlimited fixed-rate bond-buying daily to defend its yield target. Following this dovish announcement, USD/JPY broke the closely watched 130 level, the first time in 20 years. This is likely to establish a floor on the pair for now, despite growing signs of anxiety at Japan’s MOF, in the view of economists at HSBC.

Japan’s MOF has so far resorted to verbal intervention,rather than FX intervention

“The BoJ announced that it will conduct unlimited fixed-rate purchases of 10-year JGBs at 0.25% every business day to defend the YCC target ‘unless it is highly likely that no bids will besubmitted’, instead of on an ad-hoc basis.”

“While the move above 130 in USD/JPY looked a little large relative to the shift in the US-Japan yield differentials, BoJ Governor Haruhiko Kuroda’s reassertion that a weak yen is overall positive for the economy likely played its part. However, that sentiment seemed less widely held at Japan’s Ministry of Finance (MOF). In a slight escalation in tone, a MOF official said ‘recent FX moves warrant extreme concern’ and it will act appropriately on FX if needed.

“For now, the move above 130 is likely to establish this as a floor on USD/JPY.”

The dollar has remained bid ahead of tomorrow's Federal Reserve meeting. Analysts at ING think it is still risky to pick the top in the dollar rally given the prospect of aggressive tightening and the challenging global environment for risk.

Dollar remains supported into the FOMC

“Even if the Fed-induced strength might appear more limited now that an aggressive tightening cycle has been priced in, an external environment where markets find other key non-US markets unattractive (namely, China due to lockdowns, Europe due to geopolitical risk, other emerging markets due to tightening financial conditions) offers quite a solid floor to the dollar.”

“We continue to see high-beta/commodity currencies being at risk in the current choppy environment for risk sentiment, and the DXY (where low-yielders have a big weight) may not be a very indicative benchmark for dollar strength at the moment. Still, a move into the 104/105 range into the Fed meeting seems reasonable.”

The Brazilian real has weakened significantly against USD over the past few days. Economists at Commerzbank expect BRL to remain under depreciation pressure.

Hawkish surprises tomorrow might support BRL short-term

“We have been of the view for some time that the BRL rally seen since the start of the year seemed exaggerated in view of the many risks. Due to global inflation and growth concerns as well as high uncertainty resulting from the war in Ukraine, but also due to domestic risks in particular in connections with the Presidential elections in October, we are sceptical as far as the BRL’s development is concerned.”

“Hawkish surprises tomorrow might support BRL short-term, but we do not consider levels of 4.60 in USD/BRL, as seen a few weeks ago, to be justified.”

The Reserve Bank of Australia (RBA) has hiked rates by 25bp taking the cash rate target to 0.35%. The aussie jumped after the statement. However, economists at ING expect AUD/USD to struggle at the 0.72/73 zone in the coming weeks.

RBA hikes 25bp

“The RBA sent a firmly hawkish signal as it hiked rates by 25bp (to 0.35%) and announced it would stop reinvesting maturing assets, therefore allowing its balance sheet to shrink over the coming quarters.”

The AUD rally has proven relatively short-lived, which is not entirely surprising given that: a) markets were already pricing in a cash rate of 2.60% by year-end (they now expect 2.80% after the hike); b) lingering concerns on China’s Covid crisis are weighing on the Antipodeans. 

“The upside for AUD/USD may still be limited to the 0.72/0.73 area in the coming weeks.”

Gold Price is sitting at three-month troughs just above $1,850. XAU/USD bulls could come up for a last dance ahead of the Federal Reserve meeting on Wednesday, FXStreet’s Dhwani Mehta reports.

A rebound could be in the offing

“The US dollar could extend its correction, as investors resort to repositioning ahead of the all-important Fed event. Further, markets weigh the downbeat US ISM and S&P Global Manufacturing PMI reports, which could keep the sentiment around the greenback undermined.”

“Gold Price is finding some bids in the $1,850 area, which could prompt a comeback towards the daily highs of $1,867. The $1,870 round figure could then be next on buyers’ radars. Acceptance above the latter will fuel a fresh advance towards the mildly bullish 100-Daily Moving Average (DMA) at $1,879.”

“With the hawkish Fed bets in play, any recovery attempts are likely to be temporary.”

“If the $1,850 level gives way amid a selling resurgence, then a sharp sell-off towards the rising 200-DMA at $1,834 will be inevitable. Ahead of that, the $1,840 level could come to the rescue of gold bulls.”

• EUR/USD remains under pressure around 1.0500.
• German 10y bund yields approach the 1.0% yardstick.
• Germany labour market report, ECB Lagarde next on tap.

The European currency remains under pressure and now motivates EUR/USD to challenge once again the key area around 1.0500.

EUR/USD looks to data, ECB, FOMC

EUR/USD adds to the pessimism witnessed at the beginning of the week against the backdrop of rising cautiousness among market participants ahead of the FOMC event on Wednesday.

In the meantime, spot remains well under pressure in the 1.0500 neighbourhood, as the sentiment surrounding the dollar stays strong amidst the continuation of the rally in yields on both sides of the Atlantic and the palpable possibility of a hawkish message at the FOMC event on Wednesday. Furthermore, the German 10y bund yields surpass the key 1.0% level for the first time since June 2015.

Interesting day in the domestic docket, as the German labour market report for the month of April is due later seconded by the speech by Chairwoman C.Lagarde and Board member E. Fernandez-Bollo (Bank of Spain).

Across the pond, Factory Orders and the JOLTs Job Openings/Quits are also expected.

What to look for around EUR

EUR/USD remains depressed and flirts with the 1.0500 zone amidst lack of upside traction and absence of bulls’ conviction. The outlook for the pair still remains tilted towards the bearish side, always in response to dollar dynamics, geopolitical concerns and the Fed-ECB divergence. Occasional pockets of strength in the single currency, in the meantime, should appear reinforced by speculation the ECB could raise rates at some point around June/July, while higher German yields, elevated inflation and a decent pace of the economic recovery in the region are also supportive of an improvement in the mood around the euro.

Key events in the euro area this week: Germany Unemployment Rate, Unemployment Change, EMU Unemployment Rate, ECB Lagarde (Tuesday) – Germany Balance Trade, Final Services PMI, EMU Final Services PMI, Retail Sales (Wednesday) – Germany Factory Orders, Construction PMI (Thursday) – Germany Industrial Production (Friday).

Eminent issues on the back boiler: Asymmetric economic recovery post-pandemic in the euro area. Speculation of ECB tightening/tapering later in the year. Impact on the region’s economic growth prospects of the war in Ukraine.

EUR/USD levels to watch

So far, spot is down 0.01% at 1.0499 and a break below 1.0470 (2022 low April 28) would target 1.0453 (low January 11 2017) en route to 1.0340 (2017 low January 3 2017). On the flip side, the next hurdle emerges at 1.0593 (high April 29) followed by 1.0936 (weekly high April 21) and finally 1.1000 (round level).

• DXY trades without a clear direction in the mid-103.00s.
• US yields edge higher ahead of the FOMC event on Wednesday.
• Factory Orders, JOLTs next on tap in the US docket.

The greenback, in terms of the US Dollar Index (DXY), lacks a clear direction although it manages well to navigate in the upper end of the recent range north of the 103.00 hurdle.

US Dollar Index looks to Fed, yields

The index partially fades Monday’s advance amidst a so far tepid recovery in the risk complex on turnaround Tuesday.

Indeed, the index trades in an erratic fashion against the backdrop of the continuation of the upside momentum in US yields. On this, it is worth recalling that the 10y benchmark note yields trespassed the key 3.0% mark for the first time since December 2018 on Monday.

The greenback is expected to remain in a cautious mode as the FOMC’s meeting kicks in on Tuesday and is expected to deliver a 50 bps interest rate hike on Wednesday, while further announcements regarding the future rate path and the balance sheet runoff should also keep the dollar entertained.

Data wise in the US calendar, Factory Orders for the month of March are due later seconded by JOLTs Job Openings/Quits in the same period.

What to look for around USD

The dollar remains vigilant well above the 103.00 mark ahead of the key FOMC gathering on Wednesday. The Fed’s more aggressive rate path continues to be the main driver behind the robust bullish stance in the dollar, which also appears reinforced by the current elevated inflation narrative and the solid health of the labour market. Collaborating with the latter appear bouts of geopolitical tensions as well as the move higher in US yields.

Key events in the US this week: Factory Orders (Tuesday) – Mortgage Applications, ADP Report, Balance of Trade, Final Services PMI, ISM Non-Manufacturing, FOMC Meeting (Wednesday) – Initial Claims (Thursday) – Nonfarm Payrolls, Unemployment Rate, Consumer Credit Change (Friday).

Eminent issues on the back boiler: Escalating geopolitical effervescence vs. Russia and China. Fed’s rate path this year. US-China trade conflict. Future of Biden’s Build Back Better plan.

US Dollar Index relevant levels

Now, the index is retreating 0.02% at 103.57 and faces the next support at 99.81 (weekly low April 21) seconded by 99.57 (weekly low April 14) and then 97.68 (weekly low March 30). On the upside, the breakout of 103.92 (2022 high April 28) would open the door to 104.00 (round level) and finally 105.63 (high December 11 2002).

• USD/CAD picks up bids to consolidate the first daily losses in three.
• WTI crude oil prices renew intraday low as traders shift attention to USD rebound.
• Inaction in bond markets, statements from EU could have favored sellers previously.
• Second-tier US data, risk catalysts may entertain traders ahead of FOMC.

USD/CAD bears struggle to keep reins as oil prices, Canada’s main export, renew intraday low heading into Tuesday’s European session. Also consolidating the Loonie pair’s recent losses could be the US Dollar Index (DXY) rebound amid sour sentiment.

That said, the WTI crude oil prices drop to the fresh intraday low of $104.65, down 0.30% by the press time. On the contrary, the DXY remains mildly offered around 103.55 versus the early Asian session low of 103.39.

The pair’s early-day losses could be the profit-booking moves around the yearly high as holidays in China and Japan allowed traders to lick their wounds before Wednesday’s Federal Open Market Committee (FOMC). It’s worth noting that the headlines surrounding the European Union’s (EU) readiness to push Russia out of the SWIFT payment system favored the oil prices during the early day and weighed on the USD/CAD.

It should be observed that the market sentiment remains firmer as European indices seem to track Wall Street’s gains and challenge the USD/CAD recovery moves.

Hence, the Loonie pair may witness further weakness should Bank of Canada (BOC) Senior Deputy Governor Carolyn Rogers manage to please CAD bulls. Also important to watch are the US Factory Orders for March, expected at 1.1% versus -0.5% prior.

Technical analysis

Despite the daily fall, USD/CAD remains above a downward sloping trend line from December 2021, around 1.2860 by the press time, which in turn directs buyers toward the 1.3000 threshold, with the late 2021 peak of 1.2966 likely acting as an intermediate halt.

The pound is set to stabilize ahead of the Bank of England (BoE) meeting on Thursday. Economists at ING expect GBP to soften after the rate announcement, especially against the US dollar.

BoE may defy hawkish expectations on Thursday

“Expect a couple of days of ‘wait-and-see’ in the GBP crosses as investors hold their breath ahead of the Bank of England meeting on Thursday.”

“We think that would prompt a bit more dovish repricing across the GBP curve and the pound could moderately weaken after the rate announcement. Such weakness should prove more pronounced against the dollar, which could find some more support from the FOMC meeting, and EUR/GBP upside could still be capped to the 0.8450-0.8500 area for now.”

EUR/USD is currently struggling to stay above the key 1.05 support. A move below this level looks likely this week, economists at ING report.

EUR recovery requires a shift in the ECB policy statement

“An appreciating dollar, underperforming European equities and fears of a prolonged Russia-Ukraine conflict as well as ever-deteriorating diplomatic relations between Moscow and Brussels all continue to point to weakness in the pair.”

“A EUR recovery likely requires a shift in the European Central Bank policy statement, and the timing on that remains uncertain (the next meeting is on 9 June). Until that happens, EUR/USD remains at risk of dipping below 1.05.” 

“A week with the FOMC meeting and not much action on the eurozone calendar/ECB speaker side could definitely see a decisive technical break lower materialise.”

Here is what you need to know on Tuesday, May 3:

Markets stay relatively quiet early Tuesday as investors refrain from making large bets ahead of the Federal Reserve's and the Bank of England's (BOE) policy announcements later in the week. The benchmark 10-year US Treasury bond yield continues to move sideways within a touching distance of 3% and the dollar holds its ground against its rivals. Meanwhile, the market mood remains cautiously optimistic with US stock index futures rising between 0.3% and 0.4%. Unemployment and Producer Price Index (PPI) data from the euro area and March Factory Orders from the US will be looked upon for fresh impetus.

On Monday, the German economy minister said that they were not against a ban on Russian oil imports and the climate minister noted they have been preparing for a ban. Germany's DAX 30 Index lost more than 1% on Monday but Wall Street's main indexes managed to register modest gaily gains.

After touching its weakest level in nearly four months at 0.7030 on Monday, AUD/USD rose sharply during the Asian trading hours on Tuesday and was last seen rising 1% on the day above 0.7100. The Reserve Bank of Australia (RBA) hiked its policy rate by 25 basis points (bps) to 0.3% following its policy meeting, surprising investors who were expecting the bank to raise its rate by 15 bps. In its policy statement, the RBA noted that they remain committed to doing what is necessary to ensure that inflation in Australia returns to target over time. Additionally, RBA Governor Philip Lowe said that further increases in the policy rate will be necessary over the months ahead. 

EUR/USD closed the first day of the week with small losses and was last seen fluctuating in a tight range slightly above 1.0500. European Union’s (EU) top diplomat Josep Borrell said earlier in the day that more Russian banks will leave the SWIFT payment network as a part of a new sanctions package.

GBP/USD is sticking to modest recovery gains above 1.2500 after having lost nearly 100 pips on Monday. S&P Global's Manufacturing PMI (final) for April will be featured in the UK economic docket later in the session.

Gold slumped to its lowest level since mid-February near $1,850 on Monday before going into a consolidation phase at around $1,860 early Tuesday. Market participants remain increasingly concerned over the slowdown in China's economic activity spilling over to other major economies.

For the third straight trading day, USD/JPY moves sideways in a narrow band near 130.00. Japanese markets were closed due to the Constitution Day holiday on Tuesday.

Bitcoin struggles to find direction and trades in a tight channel above $38,000. Ethereum is trading with modest losses near $2,800 early Tuesday after having gained nearly 5% in the previous two days.

The Swiss National Bank (SNB) is likely to leave everything unchanged for now, a negative for the franc. However, CHF is set to appreciate due to risks that Europe will struggle with energy supply disruptions, economists at Commerzbank report. 

Caught between expansionary monetary policy and nervous markets

“While the SNB’s monetary policy, which is relatively expansionary compared with many other central banks, constitutes a negative factor for the Swiss franc there is the risk that the EU economy will deteriorate as a result of possible energy supply stops – which in turn makes the franc attractive as a safe-haven.”

“Should it emerge over the course of the week that the EU will impose an oil embargo nervousness on the financial markets might increase further, thus supporting the franc.”

The US dollar continues to appreciate to such an extent that one could almost get dizzy. Still, economists at Commerzbank expect the greenback to remain in demand.

USD without an alternative?

“USD does not just seem the preferred option as far as monetary policy is concerned. Also, against the background of the Ukraine conflict and a possible energy crisis in Europe, the USD remains the better alternative.”

“In view of the Fed meeting tomorrow and the increasingly concrete discussion about an EU oil embargo against Russia, the USD is, therefore, likely to remain in demand.”

The Reserve Bank of Australia (RBA) got the hiking party going with a 25bp rate move. AUD/USD soared to a high of 0.7147 but econmists at Commerzbank expect the aussie to struggle to enjoy further gains.

RBA statement sounded quite hawkish

“The RBA has hiked its key rate slightly more than the market expected from 0.10% to 0.35%. The RBA did not provide any more concrete information about the extent of the next rate steps. Everything all told the statement sounded quite hawkish though, allowing AUD to benefit.”

“The market is expecting a key rate hike at each of the coming meetings, so a lot seems to have been priced in already. That means there is likely to be limited scope for further AUD gains in the current rather difficult financial market environment unless further hawkish RBA comments confirm the market view.”

NZD/USD has neared the 0.6410 mark. A break below here would open up additional losses toward 0.6335, economists at ANZ Bank report.

USD strength has had a tendency to fade fairly early on in past tightening cycles

“Kiwi is now on support at 0.6410 (the 123.6% Fibo extension of the retracement of the January-April rally). From a technical perspective, a break of 0.6410 risks a move to 0.6335, but let’s see how sentiment hold up.” 

“If the Fed does frame near-term aggressive hikes as likely to limit the terminal rate, that could slow the USD’s ascent or turn it around. Indeed, USD strength has had a tendency to fade fairly early on in past tightening cycles.”

“Support 0.6280/0.6335/0.6410.”

“Resistance 0.6530/0.6650.”

Stats NZ is set to release employment figures for the first quarter on Tuesday at 22:45 GMT and as we get closer to the release time, here are forecasts from economists and researchers at four major banks regarding the upcoming labour market data.

The Unemployment Rate is expected to have stayed unchanged at 3.2% while the Employment Change is seen at 0.1%.

Westpac

“We expect the unemployment rate to fall to 3.0% in the March quarter. This would be another new low in the history of the survey going back to 1986. Labour market indicators point to a further tightening in the market in recent months, albeit with some disruptions from the Omicron wave. We expect a further acceleration in wage growth, albeit still falling short of the surge in consumer price inflation. Our forecast would represent a modest upside surprise to the Reserve Bank’s view – something that was perhaps already anticipated in this month’s decision to lift the OCR by 50 basis points in one go.”

ANZ

“We’ve pencilled in a further decline in the unemployment rate to 3.1% in Q1 (versus 3.2% in Q4). However, the Omicron wave peaked in Q1, so the data could be a little noisy. Looking through near-term volatility, we think the labour market will continue to tighten over the first half of 2022. Wage inflation has thus far failed to keep up with the rapidly rising cost of living. But with labour market tightness so widespread, we do expect wage growth to accelerate sharply over 2022. Private sector average hourly earnings are expected to have risen 1.2% q/q in Q1 (4.6% YoY), and we expect labour costs were up 0.6% QoQ (3.0% YoY). The tight labour market is likely to be a significant source of domestic inflation pressure over 2022, as firms increasingly bid up wages to attract and retain talent. For the RBNZ, that means they need to continue on with aggressive interest rate hikes (including a 50bp hike in May) in order to bring surging domestic inflation pressures to heel.”

TDS

“We expect the unemployment rate to mark a new low in the series given the strength in the labour market while wages are likely to gain and reach its highest annual growth rate since Q4'08 at 3.2% YoY. A strong Q1 labour market print will support our call for the RBNZ to continue with its ‘stitch-in-time’ approach and aggressive tightening stance, hiking by 50bps in May.”

Citibank

“Citi unemployment rate forecast; 3.2%, Previous; 3.2%; Citi employment change forecast; 0.1%, Previous; 0.1%; Citi participation rate forecast; 71.1%, Previous; 71.1%; Citi private sector wages forecast; 0.7%, Previous; 0.7%. We expect private sector wage costs to rise by 0.7% in the quarter. This would be in-line with the gains in the previous two quarters but take the YoY increase from 2.8% to 3.1%.”

While adding to his hawkish remarks that justify the RBA's latest rate hike, Governor Philip Lowe said, "A more normal level of rates would be 2.5%."

Also read: RBA’s Lowe: Further increases in interest rates will be necessary over the months ahead

Additional comments

AUD/USD stays firmer

Following a quiet response to RBA's Lowe, AUD/USD picks up bids to 0.7120 by the press time.

Read: AUD/USD defends RBA-led gains near 0.7100 on Lowe’s remarks, USD rebound

• AUD/USD seesaws around daily high, shows mixed reaction to RBA’s Lowe.
• RBA’s Lowe promotes further rate increases, eyes strong economy.
• RBA’s 0.25% rate lift offered 70 pips of an upside move before the USD moves probed buyers.
• Off in China, Japan also underpinned upside momentum amid market consolidation before the Fed.

AUD/USD struggles to portray hawkish comments from RBA Governor Philip Lowe as buyers seem taking a breather. That said, the Aussie pair stays firmer above 0.7100, around 0.7120 by the press time, while keeping the post-RBA gains ahead of Tuesday’s European session.

While backing the RBA’s higher-than-expected rate lift to 0.35%, Lowe said, “We expect a further increase in the inflation rate as the effects of global developments wash through the year-ended figures.”

The RBA Boss also favored further rate-hike in a gesture to keep the AUD/USD bulls on the table.

Also read: RBA’s Lowe: Further increases in interest rates will be necessary over the months ahead

However, the US dollar’s rebound, backed by the firmer Treasury yields, seems to challenge the AUD/USD bulls. On the same line are the market fears emanating from the Russia-Ukraine crisis, China’s covid resurgence and fears that the Fed will do whatever it takes to tame the inflation.

Other than the qualitative catalysts, US Factory Orders and ADP Employment Change for April may also offer intermediate clues to the AUD/USD pair traders, not to forget Wednesday’s Aussie Retail Sales.

Technical analysis

A clear upside break of the downward sloping trend line from April 21, near 0.7090 by the press time, directs AUD/USD bulls toward March’s low of 0.7165. Alternatively, pullback moves may initially aim for the nearby support line close to 0.7030 ahead of the 0.7000 threshold.

“I expect that further increases in interest rates will be necessary over the months ahead,” the Reserve Bank of Australia (RBA) said at the post-policy meeting press conference on Tuesday.

Additional quotes

Market reaction

The aussie fails to find any inspiration from these above comments, as AUD/USD holds a major portion of the surprise RBA rate hike-led spike to 0.7150.

AUD/USD is currently trading at 0.7115, up 1.05% on the day.

• NZD/USD has surrendered its entire intraday gains and looks to continue its eight-day losing streak.
• The DXY has turned extremely volatile ahead of the Fed’s monetary policy.
• NZ Jobless Rate and Employment Change are seen at 3.2% and 0.1% respectively.

The NZD/USD pair is displaying wild moves in the Asian session as the US dollar index (DXY) has turned erratic ahead of the monetary policy announcement by the Federal Reserve (Fed). The mega event of interest rate decision announcement has turned the Fx domain volatile.

This monetary policy carries significant importance which is why it is responsible for some erratic moves in the DXY. After the Covid-19 pandemic, the infusion of helicopter money and ultra-loose monetary policy in the economy was driving the risk-perceived currencies. As inflation has climbed to the rooftop, major central banks are tightening their policy stance to combat the soaring inflation. Considering the market consensus, the Fed is expected to elevate its rates by 50 basis points (bps). Also, this will mark an end to the era of liquidity expansion, which will be followed by a prolonged period of a liquidity squeeze. The DXY has started scaling higher and has climbed to near 103.60.

Apart from the Fed’s policy on Wednesday, the employment data in the kiwi area will remain on the radar. Statistics New Zealand is expected to report the Unemployment Rate at 3.2%, similar to the earlier print. While the Employment Change is seen at 0.1%. A higher-than-expected employment data will bolster the odds of one more rate hike by the Reserve Bank of New Zealand (RBNZ).

The Reserve Bank of Australia (RBA) hiked rates by 25bp to 0.35%, a slightly larger hike compared to consensus expectation of 15bp. AUD/USD jumped above 0.7140 following the decision, but AUD is unlikely to gain much long-lasting support in an environment where global growth risks are rising, economists at Westpac report.

AUD/USD could test 0.7160/90 in the short-term

“The combination of 25bps, the clear statement that ensuring that inflation returns to the target over time ‘will require a further lift in interest rates over the period ahead’ and that ‘the Board does not plan to reinvest the proceeds of maturing government bonds and expects the Bank's balance sheet to decline significantly over the next couple of years as the Term Funding Facility comes to an end’ meant that this was a more hawkish outcome than expected.”

“The AUD/USD quickly bounced to 0.7148 and we tend to see near-term risks that the move extends towards the 0.7160/90 region.”

“We remain of the view that the broad US dollar rise looks set to continue through this week’s Fed ‘super-tightening’ campaign and beyond. With global growth weakening, the aussie should remain on the back foot in coming weeks and dips below 0.70 are possible.”

Considering preliminary readings from CME Group for natural gas futures markets, open interest extended the erratic performance and shrank by 926 contracts on Monday. Volume reversed two consecutive daily retracements and increased by nearly 27K contracts.

Natural Gas remains focused on $8.00

Prices of natural gas added to Friday’s gains at the beginning of the week. The uptick, however, was accompanied by shrinking open interest, which could prompt a pause in the ongoing strong rebound. Natural gas, in the meantime, continues to target the 2022 high past the $8.00 mark per MMBtu (April 18).

• Gold prices remain depressed around 11-week low, extends the previous day’s losses inside fortnight-long falling wedge.
• Off in Japan, China restricts bond market moves but Treasuries remain firmer as central bankers flex muscles for hawkish play.
• USD pares early Asian session losses, US Factory Orders, ADP Employment Change can direct traders before FOMC.
• Gold Price Forecast: Further declines likely ahead of the Federal Reserve’s decision

Gold (XAU/USD) prices extend the previous day’s losses to $1,860, down 0.20% intraday as bears flirt with the lowest levels since mid-February. In doing so, the precious metal stays inside a bearish chart pattern, with limited downside room, heading into Tuesday’s European session.

Gold dropped the most in five weeks the previous day after the US Treasury yields rallied to the highest levels since December 2018.

Underlying the bond rout were escalating concerns that the US Federal Reserve (Fed) will have more than just a widely-anticipated 0.50% rate hike to offer during Wednesday’s Federal Open Market Committee (FOMC). Behind the market forecasts could be the recently easy US data, allowing the Fed policymakers to take drastic steps.

That said, the US ISM Manufacturing PMI for April eased to 55.4 versus 57.6 market forecast and 57.1 prior readings while S&P Manufacturing PMI also softened to 59.2 from 59.7 expected and prior.

While surging yields underpin the US dollar’s demand, geopolitical concerns surrounding Russia and China’s covid woes also favor the greenback. Even so, off in Japan, China and India triggered the US Dollar Index (DXY) pullback during Tuesday’s Asian session, before the latest recovery that reversed all losses with 103.60 the figure.

Moving on, US Factory Orders and ADP Employment Change for April may offer intermediate clues to the gold traders ahead of Wednesday’s Fed meeting. Should the Fed refrain from pleasing USD bulls, the much-await rebound in the gold price may take place.

Also read: ADP Employment Change April Preview: Will employment threaten Fed rate hikes?

Technical analysis

Gold prices take offers inside a two-week-old bearish chart pattern called a falling wedge. The quote nears the stated formation’s support line, surrounding $1,849 by the press time, amid oversold RSI conditions.

However, recovery moves remain elusive until crossing the 200-SMA level of $1,933.

Before that, the previous support line from March and convergence of the wedge’s upper line and 50-SMA, respectively around $1,878 and $1,903, will challenge the recovery moves.

It’s worth noting that the XAU/USD declines past $1,849 will aim for an ascending support line from August 2021, around $1,930 by the press time.

Gold: Four-hour chart

Trend: Limited downside expected

CME Group’s flash data for crude oil futures markets noted traders added nearly 7K contracts to their open interest positions on Monday, reaching the fifth consecutive daily advance. Volume, instead, dropped for the second session in a row, now by around 53K contracts.

WTI stays capped by $109.00

Prices of the WTI started the week with decent gains in tandem with rising open interest, which leaves the door open to further upside in the very near term. Therefore, further upside momentum could encourage the commodity to challenge the monthly high around the $109.00 mark per barrel (April 18).

Responding to the bigger-than-expected rate increase by the Reserve Bank of Australia (RBA) on Tuesday, Australia’s Prime Minister Scott Morrison said that Australians have been preparing for a rate hike for some time.

His comments come after the RBA hikes the Official Cash Rate (OCR) for the first time in 11 years by 25 bps to 0.35% as against the market's expectations of a 15 bps increase.

PM Morrison's conservative government is seeking a rare fourth three-year term at elections on May 21. By delivering a rate hike ahead of the election, the RBA has managed to preserve its credibility as an independent institution.

Market reaction

AUD/USD was last seen trading at 0.7115, up 1% on the day, awaiting Governor Phillip Lowe’s press conference at 6 GMT.

Open interest in gold futures markets reversed two consecutive daily builds and shrank by just 585 contracts at the beginning of the week according to advanced prints from CME Group. On the other hand, volume went up for the second straight session, this time by around 17.3K contracts.

Gold looks supported near $1850

Monday’s marked pullback in gold prices was on the back of shrinking open interest, which somewhat slows the pace of the downtrend. Against that, the yellow metal is expected to meet decent contention in the $1850 region in the very near term.

• Asia-Pacific markets remains lackluster amid holiday at major bourses.
• RBA surpasses expectations by fueling benchmark rate to 0.35%.
• Treasury yields remain firmer around multi-month high as traders brace for FOMC.
• Risk-related headlines, US Factory Orders may entertain traders.

Equity markets in the Asia-Pacific region remain lackluster, despite losing a bit due to firmer yields, amid holidays in China, Japan and India on Tuesday. While portraying the mood, MSCI’s index of Asia-Pacific shares ex-Japan drops 0.17% while the benchmark Treasury yields in the US remain near the three-year high during the inactive bond markets.

Even so, the Reserve Bank of Australia’s (RBA) higher-than-expected rate lift challenges the Aussie investors and drowns the benchmark equity index, namely ASX200. Following the RBA’s 0.25% rate hike, versus 0.15% expected, the ASX 200 refreshed daily lows to extend the previous day’s losses towards the 7,300 level, down 0.45% by the press time.

Elsewhere, softer prints of New Zealand’s Building Permits for March, 5.8% versus upwardly revised 12.8% prior, couldn’t lift the NZ stocks as the NZX 50 printed 0.40% intraday losses at the latest.

The reason could be linked to the firmer yields across the board in anticipation of tighter monetary policies ahead.

Given the off in the multiple markets, coupled with a light calendar, investors are likely to wait for the Fed’s verdict and may extend the previous moves. For the intermediate directions, the US Factory Orders for March, expected at 1.1% versus -0.5% prior, maybe looked at.

Additionally, headlines from Russia and China will also be the key as Europe is all set to exert more pressure on Moscow for its Ukraine invasion whereas Beijing announced strict activity rules during the festive season amid rising covid woes.

Also read: S&P 500 Futures print mild gains tracing Wall Street moves, yields stabilize on Japan’s off

• AUD/NZD has climbed to near 1.1044 as RBA has featured a rate hike by 25 bps.
• An unexpected hawkish tone from the RBA has set the antipodean on fire.
• Kiwi bulls are awaiting the release of the employment data.

The AUD/NZD pair has surged above 1.1040 as the Reserve Bank of Australia (RBA) sounded hawkish in its monetary policy meeting. RBA Governor Philip Lowe has stepped up its interest rates for the very first time since the pandemic of the Covid-19.

Australian central bank has unexpectedly elevated its interest rates by 25 basis points (bps) to 0.35%. The extent of the rate hike is higher than the preliminary estimate of 15 bps. An aggressive tone has been adopted by the RBA to leash the roaring inflation. The Australian Bureau of Statistics reported the yearly Australian inflation at 5.1%, much higher than the estimates of 4.6% and the prior print of 3.5%. Higher price pressures have compelled the RBA to feature a hawkish tone. As per the commentary from RBA Lowe, the agency is committed to doing whatever is necessary to ensure that inflation in the aussie area could return to target over time.

Meanwhile, kiwi bulls are eyeing the release of the Unemployment Rate, which is due on Wednesday. The NZ jobless rate is expected to land at 3.2%, in line with the previous figure. Adding to that, Statistics New Zealand will report the Employment Change at 0.1%. While the aussie area will report monthly retail sales on Wednesday. A preliminary estimate for monthly Retail Sales is 0.6% against the prior print of 1.8%.

Australia’s benchmark 10-year Treasury yields refresh the seven-year high to 3.338%, around 3.322% by the press time, on the Reserve Bank of Australia’s (RBA) stellar rate hike.

The Aussie central bank surprised bulls by crossing the 15 basis points (bps) of market forecasts with a 25 (bps) increase in the benchmark rate to 0.35%. The latest move shrugs off previous fears that the RBA won’t be able to match its foreign friends despite the rate hike.

Read: Breaking: RBA lifts OCR by 25bps to 0.35%, AUD/USD storms through 0.7100

Other than the rate lift, the RBA statement also exerts downside pressure on the Aussie bonds, which in turn fuel the Treasury yields.

Statements like, “It is appropriate to withdraw the extraordinary monetary assistance offered through the pandemic,” as well as, “We don't intend to reinvest the revenues of maturing government bonds,” seem to favor the Australian yields and the currency of late.

It’s worth noting, however, that an absence of Japanese and Chinese traders restricts bond market moves in Asia.

• AUD/JPY justifies RBA’s hawkish action while taking bids to refresh intraday high.
• RBA crosses wide market forecasts with a 25 bps rate hike to 0.35% benchmark rate.
• Off in Japan restricts bond moves, favoring cautious optimism ahead of top-tier events.
• Risk catalysts will be important to determine near-term directions, FOMC is the key.

AUD/JPY jumps around 75 pips on the Reserve Bank of Australia’s (RBA) higher-than-expected rate lift on Tuesday. The cross-currency pair printed the heaviest daily performance in a week with 112% intraday gains around 92.80 by the press time.

That said, the RBA surprised bulls by crossing the 15 basis points (bps) of market forecasts with a 25 (bps) increase in the benchmark rate to 0.35% during the latest move to tame the inflation.

Read: Breaking: RBA lifts OCR by 25bps to 0.35%, AUD/USD storms through 0.7100

Also supporting the Australian Dollar (AUD) are the comments from the RBA statement like, “The economy has proven to be resilient, and inflation has increased faster and to a higher degree than predicted.”

Having witnessed an initial reaction to the RBA’s hawkish move, AUD/JPY buyers will closely examine the risk catalysts for fresh impulse. However, a holiday in Japan and China can challenge the pair traders, which in turn also allows the bulls to keep the reins.

Even so, Wednesday’s US Federal Reserve (Fed) monetary policy meeting becomes the key catalyst amid hopes of the 0.50% rate hike and balance-sheet normalization.

Technical analysis

AUD/JPY bulls need a successful break of the 200-SMA resistance near 92.30 to aim for the downward sloping trend line from April 21 and the 100-SMA, respectively around 92.80 and 93.15. Failure to do so can drag the quote to the weekly support line near 91.60.

Following are the key headlines from the May RBA monetary policy statement, via Reuters, as presented by Governor Phillip Lowe.

Related reads

• AUD/USD tests 0.7140 as RBA elevates interest rates to 0.35%
• AUD/JPY rallies 75-pips on RBA’s more-than-expected rate hike

• AUD/USD has jumped to near 0.7140 as the RBA has announced a rate hike by 25 bps.
• The announcement from RBA’s Lowe is above the forecast of 15 bps.
• The DXY has turned volatile as a rebound in the risk-on impulse declines safe-haven appeal.

The AUD/USD pair has attracted significant bids as the Reserve Bank of Australia (RBA) has raised its interest rates by 25 basis points (bps) to 0.35%. 

The announcement from RBA Governor Philip Lowe is with the expectations of the street. Market participants were expecting a rate hike by 15 basis points (bps) amid the higher Consumer Price Index (CPI) figure. Last week, the Australian Bureau of Statistics reported yearly Australian inflation at 5.1%, much higher than the forecast of 4.6% and the previous print of 3.5%.

In the last RBA’s monetary policy, Governor Philip Lowe dictated that the central bank is in no mood to step up the interest rates as the policymakers do not see any price pressures despite rising oil and other commodity prices. However, the recent print of Australian inflation created havoc in the sentiment of the market participants, and the think tanks in the economy polled for a rate hike by 15 bps to 0.25%.

Meanwhile, the US dollar index (DXY) is losing its less volatile aura in the Asian session as investors are confused about whether to stick with the asset for more gains and to deploy the ‘Buy on rumor and Sell on news’ indicator. The news portion of the indicator indicates the event of a rate hike by the Federal Reserve (Fed) on Wednesday. The DXY is establishing below 103.50 amid a rebound in the risk-on impulse.

The Reserve Bank of Australia (RBA) board members decided to raise the official cash rate (OCR) by 25 basis points (bps) from a record low of 0.10% to 0.35% at their May 3 monetary policy meeting.

The decision surprised markets to the upside, as they had priced in a 15 bps lift-off.

The central bank dropped its ‘patient’ stance on the inflation developments at its April meeting, clearly shifting towards a hawkish pivot.

AUD/USD reaction

The AUD/USD pair jumped over 50-pips in an immediate reaction to the RBA decision.

The spot was last seen trading at 0.7133, up 1.23% on the day.

About RBA rate decision

RBA Interest Rate Decision is announced by the Reserve Bank of Australia. If the RBA is hawkish about the inflationary outlook of the economy and rises the interest rates it is positive, or bullish, for the AUD. Likewise, if the RBA has a dovish view on the Australian economy and keeps the ongoing interest rate, or cuts the interest rate it is seen as negative, or bearish.

• USD/INR rises the most in a week, grinds higher of late.
• Strong US Treasury yields, hopes of huge cash inflow favor buyers.
• US data, risk catalysts may entertain traders ahead of the key FOMC.
• Markets in China, Japan and India are off.

USD/INR holds onto the early Asian session gains around 76.75, grinding higher on Tuesday. The Indian rupee (INR) pair’s latest gains fail to justify the broad pullback in the US Dollar Index (DXY). The reason could be linked to the sluggish markets in Asia, as well as traders’ preparations for the likely heavy inflow into the Indian equity markets.

Holidays in China, Japan and India restrict market moves and allow the US dollar to consolidate recent gains. Even so, the greenback gauge remains on the front foot surrounding the 20-year high as the US Treasury yields stay strong heading into Wednesday’s Fed meeting.

Adding to the bullish bias for the USD/INR could be the hopes of heavy fund-flow from the Life Insurance Corporation of India’s (LIC) initial public offering, which in turn may help the INR to trim some of the latest losses.

It’s worth noting that the risk-off sentiment due to China’s covid-led lockdowns and escalation of the Russia-Ukraine crisis also underpin the USD/INR upside momentum.

That said, the pair’s short-term moves are likely to remain unaffected and may take clues from the US Factory Orders for March, expected at 1.1% versus -0.5% prior. However, major attention will be given to the Fed’s verdict amid hopes of a 0.50% rate hike and balance sheet normalization, not to forget Friday’s US jobs report for April.

Also read: Dollar rises in tandem with US yields before paring gains on recovery in US stocks

Technical analysis

10-DMA, Monday’s Doji keep USD/INR bulls hopeful to cross the 77.00 immediate hurdle and challenge April’s peak of 77.07. Alternatively, a downside break of the 10-DMA level surrounding 76.51 will need validation from the monthly support line, 76.40, to convince bears.

• USD/JPY is stuck in a nine-pip range ahead of Fed’s monetary policy announcement.
• A rate hike of 50 bps by the Fed is on the cards.
• BOJ’s ultra-loose monetary policy may continue to hurt the Japanese yen.

The USD/JPY pair is displaying back and forth moves in a narrow range of 129.97-130.06 as investors have preferred to stay on the sidelines till the announcement of the monetary policy by the Federal Reserve (Fed).

Investors are bracing for a tight liquidity environment as the Fed is going to elevate its interest rates by 50 basis points (bps), as per the market consensus. Soaring inflation and continuous job additions in the labor market are compelling for a rate hike but what matters the most is the guidance from the Fed. Aggressive hawkish guidance along with a jumbo rate hike would drive the asset to new highs.

The major is performing lackluster after printing a multi-year high of 131.25 on Thursday. The imbalance movement in the major has come after the Bank of Japan (BOJ) hold the interest rates unchanged in its monetary policy meet last week. An accommodative policy stance by the BOJ to spurt the growth in its economy is going to weaken the Japanese yen further. Also, the galloping commodity prices are hurting the households’ real income and widening the fiscal deficit.

Meanwhile, the US dollar index (DXY) is displaying some wild moves in the Asian session. The asst has slipped below 103.50 and is getting volatile at elevated levels. Usually, a volatile move after printing fresh highs, signals that the asset has already registered its peak and inventory distribution is a better option now.

• WTI eases from intraday high on failures to cross a five-week-old descending resistance line.
• Steady RSI directs pullback towards the 50-SMA, 100-SMA.
• April’s top will act as an extra filter to the north, sellers await confirmation from short-term ascending support line.

WTI prints mild losses around $104.15 as buyers fail to conquer short-term key hurdle during early Tuesday morning in Europe.

Steady RSI adds strength to the pullback moves, suggesting further weakness towards the 50-SMA and the 100-SMA, respectively around $101.85 and $101.60.

While a downside break of $101.60 won’t hesitate to direct the WTI bears towards the $100.00, any further weakness will be challenged by an upward sloping trend line from April 11, close to $96.70 by the press time.

On the flip side, a clear upside break of the aforementioned resistance line, at $105.10 now, could propel the energy benchmark towards the previous month’s high of $109.12.

In a case where the WTI bulls keep reins beyond the $109.12 resistance, late March’s swing high surrounding $115.85 will be in focus.

Overall, WTI prices are likely to witness a pullback but the bears have a long way to go.

WTI: Four-hour chart

Trend: Pullback expected

"In the banking sector, there will be more Russian banks that will leave the SWIFT” payment network, AFP news outlet reported, citing European Union’s (EU) top diplomat Josep Borrell.

Borell added, “a fresh EU sanctions package over Russia's invasion of Ukraine is set to include "more Russian banks" being pushed out of the global SWIFT network.”

This comes as the European Commission is expected to propose the sixth package of EU sanctions this week against Russia over its invasion of Ukraine, including a possible embargo on buying Russian oil.

Market reaction

EUR/USD is trading listlessly above 1.0500, adding 0.11% on the day. The pair is in a bearish consolidative mode, sensing calm amid the pre-Fed anxiety.

• GBP/USD picks up bids to refresh intraday high, confronts descending resistance line from April 21.
• Brexit headlines join inactive markets, amid off in Japan and China, to test the latest recovery moves.
• US Factory Orders may offer fresh impulse but risk catalysts are more important for clear directions.
• Bears stay hopeful as BOE faces a bumpy road to policy tightening compared to Fed.

GBPUSD tracks other major currencies while printing mild gains versus the US dollar during early Tuesday morning in Europe. Even so, the cautious mood ahead of the key central bank meeting and holidays in China and Japan challenges the cable buyers around nearby hurdle surrounding 1.2530 at the latest.

The US Dollar Index (DXY) drops 0.13% to 103.47 as an off in Japan resulting in inaction in the Asian bond market, which in turn leaves the benchmark Treasury yields unchanged. Given the US 10-year Treasury yields’ pullback from the highest level since late 2018 by the end of Monday, after refreshing the multi-day high, USD traders took the dormant bond market as an opportunity to pare recent gains.

Also likely to have weighed on the DXY prices could be the recently easy US data. The US ISM Manufacturing PMI for April eased to 55.4 versus 57.6 market forecast and 57.1 prior readings while S&P Manufacturing PMI also softened to 59.2 from 59.7 expected and prior.

Even so, hopes of a 0.5% rate hike from the Fed and economic challenges for the UK policymakers, including those emanating from Brexit and the Russia-Ukraine crisis, keep GBP/USD sellers hopeful.

Brexit has always been a pain for the UK policymakers and the latest deadlock resulted in Brit expats’ inability to drive vehicles in Spain. “British migrants living in Spain are facing driving bans after the Government failed to reach a post-Brexit deal on licences,” said Metro news.

Elsewhere, Germany steps back from the previous agitation to ban Russian oil imports, which in turn fuels the geopolitical tension surrounding Kyiv and underpins the US dollar’s safe-haven demand. Also favoring the rush for risk safety are the stricter activity lockdowns in Beijing due to covid resurgence.

That being said, GBP/USD recovery remains doubtful until the Fed-BOE duet completes. For the day, the US Factory Orders for March, expected at 1.1% versus -0.5% prior, will decorate the calendar.

Technical analysis

Although RSI conditions hint at an extended recovery move towards the 10-DMA level of 1.2685, a daily closing beyond 1.2530 becomes necessary for short-term buyers to keep reins. Even so, the previous support line from December 2021, near 1.2910 by the press time, acts as the key hurdle to the north.

On the contrary, the recently flashed multi-day bottom around 1.2410 appears a tough nut to crack for the GBPUSD bears.

• Gold price is moving directionless as investors await monetary policy from the Fed.
• Bearish Pennant chart formation is favoring more downside.
• Fed looks certain to hike interest rates by 50 bps.

Gold (XAUUSD) Price is consolidating in a narrow range of $1,859.82-1,867.22 in the Asian session as investors have trimmed their positions and have preferred to remain on the sidelines ahead of the interest rate decision by the Federal Reserve (Fed) on Wednesday. The bright metal has lost its shine over the past few trading sessions as investors are shifting their mindset according to a tight liquidity environment for a prolonged period.

Multi-decade high inflation and an extremely tight labor market are forcing the Fed to return to neutral rates, which will demand a lengthy spell of rate hikes and will continue to dent the demand for the precious metal. Therefore, gold prices will continue to remain on tenterhooks at least for more than a year.

On Wednesday, an interest rate elevation by 50 basis points (bps) looks certain. But the catalysts, which are binding the sight of investors, are the roadmap for balance sheet reduction and guidance by the Fed. Meanwhile, the US dollar index (DXY) has recovered some of its intraday losses and has climbed above 103.50 as profit-booking fades.

Gold technical analysis

On an hourly scale, XAU/USD is forming a Bearish Pennant chart pattern that signals a continuation of a bearish momentum after a consolidation phase. The 20- and 50-period Exponential Moving Averages (EMAs) at $1,868.80 and $1,880.00 respectively are declining, which adds to the downside filters. Also, the Relative Strength Index (RSI) (14) has shifted into a bearish range of 20.00-40.00 which signals more pain ahead.

Gold hourly chart

The Barclays research team offers their expectations from Wednesday’s Fed policy decision, with a 50 bps rate hike sealed in.

Key quotes

"At this week's May FOMC meeting, we expect the Fed to lift the target range for the federal funds rate by 50bp to 0.75%-1.00%. May’s hike has already been signaled to markets, with FOMC participants becoming increasingly receptive to front-loaded rate hikes amid resilient data on activity and intensified cost-push price pressures since the March meeting.”

“Given the broad parameters for balance sheet normalization laid out in the March meeting minutes, we expect the monthly run-off caps to ramp up from$35bn in June ($20bn for treasuries,$15bn for agency MBS),to$65bn in July ($40bn/$25bn)and then to the maximum pace of$95bn/month from August.”

"In the press conference, we expect much of the discussion to revolve around the speed at which the committee is prepared to lift its policy rate to neutral, with markets now pricing in 50bp hikes in every meeting through September. We continue to expect 50bp hikes in May and June, with the committee slowing the pace to 25bp per meeting from July onward as it sees signs of slowing inflation."

• EUR/USD is holding itself above 1.0515 as risk-on impulse got underpinned.
• ECB’s Lagarde may dictate the impact of price pressures and the Ukraine crisis.
• The additions in the labor market are seen at 380k.

The EUR/USD pair is gradually advancing higher in the Asian session as the US dollar index (DXY) witnessed exhaustion at elevated levels. The DXY printed a fresh three-year high of 103.93 last week but failed to extend momentum and tumbles lower.

Considering the exhaustion in the asset ahead of the mega event of the interest rate decision by the Federal Reserve (Fed) on Wednesday, the market participants seem to follow the ‘Buy on rumor Sell on news’ trigger. It is highly expected from Fed chair Jerome Powell to sound aggressively hawkish while addressing the economy.  A jumbo rate hike to tackle the galloping impact of multi-decade high inflation, a roadmap of balance sheet reduction, and the guidance for five monetary policy meetings in the remaining year are likely to be the key events.

On the euro front, investors are focusing on the speech from European Central Bank (ECB)’s President Christine Lagarde, which is due on Tuesday. The market participants will find insights into the monetary policy action. Higher inflationary pressures from rising oil and commodity prices are demanding a rate hike to get cool down but fears of recession amid the Ukraine crisis are restricting the ECB to sound hawkish.

Although the events of the Fed rate hike and ECB’s Lagarde speech will remain major key events this week, investors will also focus on the US Nonfarm Payrolls (NFP), which are due later this week. The additions in the labor market are seen at 380k against the prior print of 431k.

• AUD/JPY extends the previous day’s rebound, remains firmer around intraday high.
• MACD teases bulls but the key SMA, symmetrical triangle challenge upside momentum.
• Reserve Bank of Australia Preview: Will a 15 bps rate hike be enough to lift the aussie?

AUD/JPY picks up bids to refresh intraday high around 92.25 during the pre-RBA run-up on Tuesday.

In doing so, the cross-currency pair respects the recently bullish MACD signals while approaching the 200-SMA resistance near 92.30. Also favoring the AUD/JPY buyers are the hopes of a 0.15% rate hike from the Reserve Bank of Australia (RBA), its first rate lift since late 2010.

Even if the quote rises past 92.30, a downward sloping trend line from April 21 and the 100-SMA, respectively around 92.80 and 93.15, will challenge the pair’s further upside.

Alternatively, pullback moves remain elusive until staying beyond the weekly support line, at 91.60 by the press time.

Following that, a downside towards late April lows near 90.45 and the 90.00 threshold can’t be ruled out.

Overall, AUD/JPY remains on the front foot ahead of the key event.

AUD/JPY: Four-hour chart

Trend: Pullback expected

After more than a decade of holding the benchmark interest rate unchanged, the Reserve Bank of Australia (RBA) is up for conveying the likely hawkish monetary policy outcome and Interest Rate Decision around 04:30 AM GMT on Tuesday.

The RBA is expected to increase the benchmark interest rate by 15 basis points (bps) to 0.25% in the upcoming move, mainly to fight inflation and join the league of its foreign friends.

However, the Aussie central bank will remain behind the likes of the Fed and RBNZ, not to forget the BOE and BOC, which makes today’s RBA rate hike interesting. As a result, the RBA Rate Statement will be more important to watch and forecast near-term AUD/USD moves.

Ahead of the event Westpac said,

On the other hand, FXStreet’s Dhwani Mehta says,

How could the RBA decision affect AUD/USD?

AUD/USD bulls approach 0.7100 while extending the bounce off a three-month low during the pre-RBA run-up. The pair’s latest advances could be linked to the hawkish hopes from the RBA, as well as the US dollar’s pullback amid an absence of bond moves, due to holidays in Japan and China.

That being said, the RBA’s 0.15% rate hike is already known and may not even put the Aussie bank near the other major central banks, which in turn suggests the AUD/USD pair’s likely limited bullish reaction in case of a rate lift to 0.25%. Also challenging the moves could be the looming 0.50% Fed rate increase and Australia’s trade linkages with China, which is likely to exert more economic strain considering the dragon nation’s latest covid woes.

Hence, AUD/USD prices may extend the early-day rebound on hawkish RBA but the bulls will seek more, which in turn highlights the RBA rate statement for details, to keep the reins.

Technically, a downward sloping trend line from April 21, near 0.7090 by the press time, holds the key to the AUD/USD pair’s further upside. Should the pair rise past 0.7090, March’s low of 0.7165 will lure the buyers ahead of the key DMAs.

Alternatively, pullback moves may initially aim for the nearby support line close to 0.7030 ahead of the 0.7000 threshold.

Key quotes

AUD/USD Price Analysis: Bulls approach 0.7100 ahead of RBA

Australia's 10-year Treasury yields flirt with seven-year high with eyes on RBA

Reserve Bank of Australia Preview: Will a 15 bps rate hike be enough to lift the aussie?

AUD/USD Forecast: Tumbling ahead of RBA’s announcement

About the RBA interest rate decision

RBA Interest Rate Decision is announced by the Reserve Bank of Australia. If the RBA is hawkish about the inflationary outlook of the economy and rises the interest rates it is positive, or bullish, for the AUD. Likewise, if the RBA has a dovish view on the Australian economy and keeps the ongoing interest rate, or cuts the interest rate it is seen as negative, or bearish.

• GBP/JPY bears are moving in and the hourly support is under pressure. 
• The cross is on the verge of a breakout on the hourly time frame. 

GBP/JPY bears have started to engage following a significant correction of the daily bearish impulse. the cross has corrected 50% of the prior bearish impulse and is meeting a prior structure on the daily chart. The following illustrates the daily chart and hourly chart's structure and prospects for a move lower in the coming sessions to attack the support at 159.60 that would need to give out.

GBP/JPY daily chart

The daily chart is stacking up to be a downside continuation so long as the current resistance holds. 

GBP/USD H1 chart

As per the prior analysis from the New York session, the price has engaged with the hourly support and is correcting:

Prior analysis:

The price has corrected to a 38.2% Fibonacci level and can be expected to move lower for a restest of the support one in die course. There would be some room to go for a restest of the prior support near a 61.8% ratio and 163 the figure in the meantime as the last defence before further downside. 

• Silver rebounds from three-month low while snapping eight-day downtrend.
• Bullish candlestick, RSI rebound suggests further recovery towards short-term resistance line.
• 200-SMA acts as the key barrier, $22.0-21.95 offers strong downside support.

Silver (XAG/USD) prints mild gains around $22.70 as bears take a breather after ruling for consecutive eight days before Tuesday.

The metal’s recovery could also be linked to the “Dragonfly Doji” bullish candlestick, as well as a rebound in the RSI (14) line from the oversold territory.

However, the XAG/USD upside has limited free room as a downward sloping trend line from mid-April, near $23.00 by the press time.

Following that, the 50-SMA and 200-SMA, respectively around $23.55 and $24.70, will challenge the metal buyers.

On the flip side, the latest bottom surrounding $22.12 may restrict the short-term downside.

During the quote’s weakness past $22.12, the lows marked in January and February around $22.00-21.95 will question the silver bears.

Silver: Four-hour chart

Trend: Further recovery expected

• GBP/USD has climbed above 1.2500 as the DXY loses strength.
• Investors are eyeing balance sheet reduction and further guidance from the Fed apart from the rate hike.
• The BOE is expected to raise its benchmark rates by 25 bps.

The GBP/USD pair has attempted a rebound from 1.2473 in the early Tokyo session and is looking to sustain above the psychological resistance of 1.2500. The cable has gained some strength as the US dollar index (DXY) is witnessing some stellar long liquidation after reaching elevated levels.

The DXY seems unable to recapture its 19-year high at 103.93 as clouds of uncertainty over the rate hike decision by the Federal Reserve (Fed) are fading away. A risk-on impulse is finding some attraction and risk-sensitive currencies are gaining momentum. The DXY has done a test below 103.50, at the press time and is likely to skid further. The extremely overbought situation in the momentum oscillators has supported the DXY bears to play the road, at least for a while.

On Wednesday, the Fed is going to elevate the interest rates by 50 basis points (bps) as per the market consensus but what seems more crucial for investors to focus on is the announcement of balance sheet reduction and guidance for the remaining five monetary policy meetings by the end of the year.

Volatility is going to stay longer this week as the interest rate announcement by the Fed will be followed by the Bank of England (BOE)’s monetary policy meeting. The BOE is expected to raise its interest rates by 25 bps. It is worth noting that the BOE elevated its benchmark rates by half a percent in March.

• USD/CAD slides in Tokyo in fragile market conditions ahead of the Fed.
• Fed has scope for a much higher terminal rate relative to the Bank of Canada.

USD/CAD is pressured in Tokyo as the US dollar slides deeper below the 20-year highs that were scored against a basket of currencies on Monday. At the time of writing, USD/CAD is trading at 1.2843 and down some 0.25%, falling from a high of 1.2881 to a low of 1.2841 so far. 

The Federal Reserve is expected to hike rates 50 bp to 1.0% Wednesday. While there will be no new forecasts until the June 14-15 FOMC meeting, another 50 bp hike is widely expected then also. In fact, as analysts at Brown Brothers Harriman note, WIRP suggests nearly 50% odds of a 75 bp hike then. 

''Looking further out,'' the analysts said, ''the swaps market is now pricing in 300 bp of tightening over the next 12 months that would see the Fed Funds rate peak near 3.5%. Because of the media blackout, there are no Fed speakers until Chair Jerome Powell’s post-decision press conference Wednesday afternoon.'' 

The sentiment sent the yield on US Treasuries higher with the 10-year yield traded over the 3% milestone level today, the highest since December 2018. Similarly, the 2-year yield traded near 2.75% today, the highest since April 22 and nearing that day’s high near 2.78%. 

''This uptrend is likely to continue as US inflation runs hot and the Fed continues its aggressive tightening cycle Of note, the 2-year interest rate differentials are moving back in the dollar’s favour after a brief corrective phase last week. In particular, the spreads with Japan (276 bp) and the UK (112 bp) continue to make new cycle highs, while the spread with Germany (248 bp) is lagging a bit.  All three should continue to rise,'' analysts at Brown Brothers Harriman said. 

Meanwhile, analysts at TD Securities said that they think USD/CAD is a tricky proposition given that the Fed has scope for a much higher terminal rate relative to the Bank of Canada. ''We prefer to fade a 1.24/28 range in USD/CAD until proven otherwise.''

• S&P 500 Futures extend the previous day’s rebound from yearly low.
• US Treasury yields remain steady around the highest levels since late 2018.
• DXY retreat, US inflation expectations drop to three-week low.

Global traders consolidate recent losses amid a lackluster Tuesday morning, with holidays in Japan and China facilitating a pullback in the recently strong yields. This, in turn, weighs on the US dollar and helps commodities, as well as Antipodeans, while favoring equities at the latest.

That said, the S&P 500 Futures remain mildly bid around 4,155 whereas the US 10-year Treasury yields hover around 3.0% after refreshing the multi-day top the previous day.

It’s worth noting that the cautious optimism in the market, as well as a pause in the yields, also trigger profit-booking moves of the US Dollar Index, down 0.18% intraday near 103.41 by the press time. The same helps the Gold Price (XAUUSD) to rebound from the 11-week low.

The recent market action lacks any major fundamental support as the covid resurgence in China and geopolitical concerns surrounding Russia stay on the table to challenge risk appetite. Also challenging the market sentiment is the global central bankers’ rush towards tighter monetary policies amid rallying inflation and supply crunch fears.

On a different page, the US inflation expectations, as per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, dropped for the second consecutive day to 2.81% by the end of Monday US session, the lowest in three weeks. This could be linked to the USD’s latest pullback amid an absence of bond moves.

Additionally, the US ISM Manufacturing PMI for April eased to 55.4 versus 57.6 market forecast and 57.1 prior readings while S&P Manufacturing PMI also softened to 59.2 from 59.7 expected and prior, both of which also probe the USD bulls.

Moving on, the Reserve Bank of Australia’s (RBA) monetary policy meeting will be an immediate catalyst for the markets ahead of the US Factory Orders for March, expected at 1.1% versus -0.5% prior. While the RBA’s 0.15% will need extra support, most likely from the Fed, to keep the AUD/USD bulls hopeful, the quote recently refreshed daily tops by approaching 0.7100.

Read: Forex Today: Dollar reigns in a risk averse environment and ahead of central banks’ announcements

• AUD/USD renews intraday high while extending the bounce off three-month low.
• Recovery remains elusive below 0.7090 hurdle, multiple hurdles to stop bears ahead of the yearly low.
• RBA is up for 0.15% rate hike but upcoming elections test buyers.
• Reserve Bank of Australia Preview: Will a 15 bps rate hike be enough to lift the aussie?

AUD/USD takes the bids to refresh intraday high around 0.7070 as bulls flex muscles ahead of the Reserve Bank of Australia’s (RBA) monetary policy meeting on early Tuesday.

The Aussie pair’s latest upside could be linked to the sustained break of the 100-SMA and immediate resistance line on the 15-Minutes chart amid bullish MACD signals.

The upside momentum, hence, eyes the 200-SMA level surrounding 0.7085.

AUD/USD: 15-minute chart

Trend: Pullback expected

However, a downward sloping trend line from April 21, near 0.7090 by the press time, holds the key to the AUD/USD pair’s further upside.

Should the pair rise past 0.7090, March’s low of 0.7165 will lure the buyers ahead of the key DMAs.

Alternatively, pullback moves may initially aim for the nearby support line close to 0.7030 ahead of the 0.7000 threshold.

Though, multiple levels marked since early December 2021 will challenge the AUD/USD bears weakness past-0.7000 around 0.6990.

AUD/USD: Daily chart

Trend: Pullback expected

• USD/CHF oscillates around 0.9780 ahead of the interest rate decision by the Fed.
• The DXY has slipped below 103.60 as profit-booking kicks in.
• A higher reading of SNB’s inflation at 2.6% may turn SNB into a slightly hawkish mood.

The USD/CHF pair is performing lackluster in the Asian session as the asset is displaying back and forth moves in a narrow range of 0.9763-0.9783 ahead of the monetary policy by the Federal Reserve (Fed) on Wednesday. An eight-day winning streak is not displaying any signs of exhaustion in the asset, which favors greenback bulls and signals more upside.

Uncertainty over the rate hike decision by the Fed has paused the Fx domain as the market participants have underpinned a ‘wait and watch’ approach ahead of the monetary policy announcement. An interest rate elevation by 50 basis points (bps) looks imminent as announced at the International Monetary Fund (IMF) meeting by Fed chair Jerome Powell last month. Also, multi-decade inflation and a tight labor market are fulfilling the specifications for a jumbo rate hike.

Meanwhile, the US dollar index (DXY) has slipped below 103.60 firmly after consolidating in a minor range of 103.58-103.66. Profit-booking at elevated levels has dragged the asset lower however, a broad-based strength is still intact.

On the Swiss front, investors are eyeing the release of the Consumer Price Index (CPI), which is due on Thursday. The Swiss National Bank (SNB) is expected to sound slightly hawkish in upcoming conversations as the Swiss Federal Statistical Office is expected to report the yearly inflation at 2.6%, higher than the prior print of 2.4%.

• Gold bears stay in charge and take on a weekly support structure. 
• The bulls could be looking to move in at this juncture for arestest of prior lows. 

Gold is flat on Tuesday and is stuck in between the $1,862.40 lows and $1,864.39 highs so far. S firm USD and soaring Treasury yields continue to weigh on the price of the yellow metal.  Gold dropped around  2% in Monday’s session with readers in anticipation of the Fed will aggressively tighten monetary policy late this week.

The outlook for investment demand remains muted, with gold bugs staring down the barrel of a hawkish Fed, while safe-haven flows associated with the war in Ukraine dries up.

''The market is pricing in nearly 75bp rise in rates in June. However, the rally in the USD is providing the biggest headwind for the gold price,'' analysts at ANZ Bank said. 

''The US Dollar Index has rallied from 98 to 103 in April amid the prospect of higher interest rates. This has offset gains in safe-haven demand amid the Ukraine war and broad weakness in the economic backdrop.''

Meanwhile, the US dollar held just below a 20-year high against a basket of currencies on Monday before an expected rate hike. The potential for the US central bank to adopt an even more hawkish tone than many expect.

The Fed is expected to hike rates 50 bp to 1.0% Wednesday. While there will be no new forecasts until the June 14-15 FOMC meeting, another 50 bp hike is widely expected then also. In fact, as analysts at Brown Brothers Harriman note, WIRP suggests nearly 50% odds of a 75 bp hike then. 

''Looking further out,'' the analysts said, ''the swaps market is now pricing in 300 bp of tightening over the next 12 months that would see the Fed Funds rate peak near 3.5%. Because of the media blackout, there are no Fed speakers until Chair Jerome Powell’s post-decision press conference Wednesday afternoon.'' 

Meanwhile, a contingent of participants also expects the Fed's ability to constrain supply-side inflation is limited, which argues for a stagflationary regime in which gold will be in high demand as a store-of-value, analysts at TD Securities argued.

''However,'' they said, ''the decline in prices is rather nodding to a growing cohort which expects that the last month's inflation print may have marked the peak.''

Nevertheless, the analysts argued that ''with Comex shorts largely wiped out, we've argued that the right tail in gold prices is narrow as few participants remain willing to buy gold in this context.''

Gold technical analysis

The following illustrates the market structure across the weekly time frame putting some perspective on the recent price action, arriving at a bearish bias longer term.

Gold weekly chart

The weekly chart shows the price attempting to break out to the downside, so far being held up at the weekly structure. This leaves prospects of a meanwhile bullish correction to retest the prior lows.

Australia’s benchmark 10-year Treasury yields seesaw around the highest levels since November 2014 as Aussie traders await the Reserve Bank of Australia’s (RBA) monetary policy meeting.

That said, the key bond coupon retreats to 3.30% by the press time of Tuesday’s Asian session, after refreshing the multi-month high with 3.33% levels marked the previous day.

While the RBA’s 0.15% rate hike is likely to help the Australian dollar, as well as the AUD/USD, an absence of Japanese traders and firmer US Treasury yields, may test the quote ahead of the US session. The AUD/USD prices remain positive, up 0.17% around 0.7065 at the latest.

Read: AUD/USD steadies around 0.7050 ahead of RBA, Yields look to reclaim 3%

It’s worth noting that the latest comments from global rating agency Fitch said, “Geopolitical tension and Australia's macroeconomy heighten credit risk.”