CFD Markets News and Forecasts — 04-05-2022

• EUR/USD pares the biggest daily gains in two months around one-week high.
• Overbought RSI triggered consolidation but 200-HMA, multiple levels challenge further downside.
• Key Fibonacci Retracement levels stay on the bull’s radar until the quote breaks nearby support.

EUR/USD bulls seem running out of steam after rising the most since early March, taking rounds to 1.0610-15 during Thursday’s Asian session.

The major currency pair’s latest weakness could be linked to the overbought conditions of the RSI (14).

Even so, the quote holds onto the previous day’s breakout of the 200-HMA, as well as multiple levels marked by a fortnight-long horizontal area, surrounding 1.0590-95. Hence, EUR/USD remains on the buyer’s radar unless breaking the 1.0590 level.

Should the pair drops below 1.0590, a one-week-old rising support line, around 1.0515, may offer an intermediate halt during the fall targeting the latest multi-month low of 1.0471.

Meanwhile, April 27 high near 1.0655 appears immediate resistance for the EUR/USD buyers to watch during the fresh upside.

Following that, the 50% and 61.8% Fibonacci retracement of April 21-28 downside, respectively near 1.0700 and 1.0760, will be in focus.

Overall, EUR/USD is up for the much-awaited corrective pullback after the Fed’s latest action.

EUR/USD: Hourly chart

Trend: Further recovery expected

• GBP/JPY retreats from intraday high, probes three-day uptrend.
• UK PM Johnson pushes EU over NI Protocol compromise.
• Post-Fed rally of Wall Street benchmarks pleased buyers earlier.
• BOE is up for a 25 bps rate hike but Bailey’s comments will be more important for clear directions.

GBP/JPY feels the heat of pre-BOE anxiety during Thursday’s Asian session as the cross-currency pair eases to 163.20, consolidating the three-day gains. In addition to the cautious mood ahead of the Bank of England (BOE) monetary policy decision, risk-negative headlines concerning Russia and covid also test the pair buyers of late.

The quote refreshed a three-day high during the aftermath of the US Federal Reserve’s (Fed) monetary policy as equities rallied on Fed Chair Powell’s rejection of a rate hike worth 75 basis points (bps) in upcoming meetings. It should be noted that the matched market forecasts by announcing 50 basis points (bps) of a lift to the benchmark rate, as well as conveyed quantitative tightening to begin from June, initially with a $47.5 billion cap per month.

Although the Wall Street benchmarks printed 3.0% average gains, S&P 500 Futures drops 0.15% by the press time as markets shift attention from the hopes of fresh liquidity infusion due to the disappointment from the Fed.

Talking about the risk-negative headlines, UK PM Boris Johnson renewed Brexit woes by giving the European Union (EU), “one last chance” to compromise over Northern Ireland (NI) protocol, per The Times. The move could have been a political gimmick as NI elections begin on Thursday. Elsewhere, the EU’s sixth round of sanctions on Russia and China’s covid woes, also challenge the market sentiment, as well as the GBP/JPY prices.

Moving on, the BOE is up for a 0.25% rate hike, as already conveyed in the previous meeting. However, the escalating inflation pressure pushes market players to seek something more than what’s promised, which in turn may disappoint GBP/JPY buyers if the “Old Lady” tracks the Fed.

Read: Bank of England Preview: Bailey set to bring sterling down with dovish hike

Other than the BOE, NI elections and geopolitical/covid news will also be important for the GBP/JPY traders to watch for clear directions.

Technical analysis

GBP/JPY bulls failed to cross the 21-DMA hurdle, around 163.75 at the latest, despite the recent run-up, which in turn keeps sellers hopeful to test the weekly ascending support line, close to 162.20 at the latest.

• WTI has advanced sharply higher as the odds of a Europe’s embargo on Russian oil bolstered.
• The EU may phase out the dependency on Russian oil within six months.
• The US EIA has reported an unexpected rise in oil inventories by 1.2 million barrels.

West Texas Intermediate (WTI), futures on NYMEX, have surged above $107.00 as the fears of an embargo on Russian oil by the largest trading bloc, European Union (EU), renewed. The EU, on Wednesday, spelled out its plans to prohibit Russian oil imports. This has raised concerns over the supply catalyst in an already tight oil market as a prohibition of Russian oil due to its invasion of Ukraine from 3.5 million barrels per day (bpd) customer will worsen the demand-supply mechanism.

Although the EU is indicating an embargo on Russian oil within six months, a lot of questions have been raised with respect to the alternatives to fulfilling the bumper demand of oil by Europe. Inventories are so tight in the oil market considering the falling stockpiles in US Strategic Reserves and OPEC’s sticky indication to the closed deal of discussed oil supply, along with their intention to sustain oil prices above the psychological mark of $100.00.

On the demand front, oil prices have ignored the build-up of unexpected oil stockpiles last week. The US Energy Information Administration (EIA) reported the oil inventories at 1.2 million barrels despite the release of oil from its strategic reserves. Going forward, investors will keep an eye on the OPEC meeting, which is due on Thursday. The OPEC cartel is not expected to shore up the global supply and will maintain its price stability above $100.00.

• USD/CAD grinds lower following the biggest daily fall in a fortnight.
• Impending bear cross, trend line breakdown and receding strength of MACD’s bullish bias favor sellers.
• 21-DMA, 100-DMA lure short-term sellers while bulls need a clear break of 1.2900 for conviction.

USD/CAD bears lick the post-Fed wounds around mid-1.2700s, having declined the most in two weeks, during Thursday’s Asian session.

Although the Loonie pair remains trapped inside a 15-pip trading area around 1.2750 after the latest slump, sellers keep the reins as multiple catalysts hint at the quote’s further downside.

Among them, a clear break of the previous support line from April 21 and a bear cross of the 21-DMA over the 100-DMA act as crucial factors. Also supporting USD/CAD bears are the recently easing MACD bullish signals and steady RSI.

That said, the pair’s further downside towards 21-DMA, around 1.2690 by the press time, becomes imminent. However, the 100-DMA level of 1.2681 may test the USD/CAD declines afterward. Also likely to challenge the quote’s south-run is early April’s peak of 1.2673.

Alternatively, the corrective pullback may initially aim for the 1.2800 threshold before the mid-March top surrounding 1.2875.

It’s worth noting, however, that a confluence of the previous support line and a two-month-old horizontal line, around 1.2900, appears a tough nut to crack for the USD/CAD bulls afterward.

USD/CAD: Daily chart

Trend: Further weakness expected

• The AUD/JPY trimmed last week’s losses and is gaining 2.37% in the week.
• The market mood improved once US central bank chief Jerome Powell pushed against aggressive rate hikes as US equities cheered the move, closing in the green.
• AUD/JPY Price Forecast: Paired last week’s losses and ready to launch a retest of the YTD high near 96.00

The Australian dollar finally rallied vs. the Japanese yen, spurred by an upbeat market mood, courtesy of the US central bank, as the Fed hiked rates 50-bps. At the same time, its Chief Jerome Powell emphasized that 75-bps are not “on the table” in subsequent meetings. At 93.80, the AUD/JPY illustrates the strength of the uptrend after rallying from 92.20s to 93.80s.

Asian equity futures to open strong amidst an upbeat sentiment

Sentiment-wise, investors’ mood is cheerful. US equities rallied, supported by Jerome Powell, and finished with gains between 2.81% and 3.41%. Meantime, Asian stock futures look set to open higher despite China’s coronavirus crisis. The Ukraine-Russia conflict appears to last longer than estimated but has taken the backseat as traders remain turned to the global central bank’s monetary policy decisions.

However, news across the wires reported the reiteration of Russia that Kyiv desire to withdraw from the negotiation process, according to Al Jazeera. Meanwhile, Euro area countries proposed a ban on Russian oil, which would be effective in six months with no gradual phase-out, as reported by Reuters.

AUD/JPY Price Forecast: Technical outlook

The AUD/JPY’s Wednesday’s price action finally broke above a 10-day old downslope resistance trendline, a signal for AUD/JPY bulls to pull the trigger and push prices higher. However, recent statements by the Japanese Minister of Finance kept investors at bay from opening fresh longs in the pair; but Fed Chair Powell gave the greenlight, pushing back against 75-bps increases. Consequently, the AUD/JPY rallied and pared last week’s gains around 93.83, Wednesday’s daily high.

With that said, the AUD/JPY remains set for a renewed test of 2022 YTD highs. The AUD/JPY first resistance would be 94.00. A breach of the latter would expose the March 28 swing high at 94.32, followed by the 95.00 figure. Once cleared, the next ceiling level would be the YTD high at 95.74.

• USD/CHF finds a minor pullback at around 0.9720 after plummeting from 0.9840.
• The Fed hikes its rates by 50 bps to tame the soaring inflation.
• Going forward, Swiss CPI and Unemployment Rate will remain in focus.

The USD/CHF pair has displayed an intense sell-off after failing to sustain above the resistance of 0.9840 as the rate hike announcement by the Federal Reserve (Fed) underpinned the positive market sentiment. The asset has plunged to near 0.9720 but is witnessing a minor pullback as profit-booking kicks in.

Potential selling pressure came after the Federal Reserve (Fed) dictated a rate hike by 50 basis points (bps) and its strategic planning to curb the inflation mess. The Fed has announced that the balance sheet reduction program will be initiated to tame the galloping inflation along with more jumbo rate hikes in the next policy meetings.

Inflation is skyrocketing and a restrictive policy is highly required for a prolonged period but what favors is the solid US economy that can absorb the shocks of price pressures. Also, the announcement that has delighted the market participants is the gradual approach to tightening the policy. The Fed has eliminated the hopes of a 75 bps rate hike by stating that the option is not into consideration.

On the Swiss front, the focus is on the release of the Consumer Price Index (CPI), which is due in the European session. The yearly Swiss CPI is seen at 2.5% against the prior print of 2.4%. Inflation in the Swiss area is advancing modestly but does not favor any hopes of a hawkish stance from the Swiss National Bank (SNB). Apart from that, Swiss agencies will also report the Unemployment Rate, which is expected to land at 2.2%, similar to its previous print.

Late Wednesday, Reuters came out with the news saying, “UK Prime Minister Boris Johnson is set to give talks with the European Union over Northern Ireland "one last chance" before introducing legislation that will allow him to override the controversial protocol governing post-Brexit trade, The Times reported.”

Additional quotes

GBP/USD pares post-Fed rally ahead of BOE

The news allows GBP/USD bulls to take a breather as prices retreat towards 1.2600, following a 178-pip rally to 1.2638, mainly led by the Fed’s rejection of a 0.75% rate hike.

It’s worth noting that the cautious sentiment ahead of the Bank of England (BOE) monetary policy meeting also would have tested the cable buyers.

Read: GBP/USD oversteps 1.2630 as Fed’s policy announcement cheers market mood, BOE eyed

• AUD/USD bulls take a breather around two-week top after the heavily daily jump since November 2011.
• Fed matched market forecasts of 0.50% rate hike, announced balance sheet normalization in June.
• Powell’s rejection of a 75 bps increase in Fed rate triggered much-awaited relief rally.
• Australia's trade numbers for March, China’s return and risk catalysts will be crucial for immediate directions.

AUD/USD dribbles around 0.7250 following the biggest daily jump since late 2011 as buyers struggle to digest the Fed-led gains ahead of the Australian trade numbers. Also likely to have tested the Aussie bulls during the early Asian session on Thursday are the cautious moves as China begins the week’s trading after multiple holidays.

Having initially cheered the US dollar pullback and upbeat Australia Retail Sales, not to forget keeping the post-RBA optimism, AUD/USD rallied 180 pips after Fed Chairman Jerome Powell rejected the idea of a 0.75% rate hike in the upcoming meeting.

The Fed, however, kept its word by announcing 50 basis points (bps) of a lift to the benchmark rate, as well as conveyed quantitative tightening to begin from June, initially with a $47.5 billion cap per month.

It’s worth noting that the softer prints of the US ISM Services and ADP Employment Change for April also offered a background for the AUD/USD upside.

Alternatively, anxiety ahead of the key Aussie data and EU’s sixth round of sanctions on Russia, as well as China’s covid woes, also join the forces to test the AUD/USD bulls as Beijing’s return to markets makes traders cautious.

That said, Australia’s headline Trade Balance may rise to 8500M in March versus 7457M prior. Aussie Building Permits for March and China’s Caixin Services PMI for April are also in the economic docket and will be important to watch for immediate directions, in addition to the risk catalysts.

Technical analysis

AUD/USD prices remain below the 100 and 200 DMAs, respectively around 0.7265 and 0.7285, despite the latest rally, which in turn teases a pullback towards the previously important hurdle, namely the March’s low of 0.7165.

• GBP/USD has surged above 1.2630 as the Fed discarded the odds of a 75 bps rate hike.
• The US economy is strong enough to tackle restrictive monetary policy.
• The BOE will unveil its monetary policy on Wednesday, a 25 bps rate hike looks likely.

The GBP/USD pair is scaling sharply higher as the announcement of the interest rate decision by the Federal Reserve (Fed) has infused fresh blood into the cable. Pound bulls have attracted some significant bids around 1.2483 and have pushed the cable above 1.2630.

Earlier, the asset remained in the bear’s grip amid uncertainty over the rate hike announcement by the Fed. Now, the agency has stepped up its interest rates by 50 basis points (bps) and has provided a roadmap, which is dictating the further action precisely. For the next couple of meetings, Fed has favored consideration of a half-a-percent rate hike and has discarded the odds of a 75 bps rate hike. Also, the balance sheet reduction has been activated to tame the inflation mess. The fed will continue with its restrictive policy till it sees some signs of progress in achieving price stability. Adding to that, the Fed cleared that the US economy can handle the restrictive policy and the agency does not see signs of recession.

Going forward, uncertainty is going to stay a little longer in the cable as the Bank of England (BOE) will come up with its monetary policy announcement on Thursday. BOE Governor Andrew Bailey is expected to elevate its interest rate by 25 bps. Inflation in the UK’s zone has also climbed to the rooftop and the BOE needs to leash it on a serious note.

• The EUR/JPY record gains for the second consecutive day and remains defensive as a head-and-shoulders pattern looms.
• The sentiment is positive; once Fed Chair Powell said that 75-bps increases are not in the table, US equities rallied sharply.
• EUR/JPY Price Forecast: The head-and-shoulders clouds the prospects of a higher EUR.

The EUR/JPY remains subdued amidst an upbeat market mood, courtesy of the telegraphed 50-bps hike by the US Federal Reserve, and also as Fed’s Chief Powell discarded 75-bps increases, US equities rallied. At the time of writing, the EUR/JPY is trading at 137.19 as the Asian Pacific session begins.

The market sentiment is upbeat, as US equities closed with hefty gains, between 2.81% and 3.41%. Asian stocks futures look set to open higher despite China’s coronavirus crisis. Developments around the Ukraine-Russia conflict remain in the backseat as investors focus on the central bank’s monetary policy decisions.

However, news across the wires reported the reiteration of Russia that Kyiv desire to withdraw from the negotiation process, according to Al Jazeera. Meanwhile, Euro area countries proposed a ban on Russian oil, which would be effective in six months with no gradual phase-out, as reported by Reuters.

On Wednesday, the EUR/JPY pair opened near the 137.00 mark and seesawed around a 20-pip range ahead of the US central bank monetary policy meeting. Once the headline crossed wires, the EUR/JPY seesawed around 136.60-137.40, settling afterward at around  137.20s.

EUR/JPY Price Forecast: Technical outlook

From a daily chart perspective, the EUR/JPY bias remains upwards, but a formation of a head-and-shoulders chart pattern looms. To question the latter’s validity, EUR/JPY bulls need to reclaim 137.98. Once done, the head-and-shoulders would not be valid.

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.

• EUR/USD soars above 1.0620 as investors underpinned risk-sensitive currencies on Fed’s policy release.
• The Fed vapors the odds of 75 bps in the remaining five monetary policies.
• Euro bulls ignored the underperformance of the Retail Sales.

The EUR/USD pair has witnessed a juggernaut upside move after the Federal Reserve (Fed) feature a rate hike by 50 basis points in the New York session. The shared currency bulls have established the asset above 1.0600 and are driving it higher towards the next barricade at 1.0650.

Well, an interest rate decision of a 50 bps rate hike was highly expected by the market participants therefore, investors have already discounted the announcement however, what made the Fx domain underpin the risk-sensitive currencies is the guidance. Fed chair Jerome Powell announced that a rate hike by 75 bps is not into consideration but investors should brace for more 50 bps interest rate hikes.

The Fed will remain data-dependent now and need evidence of declining price pressures for a moderate stance. The central bank will aim for progress in price stability, which will require a tight monetary policy for a prolonged period. The better fact is, that the US economy can handle the restrictive monetary policy.

Meanwhile, euro bulls ignored the underperformance of Euro Retail Sales, released on Wednesday. The Retail Sales landed at 0.8% lower than the market consensus of 1.4% and the prior print of 5.2%.

Going forward, investors will focus on the US Nonfarm Payrolls (NFP), which will release on Friday. The US NFP is expected to land at 394k against the previous figure of 431k.

• NZD/USD rallies on US dollar weakness following the Fed. 
• The Fed has dialled back 75bps rake hike expectations. 

At 0.6540, NZD/USD is consolidating the post-Federal Reserve rally around the highs of Wednesday. The kiwi rallied from a low of 0.6425 to a high of 0.6556.

The US dollar and US Treasury yields were under pressure following the Federal Reserve interest rate decision, statement and the Fed chair's presser. The US 2-year Treasury yield has fallen by some 5% to a low of 2.612%. 

After hiking by 50bps today and formally starting quantitative tightening as the Fed seeks to get a grip on inflation, Jerome Powell gave the green light to a series of additional 50bp hikes but said 75bps was not something that was being considered. 

''Ruling out 75bp hikes will limit scope for a blowout in expectations (which were, and are still split between 50 and 75bps for the June meeting), in turn weighing on the USD broadly,'' analysts at ANZ Bank said arguing that the ''correction seems warranted given the potential for Fed expectations to keep recalibrating lower.''

For the Reserve Bank of New Zealand, yesterday's labour data will have been eyed. The RBNZ had which had pencilled in a 3.1% lift in private sector labour costs in the February MPS. As analysts at ANZ Bank explained, ''the data will confirm that the labour market will be a key driver of domestic inflation pressures over 2022. This will require ongoing interest rate hikes to bring labour demand back in line with labour supply and nip a potential wage-price spiral in the bud. That’s consistent with our expectation for a 50bp hike in May.''

NZD/USD technical analysis

NZD/USD has rallied into a resistance area and would be expected to revert. The imbalance of price to the prior highs could be mitigated in the coming days/ and or sessions all the way to a 61.8% Fibonacci retracement.

The Reserve Bank of New Zealand's governor Adrian Orr is crossing the wires and has stated that he doesn't see stagflation as a core risk. 

In other comments, he said ''it's business as usual'' on monetary policy and the central banks have ''no regrets on monetary policy,'' and that he is ''proud of where we are''.

He added that ''being too out of step with others has risks.''

Meanwhile, the kiwi has rallied in the immediate aftermath of the Federal Open Market Committee meeting where the Fed announced a 50bp rate hike and quantitative tightening starting in June. NZD/USD is up some 1.75% on the day. 

What you need to take care of on Thursday, May 5:

The American dollar plunged after the US Federal Reserve monetary policy decision. The central bank delivered as expected, as the central bank raised rates by 50 bps to a range of 0.75% to 1% while announcing they would begin trimming the balance sheet on June 1. They would start with a $47.5 billion cap on monthly runoff and rise to $95 billion monthly after three months.

The market did not react to the announcement but later to chief Powell’s words. Among other things, Powell noted that the Russian invasion of Ukraine adds to already overheated inflation, remarking that the central bank is highly committed to taming it. He then dismissed the chance of a 75 bps while adding that core inflation is nearing a peak, although more evidence is needed. The greenback plummeted as stocks rallied on relief.

Asian and European indexes closed in the red, but Wall Street soared. The Dow Jones Industrial Average added 932 points, while the Nasdaq Composite gained 401 points. The S&P closed the day 2.99% higher.

US government bond yields, on the other hand, eased, with the one on the 10-year note settling at 2.93% after peaking at 3.01%.

Meanwhile, European Commission President Ursula von der Leyen presented the sixth pack of Russian sanctions. She said the region would phase out the Russian supply of crude oil and refined products by the end of the year. The news weighed on high-yielding assets, keeping European indexes trading in the red amid the potential effects on economic growth. US Treasury Secretary Janet Yellen later noted that such a move could drive oil prices higher and that she needs to see the conditions of how this will be accomplished.

Commodity-linked currencies benefited the most from the broad dollar’s weakness combined with soaring equities. AUD/USD trades around 0.7260, while USD/CAD is down to 1.2730.

The EUR/USD pair trades at 1.0624, while GBP/USD advanced beyond the 1.2600 figure. Even safe-haven CHF and JPY posted gains against the greenback.

Gold currently trades at $1,883 a troy ounce while crude oil price resumed their advances, with WTI now at around $107.60 a barrel.

The Bank of England will announce its monetary policy decision on Thursday.

• US dollar plummets as the Fed dials back expectations of 75bp hikes.
• The Fed gives the nod to a series of 50bps hikes instead.

Both the US dollar and US Treasury yields are under pressure following the Federal Reserve interest rate decision, statement and the Fed chair's presser. The US 2-year Treasury yield has fallen by some 5% to a low of 2.612%. 

After hiking by 50bps today and formally starting quantitative tightening as the Fed seeks to get a grip on inflation, Jerome Powell gave the green light to a series of additional 50bp hikes but said 75bps was not something that was being considered. 

The Federal Reserve is now "highly attentive" to inflation risks and amid “robust” job gains "ongoing increases" in the Fed funds rate will be "appropriate". The Fed is starting quantitative tightening and a press release with the Fe's plans for reducing the size of the balance sheet was released showing $47.5bn per month that will start on June 1st before getting to a "max" of $95bn in September:

Nevertheless, the markets had been pricing in a more aggressive stance at the Fed. The initial knee-jerk “sell-the-fact” reaction in the greenback as the Fed delivered the expected 50bp hike was exacerbated when Powell took 75bps rate hikes off the table. This is giving risk appetite a boost and the euro is making a case for a significant multi-week correction that could take place between now and the next meeting in June.

In turn, the DXY index which is calculated by factoring in the exchange rates of six foreign currencies vs. the greenback is set up for a move that could extend as far as 101.00 in the coming days/weeks:

The M-formation is a bullish reversion pattern where the price would be expected to retest the neckline, prior to a more significant move to the downside and towards the old resistance structure. However, much will depend on this week's Nonfarm Payrolls data. 

If the US jobs data on Friday fuels expectations around potentially larger than 50bp rate hikes, then the DXY bulls will be back in play and the euro will be at risk of moving below 1.0500. The euro is, by far, the largest component of the DXY index, making up 57.6% of the basket.

The W-formation there is also compelling in this regard:

The euro is headed towards a 38.2% Fibonacci retracement of the daily bearish impulse. This has a confluence with prior daily highs. Either way, the W-formation is a bearish pattern and a retest of the neckline would be expected to occur in due course. Whether the euro can continue higher will depend on matters related to geopolitics as well as the market's appetite for the US dollar. Unstable risk sentiment, COVID and a lower appetite for emerging markets combined with the Fed's focus on fighting inflation are all factor that would be expected to underin the greenback. 

• The AUD/USD record gains of more than 130-pips and eyes the 100-DMA at 0.7260.
• The Fed raised 50-bps to the Federal Funds Rates (FFR) and would begin its QT on June 1.
• Fed’s Chair Powell emphasized that 75-bps increases are not something the Fed is considering.

The AUD/USD is rallying sharply and jumped from 0.7090s to 0.7230s after the Federal Reserve decided to raise rates by 50-bps and announced the start of the Quantitative Tightening (QT) on June 1, as the US central bank aims to trim its $8.9 trillion balance sheet. At around 0.7220s, the AUD/USD reflects investors’ sentiment as Fed Chair Jerome Powell speaks.

So far, the Fed’s policy decision seems to be perceived as hawkish, as Fed money markets futures are pricing in a 77% chance of a 50-bps hike at the June meeting and a 23% chance of a 75-bps increase.

At his press conference, Fed Chair Powell said that 75-bps increases are not something the Fed is considering, and they are not actively considering it. He added that “if we see what we expect to see,” 50-bps increases would be“on the table” at the following couple of FOMC meetings.

Remarks of the Fed’s decision

The Federal Open Market Committee (FOMC) revealed in its monetary policy statement that inflation is “expected to return to its 2% objective” and expressed that high prices reflect supply and demand imbalances are related to the Covid-19. The central bank reiterated that it would remain “attentive to inflation risks.”

Also, the US central bank acknowledged the negative print in Q1’s GDP and said that “household spending and business fixed investment remained strong.”

Concerning the balance sheet reduct, the Fed will begin on June 1 at a slower pace than estimated. The central bank would reduce its balance sheet by $47.5 billion for the first three months. The initial cap of US Treasuries would be $30 billion, while $17.5 billion of mortgage-backed securities (MBS). After three months, the Quantitative Tightening (QT) will hit $60 billion in US Treasuries and $30 billion on MBS.

AUD/USD Market’s reaction

The AUD/USD immediately surged above the R1 daily pivot at 0.7150, rallying sharply towards the R3 pivot point around 0.7250, and is pairing last week’s losses. At the time of writing, the AUD/USD is shy of the daily highs, around 0.7220s.

Jerome Powell, Chairman of the Federal Reserve System, is delivering his remarks on the monetary policy outlook at a press conference following the FOMC's decision to hike the policy rate by 50 basis points in May.

Key quotes

"As we raise interest rates, demand moderates."

"Businesses will invest a little less, consumers will spend a little less."

"There may be some pain for people in us getting inflation back down to 2% but bigger pain not dealing with it."

"No one should look at any summary of economic projections as a resting place."

"It's just us adapting to the data and using our tools to deal with it."

"Wages are to some extent being eaten up by inflation."

"We've got to get back to price stability to stop those wages being outpaced by inflation."

"Long expansions are good for labor market."

"The best thing for everyone is to get back to price stability."

About Jerome Powell (via Federalreserve.gov)

"Jerome H. Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term*. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."

"*Note: On February 4, 2022, the Federal Reserve Board named Jerome H. Powell as Chair Pro Tempore, pending Senate confirmation to a second term as Chair of the Board of Governors."

• Gold is benefiting from safe-haven flows and a dialling back of an uber hawkish Fed. 
• Fed's chairman, Powell, has taken out 75bps rate hike speculation in markets.  

At $1,885, the gold price is rallying some 0.87% on the day, breaking out of sideways consolidation and taking on a critical daily resistance area after Federal Reserve chairman, Jerome Powell disappointed the more hawkish of the financial market's participants. 

Fed futures were initially pricing in a higher chance of a 50 basis point hike at the June meeting before Powell spoke, but the US dollar has come under strong selling pressure during the press conference. Powell stated that 75bps hikes were not on the table and that it will be 50bps at the next two meetings if the members of the board see what they expect to see.

The comments have stripped the 2-year Treasury yield down to a low of 2.614% so far, sinking the US dollar index to 102.50 from the post-Fed interest rate decision highs of 103.61. The gold price has benefitted from a combination of the dialling down of 75bp hikes and safe-haven flows given the uncertainty expressed by the Fed over the Ukraine crisis.  

Meanwhile, a press release has also been published with the plans for reducing the size of the balance sheet. 

Gold technical analysis

Gold has rallied into the daily resistance from an area of demand from where the price last reacted in a significant fashion leading to what would be fresh cycle highs. However, the bulls need to get above $1,900 to mark a more convincing bullish case for higher on the charts. Failure to do so could otherwise lead to a downside extension towards $1,820 in due course. 

Jerome Powell, Chairman of the Federal Reserve System, is delivering his remarks on the monetary policy outlook at a press conference following the FOMC's decision to hike the policy rate by 50 basis points in May.

Key quotes

"Certainly possible Fed will need to move policy to restrictive levels."

"If we need to do that, will not hesitate."

"We are absolutely prepared to do that."

"Fed does see restoring price stability as absolutely essential."

Price stability is particularly essential for labor market."

"We've been hit by historically large inflationary shocks since the pandemic."

"We have to look through that and find price stability out of this."

"It's going to be very challenging to achieve price stability."

"If we think it's appropriate, we will take rates into restrictive levels."

"The decision to do that will be on the table when we reach neutral."

"I expect we will get to neutral expeditiously."

"Effect of shrinking balance sheet is uncertain."

"People estimate that broadly on the path we are on balance sheet reduction will deliver an equivalent of 1/4 pct point rate increase over the course of a year."

"Important they know we know how painful high inflation is."

"Monetary policy is working through expectations."

"Markets think our forward guidance is credible."

About Jerome Powell (via Federalreserve.gov)

"Jerome H. Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term*. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."

"*Note: On February 4, 2022, the Federal Reserve Board named Jerome H. Powell as Chair Pro Tempore, pending Senate confirmation to a second term as Chair of the Board of Governors."

Jerome Powell, Chairman of the Federal Reserve System, is delivering his remarks on the monetary policy outlook at a press conference following the FOMC's decision to hike the policy rate by 50 basis points in May.

Key quotes

"We understand the pain from high inflation."

"It's our job is to make sure high inflation doesn't get entrenched."

"Bringing down inflation is not going to be pleasant."

"Raising rates isn't going to be pleasant, but need to restore stable prices."

"Everyone will be better off, the sooner we get this job done."

"Good chance we can bring inflation down without significant increases in unemployment."

"Economy is doing fairly well."

"We expect productivity to be solid this year."

"Nothing in economy suggests it is close to recession."

"We have a good chance of avoiding a recession."

"We have a good chance to restore price stability without a recession."

"There should be room to reduce surplus demand without putting people out of work."

"That said, Fed does not have surgical tools."

"No one thinks this will be easy."

"There is a plausible path to avoid recession."

About Jerome Powell (via Federalreserve.gov)

"Jerome H. Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term*. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."

"*Note: On February 4, 2022, the Federal Reserve Board named Jerome H. Powell as Chair Pro Tempore, pending Senate confirmation to a second term as Chair of the Board of Governors."

Jerome Powell, Chairman of the Federal Reserve System, is delivering his remarks on the monetary policy outlook at a press conference following the FOMC's decision to hike the policy rate by 50 basis points in May.

Key quotes

"Ukraine war, China lockdowns both likely to add to headline inflation."

"Both issues also likely to limit progress on supply chain issues being resolved."

"Both Ukraine and Russia situations could make the supply chain situation worse."

"Russia, China situations are both negative shocks."

"For now, we are focused on doing the job we need to do on demand."

"Supply-side issues put the central bank in a difficult situation."

"Need to get labor supply and demand in better balance, no particular goal on the right number of job vacancies."

"What we would like to see is progress on wages, inflation."

"Policy works through interest-sensitive spending and asset prices broadly."

About Jerome Powell (via Federalreserve.gov)

"Jerome H. Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term*. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."

"*Note: On February 4, 2022, the Federal Reserve Board named Jerome H. Powell as Chair Pro Tempore, pending Senate confirmation to a second term as Chair of the Board of Governors."

Jerome Powell, Chairman of the Federal Reserve System, is delivering his remarks on the monetary policy outlook at a press conference following the FOMC's decision to hike the policy rate by 50 basis points in May.

Key quotes

"We are raising rates expeditiously to a broad range, plausible levels of neutral."

"We are raising rates expeditiously to a broad range of neutral."

"No bright red line on what neutral is."

"Will be making a judgment about whether we've done enough."

"We will not hesitate to go higher if we have to on rates."

"If that path involves levels higher than neutral, we will not hesitate to go there."

"If higher rates are required, we will not hesitate."

"We don't see strong evidence that inflationary psyschology has changed."

"Short-term inflation expectations are quite elevated."

"We don't see a wage-price spiral."

"We know we need to expeditiously move policy rate up to more normal levels and keep going if we have to."

About Jerome Powell (via Federalreserve.gov)

"Jerome H. Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term*. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."

"*Note: On February 4, 2022, the Federal Reserve Board named Jerome H. Powell as Chair Pro Tempore, pending Senate confirmation to a second term as Chair of the Board of Governors."

• USD/CAD smashes below daily support on Fed Powell. 
• The Fed expects to hike rates by 50bps at the next two meetings, not 75bps, US yields and the US dollar are falling. 

At 1.2754, USD/CAD was pressured through a key daily support area following the Federal Reserve and during the press conference. The pair has fallen from a high of 1.2853 to score a post Fed low of 1.2785 so far. 

The hike was hawkish and Fed futures are pricing in a higher chance of a 50 basis point hike at the June meeting. 77% priced for 50bps and 23% for a 75 basis point hike. Interest rates futures also suggest a 94% probability of an effective fed funds rate of at least 2.75% at year-end.

The Fed anticipates that ongoing increases in the target range will be appropriate as the central banks if highly attentive to inflation risks. 

A press release has also been published with the plans for reducing the size of the balance sheet. 

Fed Powell's presser has sunk the US dollar further as the chairman says 75bps is not something that the Fed is looking at and that it will be 50bps at the next two meetings if they see what they expect to see. USD/CAD is falling:

USD/CAD technical analysis

As per the prior session's analysis, USD/CAD Price Analysis: Bears have moved in to test bullish commitments at critical daily support, the current price action gives a prima facie bias to the bearish scenarios:

The price is mitigating the imbalance of the prior bullish impulse and could be on the way to 1.2720. 

• The USD/JPY is almost flat post-Fed 50 bps rate hike, the first in 20-years.
• The Quantitative Tightening (QT) will begin on June 1.
• On the headline, USD/JPY fluctuated around the 129.70-130.37 range.

The USD/JPY remains steady as the US Federal Reserve decided to raise rates by 50-bps while announcing the reduction of its $8.9 trillion balance sheet. At the time of writing, the USD/JPY is trading around 129.40s as traders listen to Fed Chief Jerome Powell’s press conference.

Summary of the FOMC monetary policy statement

The US central bank stated that inflation is “expected to return to its 2% objective and the labor market to remain strong with appropriate monetary policy firming.” However, the FOMC stated that high prices reflect supply and demand imbalances are related to the Covid-19 pandemic. The Fed reiterated that it would remain “attentive to inflation risks.”

The committee acknowledged the negative print in Q1’s GDP and said that “household spending and business fixed investment remained strong.”

Concerning geopolitics, particularly the Ukraine-Russia war, the US central bank stated that “implications for US economy highly uncertain but in the near term invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.” Furthermore, they added that the war is “causing tremendous human and economic hardship.”

Regarding the balance sheet reduction, the Fed said it would begin on June 1. The central bank will initially cap US Treasuries by $30 billion per month. Regarding agency debt and mortgage-backed securities (MBS), the Fed will reduce it by $17.5 billion per month. In both cases, the cap will be lifted after three months, as US Treasuries reduction will hit $60 billion, while the MBS cap will increase to $30 billion.

USD/JPY Reaction to the headline

The USD/JPY initially reacted downwards, as the decision was seen as a “buy the rumor, sell the fact” event and printed a daily low of around 129.73. Nonetheless, once market participants digested the Fed monetary policy statement, the USD/JPY jumped towards daily highs above 130.30s until settling around current levels, as Fed Chair Jerome Powell took the stand.

Federal Reserve Chairman Jerome Powell Press conference: here

Jerome Powell, Chairman of the Federal Reserve System, is delivering his remarks on the monetary policy outlook at a press conference following the FOMC's decision to hike the policy rate by 50 basis points in May.

Key quotes

"75 bps hike we are not actively considering."

"Broad sense that additional 50 bps increases should be on the table for next couple of meetings."

"Test is economic and financial conditions as they evolve."

"Expectations are that we'll start to see inflation flattening."

"Some evidence core PCE peaking."

"But we don't want just some evidence on inflation, we want progress."

"Difficult to give forward guidance, leaving room to look at data."

"Want to see evidence inflation is lower."

About Jerome Powell (via Federalreserve.gov)

"Jerome H. Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term*. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."

"*Note: On February 4, 2022, the Federal Reserve Board named Jerome H. Powell as Chair Pro Tempore, pending Senate confirmation to a second term as Chair of the Board of Governors."

Jerome Powell, Chairman of the Federal Reserve System, is delivering his remarks on the monetary policy outlook at a press conference following the FOMC's decision to hike the policy rate by 50 basis points in May.

Key quotes

"Wages matter a fair amount."

"Wages are running high."

"Wages are a good illustration of how tight labor market is."

"We think supply and demand will come back into balance, wage inflation will moderate."

"We have a good chance for softish landing."

"Doesn't seem we are anywhere close to a downturn."

"We do expect it will be very challenging though."

About Jerome Powell (via Federalreserve.gov)

"Jerome H. Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term*. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."

"*Note: On February 4, 2022, the Federal Reserve Board named Jerome H. Powell as Chair Pro Tempore, pending Senate confirmation to a second term as Chair of the Board of Governors."

Jerome Powell, Chairman of the Federal Reserve System, is delivering his remarks on the monetary policy outlook at a press conference following the FOMC's decision to hike the policy rate by 50 basis points in May.

Key quotes

"Inflation has surprised to upside and further surprises could be in store."

"We will strive not to add more uncertainty to a highly uncertain environment."

"Economy can handle tighter monetary policy."

"America is well-positioned to handle tighter policy."

"I expect will get some additional labor participation, tending to hold unemployment rate up a little."

"We think job creation will slow."

"Certainly possible unemployment could go down further."

About Jerome Powell (via Federalreserve.gov)

"Jerome H. Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term*. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."

"*Note: On February 4, 2022, the Federal Reserve Board named Jerome H. Powell as Chair Pro Tempore, pending Senate confirmation to a second term as Chair of the Board of Governors."

Jerome Powell, Chairman of the Federal Reserve System, is delivering his remarks on the monetary policy outlook at a press conference following the FOMC's decision to hike the policy rate by 50 basis points in May.

Key quotes

"Disruptions to supply larger, longer-lasting than anticipated."

"Ukraine war likely to restrain economies abroad, create spillover to the US."

"We are acutely aware high inflation causes hardship."

"We are highly attentive to risks inflation causing to both sides of the mandate."

"Our policy has been adapting, will continue to do so."

"We think ongoing increases in interest rates will be appropriate."

"Reducing balance sheet will also play important role."

"We are on a path to move policy rate expeditiously to more normal levels."

About Jerome Powell (via Federalreserve.gov)

"Jerome H. Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term*. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."

"*Note: On February 4, 2022, the Federal Reserve Board named Jerome H. Powell as Chair Pro Tempore, pending Senate confirmation to a second term as Chair of the Board of Governors."

Jerome Powell, Chairman of the Federal Reserve System, is delivering his remarks on the monetary policy outlook at a press conference following the FOMC's decision to hike the policy rate by 50 basis points in May.

Key quotes

"Inflation is much too high."

"We understand the hardship and moving expeditiously to bring inflation down."

"Essential we bring inflation down to keep strong labor market."

"Labor market is extremely tight."

"Improvements in labor market conditions have been widespread."

"Labor demand is very strong."

"Labor supply remains subdued."

"Wages are rising at fastest pace in many years."

"Inflation is well above goal."

"Demand in economy is strong, supply chain issues are persisting."

About Jerome Powell (via Federalreserve.gov)

"Jerome H. Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term*. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."

"*Note: On February 4, 2022, the Federal Reserve Board named Jerome H. Powell as Chair Pro Tempore, pending Senate confirmation to a second term as Chair of the Board of Governors."

• The EUR/USD is gaining some 0.28% on Wednesday’s session.
• The Federal Reserve hiked 50-bps for the first time in 2022.
• The EUR/USD seesawed around the 1.0530s-1.0570s to the headline.

The EUR/USD rallied as the Federal Reserve decided to hike rates by 50-bps and also announced the beginning of its Quantitative Tightening (QT) program. At the time of writing, the EUR/USD is trading at 1.0554, some 0.34% higher in the day, as traders prepare for Fed’s Jerome Powell press conference.

Key remarks of the FOMC monetary policy statement

The Federal Open Market Committee said that inflation remains elevated, reflecting supply and demand imbalances, pandemic-related. The committee emphasized that inflation is “expected to return to its 2% objective and the labor market to remain strong with appropriate monetary policy firming.” The US central bank reiterated that they would remain “attentive to inflation risks.”

The Fed acknowledged the negative print in Q1’s GDP and said that “household spending and business fixed investment remained strong.”

Regarding the Ukraine-Russia war issues, the Fed expressed that it “is causing tremendous human and economic hardship.” Furthermore, they added that “Implications for US economy highly uncertain but in the near term invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”

They also announced the reduction of the balance sheet on June 1. They will initially cap US Treasuries by $30 billion per month. Regarding agency debt and mortgage-backed securities (MBS), the Fed will reduce it by $17.5 billion per month. In both cases, the cap will be lifted after three months, as US Treasuries reduction will hit $60 billion, while the MBS cap will increase to $30 billion.

EUR/USD Reaction to the headline

The EUR/USD dipped towards 1.0530, then rallied sharply towards 1.0573, followed by a retracement towards current levels around 1.0553 as market players get ready for the press conference of the Federal Reserve Chairman Jerome Powell.

Federal Reserve Chairman Jerome Powell Press conference: here

• GBP/USD rallies on the Fed with a relatively muted response in financial markets.
• The Fed hiked rates by 50 basis points and published plans to reduce the size of the balancesheet. 

At 1.2522, GBP/USD is 0.22% higher and has rallied around 42 pips in the first 15 minutes on the knee jerk after the Federal Reserve hiked rates by 50 basis points. The Fed's target range stands at 0.75% - 1.00%.

The hike was hawkish and Fed futures are pricing in a higher chance of a 50 basis point hike at the June meeting. 77% priced for 50bps and 23% for a 75 basis point hike. Interest rates futures also suggest a 94% probability of an effective fed funds rate of at least 2.75% at year-end.

The Fed anticipates that ongoing increases in the target range will be appropriate as the central banks if highly attentive to inflation risks. 

A press release has also been published with the plans for reducing the size of the balance sheet. 

Nevertheless, the US dollar has been pressured on the release which has buoyed sterling. 

GBP/USD technical analysis

Into the announcements, GBP/USD had been consolidated:

The outcome has done little to shift the structure. On a longer-term basis, GBP/USD has been poised for a downside extension following a brief bullish correction on the daily chart as follows:

If the bulls fail to break beyond the resistance, mounting bearish pressure will likely lead to a downside continuation in due course. 

The US Federal Reserve announced on Wednesday that the FOMC had agreed to raise the target range for the federal funds rate by 50 basis points to 0.75% to 1%, in line with expectations. 

Follow our live coverage of the Fed's policy announcements and the market reaction.

The Fed further noted that it will begin trimming the balance sheet on June 1, starting with a $47.5 billion cap on monthly runoff and rising to $95 billion monthly after three months.

Key takeaways as summarized by Reuters

"Fed anticipates ongoing increases in target range will be appropriate."

"Inflation expected to return to its 2% objective and the labor market to remain strong with appropriate monetary policy firming."

"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, broader price pressures."

"Invasion of Ukraine by Russia is causing tremendous human and economic hardship."

"Implications for US economy highly uncertain but in the near term invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity."

"In addition, covid-related lockdowns in china are likely to exacerbate supply chain disruptions."

"We are highly attentive to inflation risks."

"Although economic activity edged down in Q1, household spending and business fixed investment remained strong."

"Job gains robust in recent months."

"Fed policy vote was unanimous."

Market reaction

The US Dollar Index turned south with the initial reaction to the Fed's policy announcements and was last seen losing 0.3% on the day at 103.12.

• AUD/USD traders await the Federal Reserve announcements.
• The RBA and Fed are a key focus while Ukrain and China risks continue to underpin the greenback. 

At 0.7145, AUD/USD is 0.7% higher on the day after rallying from a low of 0.7088 to a high of 0.7154.  The Australian dollar has continued to outperform this week following the Reserve Bank of Australia on Tuesday when it lifted the cash rate by a surprisingly large 25 basis points to 0.35%.

This was a surprise to the markets that were expected less of a raise and it was the first hike in over a decade. Additionally, the RBA gave the nod to more to come with the intention to pull down the curtain on its massive pandemic stimulus. However, for the day ahead, it is all about the Federal Reserve. 

At the top of the hour, the markets will hear from the Fed following the Federal Open Market Committee's two-day meeting. Traders will be waiting for the decision and accompanying statement. The central bank is expected to raise the Fed Funds rate by 50bp at their May meeting to 0.875% and provide a confirmation of the quantitative tightening process. Meanwhile, Fed funds futures traders are pricing for the Fed’s benchmark rate to increase to 2.96% by year-end, from 0.33% now. 

Chair Powell’s press conference will follow but there will not be any no new forecasts. Comments by Fed Chairman Powell will be key and will be scrutinized for additional signs on how the U.S. central bank will balance the need to stem inflation that has been rising at the fastest pace in 40 years. ''If he shows any hints of dovishness, markets will take yields and the dollar lower," Win Thin, global head of currency strategy at Brown Brothers Harriman, said in a report. "That said, we see no reason for Powell to hedge his bets right now and so we expect full speed ahead from the Fed," he added.

Leading into the meeting, the US dollar has fallen against a basket of currencies as traders move to the sidelines given how much of the hawkish expectations are already priced into the greenback. The dollar index (DXY) was last at 103.38, down 0.07% on the day. It reached 103.93 on Thursday, the highest since Dec. 2002 but printed a low of 103.186 today, sliding from 103.597.

Overall, the US dollar remains the go-to currency at a time when safe-haven flows are seeking shelter from the risks associated with the Ukraine crisis as well as the COVID-19 restrictions in China that have raised concerns about global growth and new supply chain disruptions.

• The Gold Price is almost flat during the day as the FOMC decision looms.
• The sentiment is mixed, blamed on the Fed policy decision and China’s coronavirus crisis.
• Gold Price Forecast (XAU/USD): Neutral-downward biased, but upside risks remains due to Fed’s monetary policy decision.

Gold spot (XAU/USD) remains subdued ahead of the Federal Reserve May monetary policy decision, in which the US central bank is foreseen to lift the Federal Funds Rate (FFR) by 0.50% to 1%. Besides, it will also announce the pace of the Quantitative Tightening (QT), expected at $95 billion, $65 billion of US Treasuries, and $30 billion of mortgage-backed securities (MBS). At the time of writing, XAU/USD is trading at $1867.82 a troy ounce.

Sentiment has improved as the Fed’s monetary policy decision gets closer, the greenback weakens

The closer the Fed’s decision gets, the market mood turns mixed. US equities fluctuate between gainers and losers. At 18:00 GMT, the Federal Reserve would release its monetary policy decision, which would trigger sharp volatility in the markets. However, at around 18:30 GMT, the Fed Chair Jerome Powell would hold its first in-person press conference in two years, in which market players would look for any hawkish/dovish commentary that could provide some forward guidance ahead.

Aside from this, Wednesday’s sentiment was also struck by China’s ongoing coronavirus crisis. Although it appears that in Shanghai, the epidemic situation seems to improve, Beijing closed 40 metro stations as cases began to ramp up, threatening to slow down the second-largest economy in the world.

Geopolitics-wise, the Ukraine-Russia conflict remains unchanged amid the late lack of peace talks. The hostilities persist as Russia tries to seize the Donbas region in Eastern Ukraine. At the same time, the EU Commission President von der Leyen said there would be a complete import ban on all Russian oil, pipeline, crude and refined.

The US Dollar Index, a gauge of the greenback’s value against a basket of its peers, is pairing some earlier losses, down 0.09%, and sits at 103.360. Contrarily, the US 10-year benchmark note sits at 2.987%, up to one and a half basis points during the day.

During the day, the US economic docket featured April’s ADP Employment Change, a prelude to Friday’s Nonfarm Payrolls report. The figures showed that the US economy added just 247K jobs, lower than the 395K estimated, while the Balance of Trade for March showed a wider deficit, from $-89 billion to $-109 billion. Regarding the Non-Manufacturing PMIs, the so-called services for April decreased, while the S&P Global Composite Final report decelerated to 56 from 57.7.

Gold Price Forecast (XAU/USD): Technical outlook

Gold remains neutral-downward biased ahead of the Fed’s decision. As of writing, XAU/USD price is below the 50 and the 100-day moving averages (DMAs), a sign of the yellow-metal weakness. Also, on its way north lies a solid resistance area around March’s lows, previous support-turned-resistance at $1890, which in the event of XAU/USD prices shooting higher, would be difficult to overcome on its way north.

To the upside, gold traders need to be aware of critical levels, like the 100-DMA at $1881.38, followed by March’s lows at $1890 and the $1900 mark. On the other hand, XAU/USD’s first support would be May 3 daily low at $1850.34, closely followed by the 200-DMA at $1835.08, and then January’s 28 YTD low $1780.18.

Jerome Powell, Chairman of the Federal Reserve System, will be delivering his remarks on the monetary policy outlook at a press conference following the meeting of the Board of Governors. Powell's speech will start at 18:30 GMT.

Follow our live coverage of the Fed's policy announcements and the market reaction.

About Jerome Powell (via Federalreserve.gov)

"Jerome H. Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term*. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."

"*Note: On February 4, 2022, the Federal Reserve Board named Jerome H. Powell as Chair Pro Tempore, pending Senate confirmation to a second term as Chair of the Board of Governors."

• The Swiss franc accumulates losses for the nine-consecutive trading session.
• US equities fluctuate between gainers and losers as risk appetite wobbles.
• USD/CHF Price Forecast: Upward biased, despite RSI being in overbought territory but still aiming higher.

The USD/CHF rallied and reached a two-year high at around 0.9839 as traders prepared for the monetary policy decision of the Federal Reserve. At 0.9829, the USD/CHF retraced from daily tops but is recording gains of 0.49% at the time of writing.

Sentiment has improved as the Fed’s monetary policy decision gets closer, the greenback weakens

The market mood is mixed, as US equities fluctuate between gainers and losers. Meanwhile, the Covid-19 crisis hitting China, the second-largest economy, threatens to slow down the post-pandemic economic recovery. However, it has already taken its toll as China’s Caixin PMIs last Saturday showed that the manufacturing and services indices are contracting.

In the meantime, the Ukraine-Russia fighting continues but has moved to the Donbas region, as Russia is trying to seize that territory.

The US Dollar Index, a gauge of the greenback’s value against a basket of its peers, slides some 0.11% and sits at 103.343, ahead of the Fed’s decision. Contrarily, the US 10-year benchmark note sits at 2.989%, up to one and a half basis points during the day.

USD/CHF Price Forecast: Technical outlook

The USD/CHF has sustained the steepest rally since reaching the 0.9200 region on March 31. However, despite the Relative Strength Index (RSI) being in overbought territory at 85.67, it shows no signs of a reversal coming up next, as RSI’s slope remains upward.

With that said, the USD/CHF first resistance level would be the R2 daily pivot at 0.9850. A breach of the latter would send the pair towards the R3 pivot point at 0.9890, followed by the 0.9900 figure, shy of the parity.

On the flip side, the USD/CHF first support would be the R1 pivot point at 0.9810, followed by the 0.9800 mark. Once cleared, the next support would be the 50-hour simple moving average (SMA) at 0.9787, followed by the daily pivot at 0.9770.

• On Wednesday, the NZD/USD is gaining some 0.25%, ahead of the Fed.
• A downbeat market mood keeps the NZD from printing larger gains vs. the greenback.
• NZD/USD Price Forecast: Downward biased, but upside risks remain as RSI begins to aim higher.

NZD/USD is contained within familiar levels as market players get ready for the Federal Reserve monetary policy decision. The central bank is widely expected to raise rates by 50-bps and begin its balance sheet reduction. However, at 0.6448, the NZD/USD remains weak, even though the Reserve Bank of New Zealand (RBNZ) has hiked rates and has its OCR at 1.50%.

The market mood is negative ahead of the US Fed meeting

Sentiment in the financial markets is negative. Global equities remain defensive as investors prepare for the Fed’s 50-bps rate hike, the first larger than 25-bps in 22 years, as the US central bank is trying to bring inflation down. Furthermore, the Covid-19 crisis in China threatens to slow down the second-largest economy in the world as Beijing announced the close of more than 40 metro stations. Meantime, Shanghai’s reported an improvement in the epidemic situation. However, previous restrictions imposed showed that the Chinese economy took a toll, with Caixin PMIs moving to the contracting territory.

Geopolitics-wise, the Ukraine-Russia conflict has not shown an improvement in peace talks at all. The hostilities persist as Russia tries to seize the Donbas region in Eastern Ukraine.

In the meantime, the greenback is under pressure ahead of the FOMC and losses some 0.12%, sitting at 103.329. Contrarily, the US 10-year Treasury yield tops at 2.981%, almost flat during the day.

Before Wall Street opened, some US economic data crossed the wires. The ADP Employment Change for April, a prelude to Friday’s Nonfarm Payrolls report, illustrated that the US economy added 247K jobs, lower than the 395K estimated, while the Balance of Trade for March reported a wider deficit, from $-89 billion to $-109 billion. Regarding the Non-Manufacturing PMIs, the so-called services for April decreased, while the S&P Global Composite Final report decelerated to 56 from 57.7.

NZD/USD Price Forecast: Technical outlook

From a daily chart perspective, the NZD/USD remains downward biased. The Relative Strenght Index (RSI) at 24.76 shows the NZD/USD as oversold, and it appears that the pair could be shiftings on its bias, as the RSI is beginning to aim upwards.

Here are some levels to account for at the FOMC monetary policy meeting. The NZD/USD first resistance would be the 100-hour simple moving average (SMA) at 0.6457. Break above would expose the R1 daily pivot at 0.6470, followed by the August 2020 daily high at 0.6488 and then the R2 pivot point at 0.6500. on the downside, the NZD/USD first support would be the YTD low at 0.6410. A breach of the latter would expose the S1 pivot at 0.6400, followed by the confluence of June 2020 lows and the S2 pivot at around 0.6370-80.

Canada registered another trade surplus in March, although below expectations: CAD 2.49 billion vs CAD 3.90 billion. Analysts at the National Bank of Canada highlight the trade surplus with the US reached a fresh record high. 

Key Quotes:

“For the ninth time in the past ten months, Canada's trade balance remained in positive territory, with both exports and imports reaching all-time highs. Total trade (exports + imports) in the motor vehicles/parts category expanded the most in 5 months “as automakers experienced a reprieve from supply chain issues that have been limiting output for a number of months.” Despite this improvement, international exchanges in the auto sector remained 7.6% below their pre-pandemic level.”

“The energy sector, meanwhile, benefited from higher prices and uncertainty surrounding global oil supply. Imports mustered a second consecutive gain, while exports jumped 12.8%, propelling Canada’s energy trade surplus to a record level.”

“The trade surplus with the United States moved from C$10.9 billion to C$12.6 billion, another record.”

“Turning to quarterly data, trade in goods likely weighed on GDP growth in the first quarter of the year, as real exports (-2.5%) contracted at a slightly faster pace than real imports (-1.0%). The increase in import volumes in the machinery equipment category (+3.8%), meanwhile, bodes well for investment spending in Q1.”
 

Data released on Wednesday showed the ISM Service Sector dropped unexpectedly to 57.1 in April. Analysts at Wells Fargo point out that while supply remains a problem for service-producers, a pullback in demand and hiring were the top factors weighing on activity during the month. 

Key Quotes: 

“Activity in the service sector stumbled in April according to the latest ISM services report. Even as every industry other than information reported growth, the pace of expansion downshifted last month as continued supply issues, sky-high inflation and a pullback in demand weighed on activity. The overall index defied expectations for a modest improvement and slipped 1.2 points to 57.1.”

“Difficulties across the supply chain remain a large constraint on activity. This was detailed in the selected purchasing manager comments as well as the uptick in the supplier deliveries component. One clear message from both ISM reports in April is that supply chain progress took a timeout in April.”

“This environment is only exacerbated by the march higher in labor costs. While the supply of labor has improved more recently, qualified help still remains hard to find, which is keeping pressure on wages. The hiring picture from the services ISM was discouraging.”

• US dollar weakens ahead of the FOMC statement.
• Market participants ignore US economic data
• GBP/USD fails to benefit from the relatively weaker dollar.

The GBP/USD is falling modestly on Wednesday before the release of the FOMC statement. After reaching a daily high at 1.2537, it turned to the downside, falling to test the 1.2465/70 support area, where the lows of the last three days are located. The pound remained above and rebounded to 1.2500.

Market participants await the outcome of the FOMC meeting. The DXY is falling on Wednesday, trading at 103.25, down 0.20%. While US yields pulled back, to neutral territory for the day.

Data ignored, markets point to the Fed

Economic data from the US came in weaker than expected but had no impact on the greenback. The ADP Employment report showed an increase in jobs in the private sector of 247K below the 395K expected. The ISM Service PMI in April dropped unexpectedly from 658.3 to 57.1. The S&P Global Servicer MIS was revised from 54.7 to 55.6.

The numbers were mostly ignored ahead of the Fed’s event. The US central bank is expected to announce a rate hike by 50bps amid higher inflation. There won’t be updated projections. Chair Powell's press conference will be watched closely and will likely keep volatility high.

On Thursday the Bank of England will announce its decisions on monetary policy and a 25bps to1.00% is expected.

“GBP/USD broke below 1.2500 for the third time in three sessions this morning. Similar moves on Monday and Tuesday were, however, quickly reverted. Still, it looks like a matter of time now for the pair to make a decisive break lower: if not triggered by the FOMC announcement today, it could come as a consequence of tomorrow’s Bank of England policy meeting, which we expect to defy hawkish expectations and add some pressure to the pound”, mentioned analysts at ING.

Technical levels

• The Loonie is losing minimal ground vs. the greenback, 0.01% ahead of the Fed meeting.
• The USD/CAD is trading in a narrow range as traders assess the pace of tightening that the US central bank is going to take.
• The Canadian trade balance showed a surplus, while in the US, the deficit widened.
• USD/CAD Price Forecast: Tilted to the upside, but macroeconomic news, can shift the bias.

The USD/CAD is subdued in a choppy trading session during the North American session, as market players remain on the sidelines waiting for the Federal Reserve monetary policy decision. At the time of writing, the USD/CAD is trading at 1.2832.

Choppy trading ahead of the Fed keeps the USD/CAD within familiar levels

The market sentiment is downbeat, as global equities are trading with losses. China’s Covid-19 crisis worsened as Beijing announced the close of more than 40 metro stations. Also, Beijing reported sporadic community coronavirus infections, while Shanghai saw an improvement in the epidemic situation. Meanwhile, Ukraine-Russo jitters have remained in the backseat since the beginning of the week; however, the EU Commission President von der Leyen stated that there would be a complete import ban on all Russian oil, particularly pipeline, crude and refined.

In the meantime, the greenback is under pressure ahead of the Fed but still near the 103.500 area, down 0.04%, while the US 10-year Treasury yield tops at 2.999%, gains three basis points.

Earlier in the session, some US and Canadian economic data crossed the wires. On the US front, April’s ADP Employment Change showed that the economy added 247K new jobs, lower than the 395K estimated, while the Balance of Trade for March reported a wider deficit, from $-89 billion to $-109 billion. Regarding the Non-Manufacturing PMIs, the so-called services for April decreased, while the S&P Global Composite Final report decelerated to 56 from 57.7.

On the Canadian side, March’s Balance of Trade rose by C$2.49 billion, higher than the C$1.9 billion estimated.

Aside from macroeconomic data, the USD/CAD has been trading in a narrow range, between 1.2800-50, since early in the Asian session, as traders remained at bay, waiting for the Fed. It is worth noting that the Bank of Canada has its interest rate at 1%, while the Fed sits at 0.50%, about to hike 50-bps. That scenario would be “positive” for the Loonie, but the speed of the Fed tightening could favor the greenback while falling oil prices could put a lid on the Loonie’s rise.

USD/CAD Price Forecast: Technical outlook

Here are some USD/CAD levels to account for ahead of the Federal Reserve meeting. Upwards, the confluence of the 50-hour simple moving average (SMA) and the central pivot at around 1.2850 would be the first resistance area. Once broken, the next resistance would be the R1 daily pivot at 1.2880, followed by March’s 7 daily high at 1.2901.

On the downside, the USD/CAD first support would be the S1 pivot at 1.2810. A breach of the latter would expose the 200-hour SMA at 1.2801, followed by the S2 pivot at 1.2780 and April’s 29 swing low at 1.2718.

• Gold prices continue to trade in subdued fashion in the $1860s with markets in wait-and-see mode pre-Fed.
• A hawkish surprise could send the precious metal under $1850 and towards its 200DMA in the $1830s.
• The fact that XAU/USD is in a bearish trend channel makes any rally more difficult.

Spot gold (XAU/USD) prices are trading with an ever so slightly negative bias in the $1860s in the run-up to Wednesday’s Fed policy announcement, though conditions remain subdued with traders for the most part in wait-and-see mode. Ahead of a big market event that carries two-way volatility risk, traders tend to refrain from placing big bets, hence conditions like this are to be expected.

The Fed is expected to lift interest rates by 50 bps, signal rates hitting around 2.5% by the year’s end (meaning more 50 bps rate hikes are likely in the coming months) and announce balance sheet reduction plans. The main focus will be on the Fed’s rate guidance and any hints as to how high officials think the terminal rate might be, meaning there will be a lot of focus on Fed Chair Jerome Powell’s post-meeting press conference.

Any “hawkish” surprises could ignite further upside in the US dollar, which has been buoyant in recent weeks as traders priced in a more aggressive tightening cycle from the Fed. The US dollar’s strong performance in recent weeks (the DXY has rallied more than 3.5% in the last three weeks) has weighed heavily on gold, which is currently down nearly 7.0% versus its near-$2000 highs from just over three weeks ago. A stronger dollar makes USD-denominated commodities more expensive for international buyers, reducing demand.

Further USD upside would probably send gold to fresh multi-month lows under the $1850 mark and the gold bears would be eyeing a test of the 200-Day Moving Average in the mid-$1830s. Technicians have pointed out that XAU/USD remains locked within a bearish trendline, so even if the Fed isn't as hawkish as feared and there is a small relief rally, it remains subject to being sold.

• Silver is back under the $22.50 level and on course for a tenth day of losses as the Fed looms.
• Traders are eyeing a test of annual lows near $22.00 if the central bank delivers a hawkish surprise.

Spot silver (XAG/USD) prices continue to trade with a negative bias in the run-up to Wednesday’s key Fed policy announcement and, after dipping back below the $22.50 per troy ounce mark as US traders arrived at their desks, look on course to post a tenth consecutive session in the red. At current levels around the $22.30 mark, silver is trading with on the day losses of a little more than 1.0%, taking its losses since mid-April, when the precious metal momentarily surpassed $26.00, to nearly 15%. Disappointing US March Trade Balance and April ISM Service PMI data didn’t have an impact on prices.

The Fed is expected to implement a 50 bps rate hike, though there is some speculation they may go with a 75 bps move, and is expected to signal rates reaching around 2.5% by the year’s end (meaning a series of rate moves of larger than 25 bps per meeting are likely). Should Fed Chair Jerome Powell hint at the likelihood of a higher terminal rate in the post-meeting press conference, markets could see a hawkish reaction, which could put silver prices under yet further pressure.

XAG/USD bears are eyeing a test of support in the form of the 2022 lows in the $22.00 area, a break below which would open the door to a drop towards Q4 2021 lows in the mid-$21.00s. Even if the Fed doesn’t deliver a hawkish surprise, concerns about geopolitics as the EU nears a blanket ban on Russian oil imports and continued concerns about Chinese growth amid ongoing lockdowns in Beijing and Shanghai suggest the buck is set to remain robust for the foreseeable future. That alone could be enough to force XAG/USD lower to test key support in the weeks ahead.

The headline ISM Services Purchasing Manager's Index (PMI) fell to 57.1 in April from 58.3 in March, below expectations for a slight rise to 58.5, according to the latest release by the Institute for Supply Management (ISM). 

Subindices:

• The Business Activity Index rises to 59.1 from 55.5 in March. 
• The Prices Paid Index rises to 84.6 from 83.8, a fresh record high. 
• The New Orders Index falls to 54.6 from 60.1, its lowest since February 2021. 
• The Employment Index falls to 49.5 from 54.0. 

Market Reaction

FX markets seemingly haven't reacted much to the latest PMI survey, with the US dollar ranging ahead of the Fed policy announcement later on Wednesday. The DXY is currently trading close to the 103.50 mark, having rebounded from earlier session lows near 103.20 since the start of US trade. 

• EUR/USD gathers renewed upside traction near 1.0560.
• The dollar’s momentum deflates somewhat ahead of FOMC.
• US ADP Report disappointed expectations at 247K in April.

The optimism around the shared currency now helps EUR/USD clinch fresh peaks in the 1.0555/60 band on Wednesday.

EUR/USD: All the attention on the Fed

EUR/USD now adds to Tuesday’s modest advance against the backdrop of the renewed offered bias in the US dollar. However, the extension and duration of this bullish move will be put to the test later in the day by the FOMC event.

It is worth recalling that the Federal Reserve is largely expected to raise the Fed Funds Target Range (FFTR) by 50 bps, although investors are expected to closely follow the subsequent press conference by Chair Powell, where the potential rate path and the balance sheet runoff should be in the centre of the debate.

Earlier in the session, the ADP Report showed the US private sector added 247K jobs during last month, while the ISM Non-Manufacturing is due later.

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 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 up 0.17% at 1.0536 and faces the next hurdle at 1.0593 (high April 29) followed by 1.0936 (weekly high April 21) and finally 1.1000 (round level). On the other hand, a breach of 1.0470 (2022 low April 28) would target 1.0453 (low January 11 2017) en route to 1.0340 (2017 low January 3 2017).

The Bank of England (BoE) is set to announce its policy decision on Thursday, May 5 at 11:00 GMT, which will be accompanied by the meeting’s minutes and inflation report. As we get closer to the release time, here are the expectations forecast by the economists and researchers of 11 major banks. 

The BoE is set fulfill expectations with a 25 bps rate hike but fail to meet market pricing of further aggressive action later in the year.

ING

“We expect another 25 basis-point rate hike, but the increasingly cautious language from BoE officials and a likely growth downgrade this Thursday suggests that markets are overestimating the amount of tightening for the rest of this year. Our view is that the Bank will hike again in June before pushing the pause button from the summer.”

TDS

“Further upward inflationary pressure, more tightening in the labour market, and strong growth figures for Q1 should steer the MPC to raise rates by 25bps at this meeting. However, early signs point to the fallout from the cost-of-living crisis weighing on growth moving forward. With the BoE already signalling that it is worried about the negative impact of surging inflation on activity, this supports our view that the MPC will pause with rate hikes after the May meeting and gradually shift its focus toward QT for the second half of the year.”

Rabobank

“We expect the BoE to press ahead with a 25 bps policy rate increase to 1.00%. Some policymakers may vote for a 50 bps increase. The central bank runs the risk of raising its policy rate into a recession. Stagflation warnings are growing louder. The policy rate will reach the level at which the MPC considers selling gilts back to the private sector. For this to happen markets need to be calmer than they are right now. We do expect some clues on how the central bank intends to sell its gilt holdings. We expect two more 25 bps hikes in June and August before the cycle should pause.”

Danske Bank

“We expect BoE to hike the Bank Rate to 1.00% from 0.75%, but stick to its softer guidance on the hiking pace from last time. If we are right about the BoE sticking to its dovish signals, it is likely to weigh on GBP given the hawkish market pricing. Our Bank of England call is two additional rate hikes (August and November) but see risks skewed towards more rate hikes.”

Nomura

“We expect the BoE to lift rates by 25bp to 1%. We would not be surprised to see another 8-1 vote for a quarter-point hike with Mr. Cunliffe once again voting for unchanged rates.”

ING

“The BoE has hiked three times so far and a fourth increase looks like a near-certainty. But despite talk of a more aggressive 50bp move, we suspect that’s unlikely. It’ll be interesting to see if any committee members join Jon Cunliffe, who last month was the sole voter for no change in rates. More likely though we’ll get another 8-1 vote in favour of the hike. We expect the rate hike on Thursday to be followed by another in June, but after that, we suspect policymakers will be inclined to pause – or at the very least slowdown – the pace of rate rises. That suggests markets, which expect roughly another six hikes this year, are likely to be overestimating the amount of tightening required.”

Deutsche Bank

“The BoE is expected to raise rates and signal tighter balance sheet policy. We expect the MPC to continue wrestling with the trade-off between slowing growth and intensifying inflation, with the latter winning out and bringing a +25bp Bank Rate hike, along with two more hikes coming this year. On the balance sheet, we think the MPC will confirm its intention to sell gilts later this year, with more guidance coming over the next few meetings and sales beginning in September.”

CE

“We think the MPC is sufficiently worried about rising price/wage expectations to raise Bank Rate from 0.75% to 1.00% and to start shrinking the balance sheet quicker by selling gilts. Based on our forecast that the labour market will be tighter and that wage/price expectations will be more persistent, we expect the MPC to hike rates to 3.00% in 2023. That’s above the peak priced into the markets (2.50%) and the peak expected by a consensus of economists (2.00%).”

SocGen

“The MPC is likely to believe that it has no choice but to act decisively to prevent higher inflation becoming embedded in wage demands, despite the probable substantial hit to demand from the cost of living crisis. We no longer think the MPC will be prepared to pause at the forthcoming meeting to assess the damage from the crisis. Instead, it looks set to increase Bank Rate by 25bp at this meeting and every subsequent meeting up to and including November this year, taking it to a peak of 2%.”

Citibank

“We expect the BoE MPC to deliver a fourth 25bp back-to-back hike this week, taking the cash rate to 1.0%. Active QT may also begin in small size in June. Cost pressures remain intense, and in a context of a tight labor market, it is unlikely the MPC concludes the immediate risks to inflation expectations are yet contained – despite a weak medium-term forecast. However, the risks here seem skewed to the dovish side, with two dissenters likely to back holding the stance steady. For now, we expect a pause in the current tightening to come only in August, once weak demand has arrested the inflation pass-through, and the labor market has softened. However, with UK data now deteriorating at an accelerating rate, the team does not rule out an earlier pause or a dovish surprise (especially on guidance) this week.”

Wells Fargo

“For May, the consensus forecast (and Wells Fargo forecast) is for the BoE to deliver another 25 bps hike, which would take the policy rate to 1.00%. We expect the BoE's economic projection to include an upward revision to its CPI inflation forecast and a downward revision to its GDP growth forecast. For market participants, the focus will be on how much emphasis the central bank puts on slower growth versus faster growth, and whether it softens its prior guidance that ‘some further modest tightening in monetary policy may be appropriate in the coming months.’ That could offer insight into whether the BoE continues to hike rates at a 25 bps per meeting pace or shifts to an even slower pace of tightening.”

According to the final version of S&P Global's Services PMI survey released on Wednesday, the headline index came in at 55.6 in April, above the flash estimate released midway through last month of 54.7. The final Composite PMI subsequently was revised higher to 56.0 from 55.1.

That still left both below March's levels, when the Services PMI came in at 58.0 and 57.7, suggesting a slight deterioration in broad business conditions last month. Still, with both readings still well above the 50.0 mark that separate expansion from contraction, the PMI data suggests the US economy continued to grow at a reasonable pace last month. 

• Oil prices are sharply higher on Wednesday, with focus on EU proposals for a ban on Russian oil imports.
• WTI is trading over $3.0 higher in the $106.00s and eyeing recent highs in the $108-$110 area.

Oil prices have turned sharply higher this Wednesday in wake of a proposal by the European Commission to phase out all imports of Russian oil within six months, end imports of refined products by the end of the year and kick Russia’s top bank out of the SWIFT global payments system. EU nations will have to unanimously agree on the proposal for it to take effect and a few smaller nations (Hungary, Bulgaria, Slovakia) have been kicking up a fuss, meaning a final deal was not reached on Wednesday.

But envoys from each of the EU’s 27 nations will be meeting again on Thursday and the market's base case is that a deal will be finalised soon. The EU’s proposal will also ban EU companies from providing any shipping, financing or insurance services to aid the transport of Russian crude oil worldwide, a move analysts said would have a “chilling” effect on the global trade of Russian crude oil. Meanwhile, some have argued that once the EU has weened itself of Russian oil, the West will be able to up the pressure on countries still buying Russian crude oil grades, perhaps with the threat of sanctions.

As commodity markets brace for further declines in Russian oil output in the coming months as the EU’s latest sanctions take effect in the coming months, front-month WTI futures are trading firmly on the front foot. At current levels in the $106.00s per barrel, WTI is slightly more than $3.00 higher on the day, with oil prices for now shrugging off mixed news coming out of China regarding lockdowns there, as well as further evidence of global growth woes. WTI bulls are eyeing a test of recent highs in the $108-$110 area.  

Local press reported that Beijing is to extend lockdown measures indefinitely as the city continues to grapple with rising Covid-19 infection rates, however, the situation in Shanghai reportedly continues to improve, with much of the city now out of lockdown as case rates decline. The chilling impact on the global economy of recent Chinese lockdowns was on show on Wednesday with the release of IHS Markit’s global manufacturing PMI survey, which fell into contractionary territory for the first time since June 2020.

Looking ahead, official weekly US crude oil inventory figures will be released at 1530BST after private weekly API inventory data showed a larger than expected decline in headline crude oil stocks on Tuesday. This has arguably also supported the price action on Wednesday. Focus then turns to the broader macro theme of central bank tightening later in the US session, with the Fed seen delivering a 50 bps rate hike at 1900BST.

On Thursday, OPEC+ is scheduled to meet, with analysts expecting the meeting to be a non-event, with producers set to agree to continue their current policy of hiking output quotas by 400K barrels per day each month. The more important theme right now is how well OPEC+ nations can actually keep up with hikes to output quotas. Smaller nations have been struggling over the last 12 or so months, whilst sanctions mean Russia is also now a big under producer.

US ISM Services PMI Overview

The Institute of Supply Management (ISM) will release the Non-Manufacturing Purchasing Managers' Index (PMI) - also known as the ISM Services PMI – at 14:00 GMT this Wednesday. The gauge is expected to edge higher to 58.5 in April from 58.3 in the previous month. Given that the Fed looks more at inflation than growth, investors will keep a close eye on the Prices Paid sub-component, which is expected to rise to 84.1 from 83.8 in March.

How Could it Affect EUR/USD?

Ahead of the key release, the disappointing release of the US ADP report exerted some downward pressure on the US dollar and lifted the EUR/USD pair back above the mid-1.0500s. That said, the prospects for a more aggressive policy tightening by the Fed acted as a tailwind for the buck. Stronger-than-expected US macro data would reaffirm hawkish Fed expectations and push the US bond yields/USD higher. Conversely, a softer reading is more likely to be overshadowed by concerns that the European economy will suffer the most from the Ukraine crisis, which, in turn, should continue to weigh on the euro. This, in turn, suggests that the path of least resistance for the EUR/USD pair is to the downside. That said, any immediate market reaction is more likely to be short-lived as the focus remains glued to the outcome of a two-day FOMC meeting, scheduled to be announced later during the US session.

Valeria Bednarik, Chief Analyst at FXStreet, offered a brief technical outlook for the pair: “The EUR/USD pair keeps trading near a multi-year low of 1.0470 achieved last week, consolidating yearly losses. The daily chart shows that bears are still in the drivers’ seat, given that technical indicators remain lifeless near oversold readings, reflecting absent buying interest. At the same time, the pair is far below all of its moving averages, with a bearish 20 SMA providing dynamic resistance around 1.0730.”

“In the near term, and according to the 4-hour chart, the pair is neutral. It keeps seesawing around a flat 20 SMA while the longer moving averages maintain their downward slopes far above the current level. Technical indicators aim to cross their midlines into positive territory but without enough momentum to confirm a firmer recovery. Bulls will have better chances if the pair extends its rally above 1.0595, April 29 daily high and the immediate resistance level,” Valeria added further.

Key Notes

  •  EUR/USD Forecast: How aggressive would the Fed be after today?

  •  EUR/USD Forecast: Cautious Fed to trigger a rebound

  •  EUR/USD Price Analysis: The door to a deeper pullback remains open

About the US ISM manufacturing PMI

The Institute for Supply Management (ISM) Manufacturing Index shows business conditions in the US manufacturing sector. It is a significant indicator of the overall economic condition in the US. A result above 50 is seen as positive (or bullish) for the USD, whereas a result below 50 is seen as negative (or bearish).

Gold is in wait-and-see mode ahead of the Federal Reserve policy announcement. Strategists at TD Securities expect the yellow metal to rise if the Fed delivers the expected 50 bps rate hike before resuming its downmove.

Highly-anticipated FOMC day could translate into a whipsaw for many gold bears

“It's FOMC day, and sentiment across global markets is pervasively negative with the Fed set to embark on an aggressive quantitative tightening path and to hike rates by 50bp.”

“The Fed's move has been well telegraphed, and global market participants are well-positioned for it. In this context, we could potentially expect a ‘buy-everything-rally’ if the Fed hits the mark relative to expectations, as consensus positioning across global markets is flushed out amid pervasively negative sentiment. This would suggest a bullish knee-jerk reaction in gold – but make no mistake, it would necessarily be caused by a dovish Fed.” 

“It is also worth noting that consensus positioning in the yellow metal remains to the long-side, pointing to some complacent length amid the war in Ukraine, which would limit the implications on gold.” 

“Ultimately, the highly-anticipated FOMC day could translate into a whipsaw for many gold bears, before prices resume their downward trajectory.”

• GBP/USD staged a goodish intraday bounce from the weekly low touched earlier this Wednesday.
• A positive risk tone and dismal ADP report weighed on the safe-haven USD and extended support.
• The upside potential seems limited as the focus remains glued to the crucial FOMC policy decision.

The USD edged lower in reaction to the dismal US ADP report and pushed the GBP/USD pair to a fresh daily high, around the 1.2535 region during the early North American session.

The pair quickly reversed an intraday dip to the 1.2465 area and has now rallied nearly 70 pips from the weekly low touched earlier this Wednesday amid modest US dollar weakness. Given that the Fed's anticipated move to hike interest rates is already priced in, indications of a positive opening in the  US equity markets undermined the safe-haven greenback.

The USD added to its intraday losses after data released by the Automatic Data Processing (ADP) showed that the US private-sector employers added 247K new jobs in April. This missed consensus estimate pointing to the 395K increase, though was largely offset by an upward revision of the previous month's reading to 479K from the 455K reported earlier.

Apart from this, the prospects for a more aggressive policy tightening should act as a tailwind for the buck and keep a lid on any further gains for the GBP/USD pair. Investors seem convinced that the Fed would tighten its monetary policy at a faster pace to curb soaring inflation. Hence, the focus will remain on the outcome of a two-day FOMC meeting.

The Fed is widely expected to hike the benchmark interest rates by 50 bps and lay plans to start shrinking its massive, a near $9 trillion balance sheet. Investors, however, will scrutinize Fed Chair Jerome Powell's comments to see if the US central bank is ready to continue with its policy tightening and hike interest rates further even if the economy weakens.

This will play a key role in influencing the near-term USD price dynamics and provide some meaningful impetus to the GBP/USD pair ahead of the Bank of England policy meeting on Thursday. The combination of key central bank event risks warrants some caution for aggressive traders and before positioning for a firm near-term direction.

Technical levels to watch

In an unscheduled meeting, the Reserve Bank of India (RBI) just hiked policy rates by 40bp to 4.4%. Indian bonds sold off, INR rallied and equities fell on the decision. In the view of economists at TD Securities, stabilization in oil prices and likely higher yields will likely give the Indian rupee more comfort in the short term.

More hikes in the months ahead

“In a surprise inter-meeting move, the RBI hiked its repo rate by 40bps to 4.40% while maintaining an accommodative stance, in a move revealing renewed urgency to clamp down on price pressures.”

“We think this will be followed up by further hikes in the months ahead, with the RBI likely to hike again at its meetings in June and August and subsequent meetings given low real rates.”

“We expect more pressure on bonds amid a further reassessment of tightening expectations, while the stabilization in oil prices and likely higher yield will likely give the INR more comfort.”

GBP/USD recovers from a dip under 1.25 again, However, economists at Scotiabank expect the pair to head for a firm break under 1.24 in the coming days.

Political uncertainty could further see the GBP weaken in the near-term

“With the Fed set to deliver a hawkish hike today that perhaps even opens the door to a 75bps hike (if necessary), the GBP is at risk of firming its losses to a break under 1.24 this week.”

“Political uncertainty following tomorrow’s local elections (results due through Friday) could further see the GBP weaken in the near-term.”

Envoys from EU countries were unable to reach an agreement during a meeting on Wednesday on the European Commission's proposed sixth round of sanctions on Russia, sources told Reuters on Wednesday. The Commission's proposal included plans to phase out the import of Russian crude oil within six months, phase out refined products by the end of the year and cut major Russian banks from SWIFT.

The source said that EU nations are expected to move closer to a deal at a meeting on Thursday. Hungary, Slovakia, the Czech Republic and Bulgaria raised concerns about the oil embargo, the source told Reuters, in fitting with public remarks from leaders/government officials from these countries. 

• USD/JPY extended its sideways consolidative price move for the third straight day on Wednesday.
• The disappointing US ADP report failed to impress or provide any meaningful impetus to the major.
• The market focus remains glued firmly to the highly-anticipated FOMC monetary policy decision.

The USD/JPY pair traded with a mild negative bias through the early North American session and was seen hovering around the 130.00 psychological mark following the release of the US ADP report.

The Automatic Data Processing (ADP) reported that the US private-sector employers added 247K new jobs in April, missing consensus estimates pointing to the 395K increase. This, however, was offset by an upward revision of the previous month's reading to 479K from 455K and did little to impress traders or provide any meaningful impetus to the USD/JPY pair.

Looking at the broader picture, spot prices have been oscillating in a range since the beginning of this week as investors await a fresh catalyst before positioning for the next leg of a directional move. Hence, the focus will remain glued to the outcome of a two-day FOMC monetary policy meeting, scheduled to be announced later during the US session on Wednesday.

The US central bank is widely expected to raise benchmark interest rates by 50 bps and lay down its plans to start shrinking its massive, near $9 trillion balance sheet. The anticipated move, however, is fully priced in the markets, suggesting that investors will look for cues to see if the Fed is ready to hike rates further even if the economy weakens.

Apart from this, investors will also scrutinize Fed Chair Jerome Powell's comments at the post-meeting press conference for additional hints about the policy tightening path. This, in turn, will play a key role in influencing the near-term USD price dynamics and help investors to determine the near-term trajectory for the USD/JPY pair.

Nevertheless, the big Fed-BoJ monetary policy divergence favour bullish traders and supports prospects for an extension of the USD/JPY pair's strong uptrend witnessed over the past two months or so. Wednesday's economic docket also highlights the release of the ISM Services PMI, though would fail to produce any meaningful trading opportunities.

Technical levels to watch

According to the latest figures released on Tuesday by Statistics Canada, the Canadian Trade surplus fell unexpectedly to C$2.49B in March from C$3.08B a month earlier versus expectations for a rise to C$3.9B. Exports were up 6.3% MoM to C$63.63B from C$59.84 a month earlier, while imports were up 7.7% MoM to C$61.14B from C$56.76 a month earlier. 

Market Reaction

The still fairly decent Canadian trade figures for March have not provoked a lasting reaction in FX markets, with the loonie still trading subdued just above the 1.28/$ level. The loonie has found support from rising crude oil prices on Wednesday, as commodity traders focus on EU discussion for a ban on Russian oil imports.  

According to the latest data from the Bureau of Economic Analysis and US Census Bureau, the US Goods and Services Trade deficit jumped to $109.8B in March. That was larger than the expected increase to $107B from $89.8B in February. 

The Goods Deficit was $128.14B in March while the Services Surplus was $18.34B. Exports jumped 5.6% MoM in March to $241.72B from $228.82B a month earlier, while imports lept 10.3% to $351.52B from $318.62B a month earlier. 

The US trade deficit with China rose to $34B in March, up from $30.67B a month earlier. Meanwhile, the average price of imported crude oil jumped to $87.2 per barrel, up from $76.37 a month earlier, and up nearly 70% from March 2021's $51.54 per barrel. 

Market Reaction

The DXY has seen some fairly limited selling pressure in wake of the larger than expected jump in the US trade deficit and is currently at session lows in the 103.20s, though trade will probably remain fairly contained ahead of the Fed meeting later in the day. 

Hungary cannot support the EU's proposed ban on Russian oil imports, the country's Foreign Minister said on Wednesday, reported Reuters. European Commission President Ursula von der Leyen proposed the EU's sixth major Russia sanctions package earlier in the day, which included plans to phase out the import of Russian crude oil within six months, phase out refined products by the end of the year and cut major Russian banks from SWIFT.

The proposed ban on Russian oil imports would destroy Hungary's energy security, the Foreign Minister said, noting that Hungary will be seeking an exemption on crude oil imported from Russia via pipelines.

The Czech PM on Wednesday said that his country is in talks for a two-three year transition period for the phaseout of Russian oil imports. Slovakia also reportedly looks primed to get an extended phase-out time period. 

Private sector employment in the US rose by 247,000 in April, well below the expected gain of 395,000 jobs, according to US payroll company ADP's latest estimate of national employment change released on Wednesday. That marked a sharp decline in the rate of job gains after 479,000 were added to the US economy back in March, according to ADP data. The March job gain estimate had been revised slightly higher from 455,000. 

Market Reaction

With ADP's estimate of monthly US employment change not regarded as a particularly accurate predictor of the Bureau of Labour Statistic's official non-farm payroll employment change number, which is scheduled for release on Friday, FX markets have not reacted to the latest data. Attention, for now, remains very much on the Fed's upcoming policy announcement.  

The EU is reportedly set to propose a ban on all shipping, financing and insurance services for the transport of Russian crude oil worldwide within one month, an EU source told Reuters on Wednesday. An EU ban on the imports of Russian oil would be effective within six months, the source added, with no gradual phase-out, and would cover both spot markets and existing contracts.

The worldwide ban on services provision for the transport of Russian crude oil could potentially affect Russia's ability to find alternative buyers for its crude oil after the EU embargo kicks in, Reuters speculated. The EU source told Reuters that the latest EU measures would have a "chilling" effect on Russian oil trade and could lead to further so-called "self sanctioning", where international traders shun Russian crude oil even if not directly targetted by EU sanctions. 

• AUD/USD attracted some buying for the second successive day on Wednesday.
• RBA’s hawkish rate hike, upbeat domestic data extended support to the aussie.
• A positive risk tone undermined the safe-haven USD and remained supportive.
• Investors eye the US ADP report, ISM PMI ahead of the FOMC policy decision.

The AUD/USD pair built on its steady intraday ascent and climbed to a fresh daily high, around the 0.7135 region heading into the North American session.

A combination of supporting factors assisted the AUD/USD pair to gain positive traction for the second successive day on Wednesday and inch back closer to the overnight swing high. Against the backdrop of a more hawkish rate hike by the Reserve Bank of Australia, upbeat domestic macro data extended some support to the aussie. It is worth recalling that the RBA on Tuesday surprised markets and raised the official cash rate by 25 bps from a record low of 0.10% to 0.35%, and also signalled more rate hikes ahead. Apart from this, subdued US dollar price action turned out to be another factor that acted as a tailwind for spot prices.

Given that the Fed's anticipated move to hike interest rates is fully priced in, a positive tone around the US equity futures undermined the safe-haven buck and benefitted the perceived riskier aussie. The USD downtick, however, remains cushioned amid expectations that the Fed would adopt a more aggressive policy response to curb soaring inflation and lift the benchmark interest rate to around 3.0% by the end of the year. This was reinforced by elevated US Treasury bond yields, which should act as a tailwind for the greenback and keep a lid on any further gains for the AUD/USD pair ahead of the highly-anticipated FOMC decision.

The US central bank is widely expected to raise benchmark interest rates by 50 bps and lay down its plans to start shrinking its massive, near $9 trillion balance sheet. Hence, the market focus will remain on the accompanying policy statement to see if the Fed would hike rates further even if the economy weakens. This, along with Fed Chair Jerome Powell's comments at the post-meeting conference, will play a key in influencing the near-term USD price dynamics and help determine the next leg of a directional move for the AUD/USD pair.

In the meantime, traders on Wednesday will take cues from the US economic docket, featuring the releases of the ADP report on private-sector employment and ISM Services PMI. Apart from this, the broader market risk sentiment would drive the USD demand and produce some trading opportunities around the AUD/USD pair. That said, investors might prefer to wait on the sidelines heading into the key central bank event risk, warranting some caution before placing aggressive bets.

Technical levels to watch

• Gold is in wait-and-see mode and trading nearly flat in the $1870 area with key risk events upcoming on Wednesday.
• The main risk event of the day will be the Fed’s policy announcement, with a 50 bps rate hike expected.
• XAU/USD remains locked within the bearish trend in play since mid-April and is eyeing a test of its 200DMA.

Spot gold (XAU/USD) markets are in wait-and-see mode ahead of the release of a batch of important US economic data and the Fed’s latest monetary policy decision. For reference, US payroll company ADP will release their estimate of private employment change in the US in April at 1315BST, followed by the release of the April ISM Services PMI survey at 1500BST and the Fed’s policy announcement at 1900BST. Fed Chair Jerome Powell will then be delivering his usual post-Fed meeting press conference from 1930BST.

XAU/USD is currently trading completely flat on the day around $1868 per troy ounce, with prices for now stable above Tuesday’s lows at $1850, but very much still locked within the downtrend that has been in play since mid-April. Since coming within a whisker of hitting the $2000 mark on 18 April, prices are down roughly 6.5%.

That downturn reflects the bearish headwinds of a significantly stronger US dollar and much higher US yields. Since April 18, the Dollar Index (DXY) has rallied nearly 3.0% from around 100.50 to current levels in the mid-103.00s. US 10-year yields, meanwhile, are up over 10 bps and look likely to break above the 3.0% and to fresh multi-year highs in the near future.

A stronger US dollar makes USD-denominated commodities (like XAU/USD) more expensive for international buyers, while higher yields raise the “opportunity cost” of holding non-yielding assets (such as gold). These recent FX and bond market trends that have proven such a headwind to gold come ahead of an expected acceleration in the pace of monetary tightening from the Fed.

The US central bank is expected to lift interest rates by 50 bps on Wednesday, signal rates reaching the 2.5% area by the year’s end (meaning more 50 bps rate hikes at upcoming meetings) and outline balance sheet reduction plans. Markets will be focused on any hints from Fed Chair Jerome Powell as the where the Fed’s so-called “terminal” interest rate might be, with many Fed officials in recent weeks suggesting they see it as likely that the Fed will need to take interest rates above 2.5% to combat inflation.

Any hints towards a higher terminal rate in the US from the Fed Chair could ignite further upside in the US dollar and US yields, and trigger a breakout below $1850 in XAU/USD. In this case, traders should note support in the $1830s in the form of gold’s 200-Day Moving Average. Below that, its pretty much clean air all the way to an early 2022 double bottom in the $1780s.

• EUR/USD keeps navigating in the low-1.0500s ahead of the FOMC.
• A visit to the YTD low at 1.0470 should not be ruled out in the near term.

EUR/USD adds to Tuesday’s gains around the 1.0530 region amidst a slight improvement in the sentiment.

The underlying bearish view in the pair remains well and sound and another visit to the 2022 low around 1.0470 (April 28) in the near term remains well on the cards for the time being. 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

UOB Group’s Economist Enrico Tanuwidjaja comments on the latest Total Investment figures in the Indonesian economy.

Key Takeaways

“Indonesia’s total investment rose by 28.5% y/y to IDR 282.4tn in 1Q22, aided by a pick-up in foreign investment.”

“Investments outside of Java Island accounted for 52.7% of the total investment in 1Q22.”

“The investments added 319,013 jobs in 1Q22.”

• DXY remains directionless around 103.50 ahead of the FOMC.
• The resumption of the upside could see the 2022 peak retested.

DXY exchanges gains with losses in the mid-103.00s in pre-FOMC trading on Wednesday.

Price action in DXY keeps pointing to some consolidation ahead of the potential breakout of the current pattern. In that scenario, the next up barrier aligns at the 19-year high just below the 104.00 yardstick (April 28) ahead of the 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 95.87.

DXY daily chart

When asked about the European Union's plans to ban Russian oil imports, Kremlin spokesman Dmitry Peskov said on Wednesday that Russia is looking into various options, as reported by Reuters.

Regarding the new western sanctions, "sanctions are a double-edged sword, costs for the European citizens will increase a lot," the spokesperson argued.

Market reaction

Markets remain risk-averse following these comments. As of writing, the Euro Stoxx 600 Index was down 0.6% on the day and US stock index futures were posting small daily gains. Meanwhile, EUR/USD continues to move sideways in a tight range above 1.0500.

Alvin Liew, Senior Economist at UOB Group, assesses the latest BoJ monetary policy meeting.

Key Takeaways

“The Bank of Japan (BOJ), as widely expected, decided to keep its policy measures unchanged at its Monetary Policy Meeting (MPM). What caught the market by surprise was that the BOJ “clarified” its JGB purchase operations where it pledged it “will offer to purchase 10-year JGBs at 0.25 percent every business day through fixed-rate purchase operations, unless it is highly likely that no bids will be submitted.” (i.e. it will defend its 0.25% 10-year JGB yield cap for the long-term interest rate strategy of the Yield Curve Control).”

“The BOJ continued its stark divergence with its G7 peers who are on the cusp or already normalizing monetary policy, as the Japanese central bank kept its preference for easing bias and retained the statement that “it expects short- and long-term policy interest rates to remain at their present or lower levels.”

“In its latest outlook for economic activity and prices (The Bank’s View), the most notable change was the significant upgrade of its FY2022 inflation forecast which will rise to +1.9% before easing back to 1.1% in FY2023 “due to the impact of a significant rise in energy prices” as BOJ expects that to wane subsequently. The BOJ also introduced the CPI forecasts that exclude both fresh food and energy items (i.e. core-core CPI), to highlight the role of energy in driving the inflation outcomes.”

“The other significant change was the further material downgrades for GDP growth in FY2021 to 2.1% (from +2.8% previously in Jan 2022 MPM) as well as for FY2022 to 2.9% (from +3.9% previously in Jan 2022 MPM), while upgrading the FY2023 growth forecast to 1.9% (from 1.1% previously in Jan 2022 MPM).”

“Even as Japan’s inflation is heading higher, the driving factor is largely stemming from an uncertain supply shock while domestic demand remains weak, in line with Kuroda’s inflation view as he is skeptical that the imported inflation that is surging in many parts of the world will lead to sustained price gains in Japan and he said it will take some time to get sustainable inflation, a clear indication that the BOJ is not considering policy normalization (rate hikes or tweaking current monetary easing) anytime soon.”

German Chancellor Olaf Scholz said on Wednesday that Russian President Vladimir Putin has miscalculated the war against Ukraine and added that now he is facing a stronger NATO and European Union, as reported by Reuters.

Scholz further noted that they will put forward on Monday a law that they have discussed to speed up the development of LNG.

Market reaction

These comments don't seem to be having a noticeable impact on market sentiment. As of writing, Germany's DAX 30 Index was down 0.3% on the day at 14,000.

• NZD/USD gained some positive traction on Wednesday and move away from the YTD low.
• Subdued USD price action prompted some short-covering heading into the key event risk.
• Investors now eye the US ADP report and ISM PMI for some impetus ahead of the FOMC.

The NZD/USD pair maintained its bid tone through the first half of the European session and was last seen hovering near the daily high, around mid-0.6400s.

Following the previous day's two-way directionless price moves, the NZD/USD pair attracted some buying on Thursday and moved away from a near two-year low touched earlier this week. Given that the Fed's anticipated move to hike interest rates is already priced in, the US dollar bulls took a breather ahead of the highly-anticipated FOMC policy decision. This, in turn, was seen as a key factor that extended some support to the pair, though any meaningful positive move seems elusive.

Investors seem convinced that the US central bank would adopt a more aggressive policy response to curb soaring inflation and lift the benchmark interest rate to around 3.0% by the end of the year. This was reinforced by elevated US Treasury bond yields, which should act as a tailwind for the greenback and keep a lid on the intraday uptick for the NZD/USD pair. Hence, the market focus will remain glued to the outcome of a two-day FOMC meeting, scheduled later during the US session.

The US central bank is widely expected to raise interest rates by 50 bps and lay down plans to start shrinking its massive, a near $9 trillion balance sheet. Market players will also scrutinize Fed Chair Jerome Powell's remarks to see if the US central bank is ready to hike rates further even if the economy weakens. This will play a key role in influencing the near-term USD price dynamics and help determine the next leg of a directional move for the NZD/USD pair.

In the meantime, traders will take cues from the US economic docket - featuring the release of the ADP report on private-sector employment and the ISM Services PMI. The data, along with the broader market risk sentiment, could drive the USD demand and provide some impetus to the NZD/USD pair. That said, the immediate market reaction is more likely to be short-lived heading into the key central bank event risk.

Technical levels to watch

• EUR/JPY extends the consolidative theme around 137.00.
• Further range bound trading remains in the pipeline very near term.

EUR/JPY keeps the side-line trading well and sound for yet another session midweek.

The cross has likely moved into a consolidative phase ahead of the FOMC event coming later on Wednesday. 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 130.79, the outlook for the cross is expected to remain constructive.

EUR/JPY daily chart

Swiss National Bank (SNB) Board Member Andrea Maechler said on Wednesday that the deterioration in consumer climate could weigh on the Swiss economy, as reported by Reuters.

Maechler further noted that the strong Swiss franc will help Switzerland on the inflation front. "Even if market interest rates rise, we remain in an accommodative financial environment," she added.

Market reaction

The USD/CHF pair showed no immediate reaction to these remarks and was last seen trading at 0.9810, where it was up 0.2% on a daily basis. 

• USD/CHF gained follow-through traction on Wednesday and climbed to a fresh YTD peak.
• The prospects for rapid US interest rate hikes remained supportive of the ongoing move up.
• Investors eye the US ADP report, ISM PMI for some impetus ahead of the FOMC decision.

The USD/CHF pair climbed to the highest level since March 2020 during the first half of the European session and is now looking to build on the momentum beyond the 0.9800 mark.

The pair prolonged its recent strong bullish trajectory witnessed over the past one month or so and gained some follow-through traction on Wednesday. The prospects for a more aggressive policy tightening by the Fed continued acting as a tailwind for the US dollar. Apart from this, a positive tone around the US equity futures undermined the safe-haven Swiss franc and extended some support to the USD/CHF pair.

Investors seem convinced that the US central bank would adopt a more aggressive policy response to curb soaring inflation and lift the benchmark interest rate to around 3.0% by the end of the year. This was reinforced by elevated US Treasury bond yields, which, in turn, assisted the USD to hold steady near the multi-year high. The USD bulls, however, preferred to wait for the outcome of a two-day FOMC policy meeting.

The Fed is scheduled to announce its monetary policy decision later during the US session and is widely expected to raise interest rates by 50 bps. The US central bank is also anticipated to outline plans to start shrinking its massive, a near $9 trillion balance sheet at a likely pace of $95 billion a month. Moreover, Fed Chair Jerome Powell's comments will offer clues about the pace of future policy tightening.

This, in turn, will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the USD/CHF pair. In the meantime, traders will take cues from the release of the US ADP report on private-sector employment and the ISM Services PMI. The immediate market reaction, however, is more likely to be short-lived, warranting some caution before placing aggressive bets.

Technical levels to watch

Senior Economist at UOB Group Alvin Liew assesses the first revision of the US Q1 GDP Growth.

Key Takeaways

“The advance estimate of US 1Q GDP surprised on the downside with a 1.4% q/q SAAR contraction, the first decline in nearly two years since 1Q 2020, from an 6.9% expansion in 4Q 2021. While private consumption expenditure (PCE) and business spending supported growth, the larger drags came from the net exports of goods and services, the reversal of private inventories and weaker government consumption and investment.”

“The lower than expected 2.7% PCE increase coupled with the lower savings rates in 1Q, was seen as a sign on how the accelerating inflation is eating into spending, and this is something that will need to be monitored as inflation is likely to accelerate further in 2Q, which could further impair spending.”

“With the unexpected magnitude of the drag of net exports and the reversal of private inventories resulting in the weaker growth outcome in 1Q, we will further lower our US GDP growth forecast for 2022. While growth is lowered, it remains above US potential and we are not expecting US to enter into a recession in the next 6-12 months, as we note that the US employment situation remains favorable with good wage growth, still significant excess household savings, and potentially new investments into US energy sector while the Russia-Ukraine conflict is likely to have a greater impact on US inflation compared to its growth.  We now expect GDP growth to be lower by 0.3ppt to 3.0% in 2022 (from previous forecast of 3.3%) before easing further to 2.3% in 2023 (unchanged from previous forecast).”

Gold Price is on standby ahead of the Federal Reserve Interest Rate Decision. A cautious Fed could trigger a correction higher in the yellow metal, economists at Commerzbank report.

Another sharp increase in jobs created could weigh on gold 

“A rate hike of 50 basis points is generally expected and is fully priced in according to the Fed Fund Futures. It will therefore be almost more interesting to hear what Fed Chair Powell has to say about the bank’s future monetary policy. If he sounds very hawkish and indicates that other major rate hikes will be made at the following Fed meetings, this could push the US dollar and bond yields further up, which would presumably depress XAUUSD.” 

“If Powell were to sound more cautious, the gold price would probably profit and could recoup some of the losses it has suffered in the past few days.” 

“The ADP labour market report will be published in the US this afternoon ahead of the Fed interest rate decision. The Bloomberg consensus anticipates another sharp increase in the number of jobs created. This could weigh on the gold price this afternoon.”

The Reserve Bank of India (RBI) caught markets off-guard by announcing a 40 basis points (bps) rate hike, in the first such unscheduled statement from the governor since the start of the pandemic in 2020.

more to come ...

EUR/USD has been fluctuating in a very tight range with investors remaining on the sidelines while gearing up for the Federal Reserve's policy decisions. A cautious Fed could trigger a correction in the dollar and help EUR/USD rebound, FXStreet’s Eren Sengezer reports.

Cautious Fed to trigger a rebound

“The Fed is widely expected to announce its first 50 basis points (bps) rate hike since 2000 and confirm that it will start shrinking the balance sheet by $95 billion per month from June. The impact on the dollar's valuation is likely to remain limited since markets have been pricing them since March.”

“A 'buy the rumour sell the fact' market reaction could trigger a correction in the DXY and open the door for a rebound in EUR/USD. In case Powell adopts a cautious tone regarding future rate hikes, the greenback is likely to come under selling pressure and help the pair push higher.”

“A mention of 75 bps rate hikes being on the table in the upcoming meetings to tame inflation could be seen as an extremely hawkish stance and boost the dollar regardless of the currency's overbought conditions.”

See – Fed Preview: Forecasts from 18 major banks, 50bps is universally expected

• GBP/USD staged modest intraday recovery from the weekly low touched on Wednesday.
• A generally positive risk tone undermined the safe-haven USD and extended some support.
• The upside seems limited as investors await the highly-anticipated FOMC policy decision.

The GBP/USD pair quickly reversed an early European session dip to the weekly low and jumped to a fresh daily high, around the 1.2520-1.2525 region in the last hour.

Given that the Fed's anticipated move to hike interest rates is already priced in, a generally positive tone around the equity markets undermined the safe-haven US dollar. This, in turn, was seen as a key factor that assisted the GBP/USD pair to attract some buying near the 1.2465 region on Wednesday, though any meaningful positive move seems elusive.

Investors seem convinced that the US central bank would adopt a more aggressive policy response to curb soaring inflation and lift the benchmark interest rate to around 3.0% by the end of the year. This was reinforced by elevated US Treasury bond yields, which should act as a tailwind for the greenback and keep a lid on the intraday uptick for the GBP/USD pair.

Investors might also refrain from placing aggressive bets and prefer to wait on the sidelines ahead of the highly-anticipated FOMC policy decision, scheduled to be announced later during the US session. The Fed is widely expected to raise interest rates by 50 bps and lay down plans to start shrinking its massive balance sheet at a likely pace of $95 billion a month.

Investors will also scrutinize comments by Fed Chair Jerome Powell for fresh clues about the pace of future policy tightening if the economy weakens. This will play a key role in influencing the near-term USD price dynamics and produce some trading opportunities around the GBP/USD pair ahead of the Bank of England monetary policy meeting on Thursday.

Heading into the key event risk, traders might take cues from the US economic docket, featuring the releases of the ADP report on private-sector employment and the ISM Services PMI. This, along with the broader market risk sentiment, will drive the USD demand and provide some impetus to the GBP/USD pair, though any immediate market reaction is likely to be short-lived.

Technical levels to watch

Economist at UOB Group Lee Sue Ann comments on the imminent FOMC event and the prospects for the rest of the year.

Key Takeaways

“The risk of more aggressive Fed rate action is seen to be fulfilled by the accelerated inflation path, affirmed by the 8.5% price spike in Mar. As such, we expect the FFTR to be hiked faster by 50bps in the May FOMC.”

“We expect 25bps in every remaining meeting of this year but note the risk of 50bps hikes in Jun/Jul. Including the Mar FOMC’s 25bps hike, this implies a cumulative 200bps of increases in 2022, bringing the FFTR higher to the range of 2.00-2.25% by end of 2022.”

• USD/CAD edged lower for the second straight day and refreshed its weekly low on Wednesday.
• A goodish pickup in oil prices underpinned the loonie and acted as a headwind for the major.
• The downside seems limited ahead of the highly-anticipated FOMC monetary policy decision.

The USD/CAD pair remained on the defensive through the early European session and was last seen trading around the 1.2820 region, or the weekly low.

Crude oil prices rallied nearly 3% on Wednesday after the European Commission President, Ursula von der Leyen, announced the sixth round of sanctions against Russia. The proposal included phasing out the Russian supply of crude oil within six months and refined products by the end of the year, which helped offset demand worries in China and acted as a tailwind for the black liquid. This, in turn, underpinned the commodity-linked loonie and weighed on the USD/CAD pair.

The downside, however, remains cushioned amid the underlying bullish sentiment around the US dollar, bolstered by expectations for a more aggressive policy tightening by the Fed. Investors seem convinced that the US central bank would hike interest rates at a faster pace to curb soaring inflation. This was evident from elevated US Treasury bond yields, which assisted the USD to stand tall near the multi-year peak and extended some support to the USD/CAD pair.

Hence, the market focus will remain glued to the outcome of a two-day FOMC monetary policy meeting, scheduled to be announced later during the US session. The Fed is widely expected to raise interest rates by 50 bps and lay down plans to start shrinking its massive, a near $9 trillion balance sheet. Investors will also scrutinize Fed Chair Jerome Powell's remarks to see if the US central bank is ready to hike rates further even if the economy weakens.

Heading into the key event risk, the US ADP report on private-sector employment and the ISM Services PMI will be looked upon for some impetus. Apart from this, oil price dynamics could allow traders to grab some short-term opportunities around the USD/CAD pair.

Technical levels to watch

Here is what you need to know on Wednesday, May 4:

Following Tuesday's choppy action, markets remain calm early Wednesday as investors move to the sidelines ahead of the US Federal Reserve's policy announcements. The US Dollar Index continues to move sideways near 103.50 and the 10-year US T-bond yield fluctuates in a tight range below 3%. The European economic docket will feature March Retail Sales data for the eurozone. April ADP Employment Change and ISM Services PMI from the US will be looked upon for fresh impetus in the early American session. 

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

European Commission President Ursula von der Leyen said early Wednesday that they will phase out the Russian supply of crude oil and refined products by the end of the year. Von der Leyen further added that Sberbank and other major Russian banks will be excluded from the SWIFT system as part of the latest sanctions package.

The Fed is widely expected to hike its policy rate by 50 basis points and unveil its plan for balance sheet reduction. FOMC Chairman Jerome Powell will deliver his remarks on the policy and the economic outlook at a press conference at 1830 GMT. 

Federal Reserve Preview: Buy the dollar dip and three other scenarios as Powell shows his power.

In the meantime, Beijing announced earlier in the day that they shut more than 40 metro stations and 158 bus routes to limit the spread of the virus. Additionally, Zhengzhou said that it will start enforcing strict coronavirus restrictions from next week. Meanwhile, Reserve Bank of New Zealand Governor Adrian Orr said earlier in the day that they cannot rule out a global recession in the coming months. Nevertheless, US stock index futures post small gains in the early European session but the market mood is likely to remain cautious ahead of the Fed event.

EUR/USD continues to fluctuate above 1.0500 on Wednesday but stays on the back foot with the Euro Stoxx 600 Index losing nearly 0.5% in the early European session.

GBP/USD staged a rebound on Tuesday but erased its daily gains after having met resistance at 1.2570. The pair was last seen moving sideways near 1.2500.

Gold is edging higher toward $1,870 Wednesday morning but struggles to gather bullish momentum as US T-bond yields remain steady.

USD/JPY is moving in an extremely narrow trading band near 130.00 for the third straight day on Wednesday.

Bitcoin is up more than 2% early Wednesday but continues to trade below the key $40,000 level. After having lost nearly 3% on Tuesday, Ethereum has regained its traction and was last seen rising 1.5% on the day at $2,820. 

Economists at Citibank expect gold prices to soften mildly from March's all-time highs. They forecast XAUUSD at $1,910 this year.

Macro and micro factors tilt positive for the yellow metal this year

“We see gold prices moderating from fresh all-time highs hit in March but holding a high(er) range for the balance of 2022 as financial markets grapple with surging headline inflation, geopolitical uncertainty, and recession tail risks.”

“2022E forecast is $1,910/oz, and 2023E forecast is $1,725/oz.” 

“Much hinges on whether the Fed can dampen inflation without significant growth pains. On balance, macro and micro factors tilt positive for the yellow metal this year.”

GBP/JPY has seen a staggering 35.7% rally from 124.09, late March 2020 lows. However, there are signs the cross having met its 61.8% Fibonacci retracement at 167.49 requires a downward correction to correct the excesses, Benjamin Wong, Strategist at DBS Bank, reports.

Seasonality studies typically show the cross adopts a weaker profile as it enters the month of May through August

“There are some formative nuances that requires a downward correction of excesses. In trading up to 168.43, the cross has exceeded 167.49, the 61.8% Fibonacci retracement of the 195.88-121.61 range grip that covered the Brexit referendum crisis into October 2016. On the technical panel, the cross is now straddling the top end away from the mean of standard deviations. A rising trendline resistance that drives up from 121.61 lows has as well played its part in retarding the move to 168.43.”

“A quick check on seasonality studies; a 10-year back-test shows GBP/JPY typically has a weaker profile as we enter the month of May through August.”

“The market remains on tenterhooks over the Bank of Japan’s (BoJ) policy where JPY weakness has been persistently driven by the BoJ’s determination to anchor yields within its Yield Curve Control target band. Until that changes, or on the vanguard of a Mi JPY intervention, any decline assumes a corrective tone.”

Norges Bank meets on Thursday, May 5 at 08:00 GMT and as we get closer to the release time, here are the expectations forecast by the economists and researchers of seven major banks regarding the upcoming central bank's Interest Rate Decision. 

Norges Bank is set to keep its policy rate unchanged at 0.75%. But the central bank is also expected to confirm a June hike at this week’s policy meeting.

Nordea

“Norges Bank will be on hold and confirm that the key rate will be raised further in June. We expect one hike each quarter throughout 2023 in line with the plan that Norges Bank presented in March. We believe that it will take a lot for Norges Bank to raise interest rates more often than four times per calendar year. We expect that the Committee will reiterate their message from March: ‘Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in June’. Market reactions will likely be muted.”

Danske Bank

“We expect Norges Bank to leave its policy rate unchanged but to reiterate that it will most likely be raised in June. This would be consistent with the guidance put out in March, and as it is only an ‘interim’ meeting followed by nothing more than a press release, the threshold for deviating from plan would normally be high.”

TDS

“With no MPR, we think Norges Bank will stick to its guidance and hold its policy rate at 0.75% as recent data does not suggest the need for a hawkish shift. February GDP growth came in slightly below the Bank's most recent forecast and underlying CPI-ATE inflation remained at 2.1% YoY in March, 0.4ppts below what Norges Bank expected, and well below other countries' readings.”

Credit Suisse

“While the possibility of a rate hike is in our view limited, the Norges Bank could instead validate the idea of one more hike in 2022 (that is, validate the 105bps being priced in by markets, as opposed to the 75bps that the bank estimates). Alternatively, the bank could signal that in total it will hike rates by more than the 200bps it is signalling by Q4 2024, or that it will front-load hikes. The bank will not be releasing a full set of revised forecasts, but it could make changes in the statement that accompanies the rate decision. The market’s priced-in tightening expectations are mostly aligned with the Norges Bank’s guidance, in contrast with other G10 markets that are pricing in larger hawkish pivots. As such, market pricing leaves limited scope for an enduring NOK rally, even in the event of a surprise rate hike.”

Commerzbank

“I assume that Norges Bank will keep everything on hold at tomorrow’s meeting and will signal that the next step will follow in June. This way it is also able to wait and see how things develop. As Norges Bank’s rate hike cycle has already been priced in NOK’s appreciation potential for monetary policy reasons seems to have been exhausted for now. The rate decision is likely to be largely neutral for NOK.”

Swedbank

“Not much should be expected from Norges Bank this week. The possibility of a May hike should be close to non-existing. The main message this coming Thursday will be that the policy rate ‘most likely’ will be hiked by another 25 bps to 1.0% in June, as was communicated in March. But we will keep an eye out for any hints whether double or interim hikes could be on the cards, should inflation dynamics continue to firm ahead. Our expectation is for Norges Bank to end its hiking campaign at 1.75% by year’s end, and to refrain from hiking rates next year. We expect 25 bps hikes at the meetings in June, August, September and December.”

Handelsbanken

“It is widely expected that Norges Bank will keep its policy rate unchanged at 0.75%. But we strongly believe that Norges Bank will reiterate its call that the next hike is likely to come in June. Note that at these interim meetings (unless dramatic events have unfolded) Norges Bank tends to balance its public statements so that they are fairly in line with the message from the previous Monetary Policy Report. We believe that this is also likely to be the case this week.”

The European Commission President, Ursula von der Leyen, announced the sixth round of sanctions against Russia this Wednesday. The proposal, which will require approval from all 27 EU countries, included phasing out the Russian supply of crude oil within six months, refined products by the end of the year and cutting major Russian banks from SWIFT.

Market reaction

Traders reacted little to the latest headlines as the focus remains glued firmly on the outcome of a two-day FOMC monetary policy meeting, scheduled to be announced later during the US session. Nevertheless, the development added to worries the European economy, which relies heavily on Russia to meet its energy needs, will suffer the most from the Ukraine crisis. This, in turn, should continue to act as a headwind for the shared currency and supports prospects for a further near-term depreciating move for the EUR/USD pair.

The US dollar is on sure ground as the Federal Reserve gets set to hike. Any "sell-the-fact" downside risk to the dollar appears limited, economists at ING report.

The balance sheet will be allowed to shrink over the coming months

“We think the FOMC will deliver a well-telegraphed 50bp rate hike, with a 75bp move) not completely off the table but unlikely at this stage. We expect quantitative tightening to be announced today. We expect the Fed to start with $50bn being allowed to run off each month before increasing it to $95bn by September. All these measures should be broadly in line with market expectations. That, however, doesn't mean that there's no room for surprises on either side.” 

“The possibility of a ‘sell-the-fact’ reaction by the dollar is not unlikely. Still, we think that as long as the Fed doesn’t push back against hawkish market expectations, the dollar is likely to face limited downside risks today, or any negative reaction may be short-lived. This is especially true considering the geopolitical risk in Europe tied to the war in Ukraine, lockdowns in China and portfolio outflows from emerging markets.”

See – Fed Preview: Forecasts from 18 major banks, 50bps is universally expected

• EUR/USD trades in an inconclusive note around 1.0500.
•  Germany trade surplus shrank to €9.7B in March.
• Fed interest rate decision, ISM Non-Manufacturing next on tap.

The single currency remains within the familiar range vs. the greenback and motivates EUR/USD to gyrate around the 1.0500 neighbourhood.

EUR/USD looks to Fed for direction

EUR/USD looks to add to Tuesday’s gains above the 1.0500 mark, although the price action is expected to remain side-lined at least until the key FOMC gathering due later in the European evening/night.

Spot remains well under pressure, and despite a 50 bps rate hike by the Fed on Wednesday is widely priced in, the centre of the debate is expected to shift to Powell’s pressure where the main focus will surely be on the balance sheet runoff and the potential extra rate hikes in the next months.

In the German cash market, the 10y bund yields seem to struggle to advance further north of the key 1.0% yardstick amidst rising unease among investors pre-FOMC event.

In the domestic calendar, Germany’s trade surplus narrowed to €9.7B in March, with Exports shrinking 3.3% and Imports expanding 3.4% on a monthly basis. Later in the session, the final Services PMIs are due in Germany and the broader Euroland along with Retail Sales also in the euro area.

Across the pond, usual weekly MBA Mortgage Applications, the ADP Report, Balance of Trade, Services PMI and the ISM Non-Manufacturing are all due later in the NA session.

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 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 up 0.02% at 1.0519 and faces the next hurdle at 1.0593 (high April 29) followed by 1.0936 (weekly high April 21) and finally 1.1000 (round level). On the other hand, a breach of 1.0470 (2022 low April 28) would target 1.0453 (low January 11 2017) en route to 1.0340 (2017 low January 3 2017).

GBP/USD broke below 1.25 for the third time in three sessions this morning. Similar moves on Monday and Tuesday were quickly reverted but analysts at ING expect the pair to make a decisive break lower.

EUR/GBP may hold within the 0.84-0.8450 range today

“it looks like a matter of time now for the pair to make a decisive break lower: if not triggered by the FOMC announcement today, it could come as a consequence of tomorrow’s Bank of England policy meeting, which we expect to defy hawkish expectations and add some pressure to the pound.”

“EUR/GBP may hold within the 0.84-0.8450 range before tomorrow’s risk event but is at risk of jumping into the 0.8450-0.85 territory after the BoE announcement.”

Tuesday’s surprise 25bp rate hike by the Reserve Bank of Australia (RBA) pushed the aussie higher. However, in the view of economists at ING, the AUD/USD upside is limited despite RBA's hawkish shift.

Markets are now pricing 270bp of tightening by the end of the year

“While the RBA offered some signals that it is now committed to a period of rising interest rates to fight inflation, markets are now pricing 270bp of tightening by the end of the year, which may have fallen too far on the hawkish side.”

“For now, we think that an external environment that remains negatively affected by China’s clouded outlook will contribute to keeping AUD/USD capped to the 0.72-0.73 area in the coming weeks.”

The loonie is struggling to stand up to USD in the current environment. Although the Bank of Canada (BoC) could accelerate its rate hikes over the coming months, this is unlikely to lift the CAD, economists at Commerzbank report.

Hawkish signals from the Fed to drive USD/CAD further upwards again

“Hawkish signals from the Federal Reserve cannot be excluded. This would drive USD/CAD further upwards again, at least on a short-term basis.”

“When the Canadian labour market report is due on Friday the market is likely to have more or less digested the Fed meeting. If the data were to illustrate that the situation on the labour market is tighter than expected, and if this leads to a stronger rise in wage indicators, this is likely to fuel expectations of accelerated BoC rate hikes. Even though a lot seems to have been priced in already the loonie is likely to benefit at least short-term.”

• EUR/JPY retreats from short-term key resistance confluence, fades previous rebound.
• Steady RSI suggests further weakness targeting 200-SMA, monthly support.
• Bulls have a bumpy road ahead, 138.40-45 acts as an extra filter to the north.

EUR/JPY fails to extend the previous day’s corrective pullback from the 61.8% Fibonacci retracement of April’s run-up, dropping back below 137.00 as traders in Brussels await Wednesday’s bell.

By dropping back towards the intraday low around 136.80, EUR/JPY marks the inability to cross the convergence of the 50-SMA and a fortnight-old descending trend line, around 137.00 by the press time.

Given the steady RSI and multiple failures to cross the aforementioned key hurdle, EUR/JPY prices are likely to retest the 61.8% Fibonacci retracement level surrounding 136.50.

However, the 200-SMA and a horizontal area comprising multiple levels marked since early April, respectively near 136.00 and 135.45-40, will challenge the pair sellers past 136.50.

Meanwhile, the EUR/JPY pair’s successful run-up beyond 137.00 could direct buyers toward the last week’s swing high surrounding 138.00.

Though, the 138.40-45 zone including a fortnight-old horizontal line, could test the further upside ahead of highlighting the April top near 140.00.

EUR/JPY: Four-hour chart

Trend: Pullback expected

Norges Bank will announce its rate decision on Thursday. The central bank is set to hold rates at 0.75% and to reiterate that it will hike rates in June. Economists at Commerzbank expect the Norges Bank meeting to have a limited impact on the krone.

Risk aversion is putting downside pressure on NOK

“I assume that Norges Bank will keep everything on hold at tomorrow’s meeting and will signal that the next step will follow in June. This way it is also able to wait and see how things develop.”

“As Norges Bank’s rate hike cycle has already been priced in NOK’s appreciation potential for monetary policy reasons seems to have been exhausted for now.”

“The rate decision is likely to be largely neutral for NOK.” 

“At present risk aversion is the dominating force anyway and is putting downside pressure on NOK just like on SEK.”

• A combination of factors prompted fresh selling around gold on Wednesday.
• Aggressive Fed rate hike bets, elevated US bond yields acted as a headwind.
• A positive risk tone, bullish USD also contributed to the intraday selling bias.
• The focus remains on the highly anticipated FOMC monetary policy decision.

Gold struggled to capitalize on the overnight bounce from the $1,850 area, or the lowest level since February 16 and edged lower during the first half of trading on Wednesday. The XAU/USD remained on the defensive through the early European session and was last seen trading around the $1,865 region. The markets seem convinced that the Fed would adopt a more aggressive policy response to curb soaring inflation. This was reinforced by elevated US Treasury bond yields and acted as a headwind for the non-yielding yellow metal. Hence, the focus will remain glued to the outcome of a two-day FOMC monetary policy meeting, scheduled to be announced later during the US session.

The Fed is widely expected to raise the benchmark interest rates by 50 bps and lay plans to start reducing its near $9 trillion balance sheet. Apart from this, comments by Fed Chair Jerome Powell will be scrutinized closely to see if the US central bank is ready to hike rates further to curb soaring inflation, even if the economy weakens. This will play a key role in influencing the near-term US dollar price dynamics and provide a fresh directional impetus to the dollar-denominated. Heading into the key event risk, traders might take cues from the US ADP report on private-sector employment and the ISM Services PMI for some impetus during the early North American session.

In the meantime, a generally positive risk tone might hold back traders from placing any bullish bets around the safe-haven gold. Apart from this, the underlying bullish sentiment surrounding the US dollar could exert some downward pressure on spot prices, suggesting that the path of least resistance is to the downside. Even from a technical perspective, sustained break and acceptance below the 100-day SMA support prospects for an extension of the recent rejection slide from the vicinity of the $2,000 psychological mark. Hence, some follow-through decline towards testing a technically significant 200-day SMA support, currently around the $1,835-$1,834 region, remains a distinct possibility.

Key levels to watch

Economists at Credit Suisse look to fade strength in G10 commodity FX. They see a number of developments that leave them less convinced about the prospects for the Australian dollar, New Zealand dollar and Canadian dollar over the next three months.

Further USD strength against G10 commodity FX

“Central banks have surprised sharply on the hawkish side of market expectations in Q2 so far, leading rates markets to price in even more aggressive policy tightening schedules than before. This leaves much less scope for developments that further hawkish policy expectations at a local idiosyncratic level. Strength in commodities prices also appears to have peaked for the time being, with the prices of the likes of iron ore, crude and dairy under pressure”

“The Chinese leadership’s vocal commitment to a Zero Covid approach, and the low probability of a change in approach ahead of the Chinese Communist Party Congress (still far out, in November), reduces the likelihood of a sudden improvement in the near-term growth outlook. This arguably is a much more direct concern for Australia and New Zealand than for Canada, and is likely to be reflected in ongoing CAD outperformance, even if limited, against both AUD and NZD.”

“Over the past several months, the hawkish repricing of monetary policy expectations across the G10 spectrum has also coincided with terminal rates expectations for Canada, Australia and New Zealand rising at much faster pace than for the US – despite the leading role played by the Fed in driving the move starting in Q421. We see this development as creating potential for disappointment over the medium-term.”

According to FX Strategists at UOB Group Lee Sue Ann and Quek Ser Leang, USD/CNH’s upside is seen facing the next hurdle at 6.7200 in the short term.

Key Quotes

24-hour view: “USD settled on a soft note yesterday (6.6444, -0.49%). The underlying tone has softened and USD is likely to drift lower from here. That said, any weakness is not expected to break the strong support at 6.6200. Resistance is at 6.6600 followed by 6.6750.”

Next 1-3 weeks: “USD popped to a fresh multi-month high of 6.6979 yesterday before pulling back sharply. While upward momentum has been dented, it is premature to expect the bullish phase that started more than 2 weeks ago to come an end. Only a breach of 6.6000 would indicate that a short-term top is in place. That said, 6.6979 is a strong resistance now and USD may trade below this level for a few days first. Looking ahead, the next resistance level above 6.6980 is at 6.7200.”

• DXY extends the side line trading in the mid-103.00s.
• US yields resume the upside ahead of the FOMC event.
• The Fed is expected to raise the FFTR by 50 bps on Wednesday.

The greenback alternates gains with losses in the 103.50 region when tracked by the US Dollar Index (DXY) on Wednesday.

US Dollar Index focuses on Fed, Powell

The index gyrates around the mid-103.00s and trades without a clear direction midweek, as market participants wait for the FOMC event due later in the European evening.

Still around the FOMC, the Committee is expected to raise the Fed Funds Target Range (FFTR) by 50 bps to 0.75%-1.00%, as has been already largely telegraphed. The bulk of the attention, however, is expected to fall on the subsequent press conference by Chief Powell, where the Fed’s rate path and the timing of the start of the reduction of the Fed’s balance sheet are seen taking centre stage.

In the US cash markets, yields resume the upside, with the 2y note trading in levels last seen in December 2018 and the 10y benchmark note hovers around the key 3.00% yardstick.

Busy day in the US data sphere, as MBA Mortgage Applications are due in the first turn seconded by the ADP Report, Balance of Trade, Services PMI and the ISM Non-Manufacturing.

What to look for around USD

The dollar trades on a range bound fashion ahead of the FOMC event later 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: 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 gaining 0.06% at 103.51 and 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). On the other hand, the next support emerges at 102.81 (low April 29) seconded by 99.81 (weekly low April 21) and then 99.57 (weekly low April 14).

The US central bank is likely to hike its key rate by 50bp today. In such a case, the US dollar could stage a mild move higher, economists at Commerzbank report.

Developments surrounding the war in Ukraine to limit a possible downside correction

“USD might benefit from the rate decision short-term as there are likely to be some market participants who expect a smaller 25bp rate step. Whether the Fed comments and statements by Powell at the press conference will be sufficiently hawkish to allow USD to appreciate further seems questionable though.”

“Rate expectations have already gone a long way. The market might therefore be disappointed, with the USD correcting downwards. However, developments in connection with the war in Ukraine are likely to limit a possible downside correction.”

See – Fed Preview: Forecasts from 18 major banks, 50bps is universally expected

With EUR/SEK back above pre-Riksbank meeting levels, economists at Credit Suisse leave their EUR/SEK target at 10.60. Markets will likely wait to see whether upcoming local data validates hawkish priced-in policy expectations: as a result, 10.60 may come into play only later in Q2. 

The target of 10.60 restated

“We think the market is sceptical that there is room for SEK to benefit from the Riksbank’s hiking cycle. This is likely because the market’s priced-in policy expectations, which currently reflect about nine more 25bp rate hikes by end of 2024, continue to look excessively hawkish relative to Sweden’s macro backdrop. 

“We continue to think a 10.60 EUR/SEK target appropriately weighs the risks for SEK.” 

“We look for CPI data on the 12 May, and quarterly GDP data on 30 May to potentially shift the narrative in favour of further EUR/SEK upside. The true test will come from the 30 Jun Riksbank decision.” 

“EUR/SEK rallies towards 10.60 can become a more convincing proposition towards the end of Q2.”

• AUD/USD prints two-day rebound during a lackluster Asian session.
• Aussie Retail Sales came in positive but holidays in Japan, China, softer PMIs test buyers.
• Fed’s widely expected moves, also priced in, keep pair buyers hopeful.
• US macros, risk catalysts and yields can offer intermediate moves.

AUD/USD picks up bids to refresh intraday high around 0.7125 ahead of Wednesday’s European session. In doing so, the Aussie pair extend the previous day’s recovery moves amid a broadly softer US dollar during sluggish momentum.

The US dollar seems to bear the burden of a pullback in the US Treasury yields, portrayed on Tuesday, as well as hoes that the US Federal Reserve (Fed) won’t adhere to any major surprises that could propel the greenback.

Additionally favoring the AUD/USD prices could be the firmer Australia Retail Sales data for March, actual 1.6% versus 0.6% forecast and 1.8% prior.

It should be noted that an absence of Chinese and Japanese traders restricts the bond market moves during the Asian session, which in turn allows the AUD/USD bears to consolidate recent losses around a three-month low.

Moving on, the pair’s recent buying is likely to continue in a phased manner ahead of the US session, wherein the US ISM Services PMI and ADP Employment Change, as well as geopolitical and covid-linked headlines, could entertain AUD/USD traders. Above all, how the Fed takes a big leap to tame inflation and still rejects economic fears will be an interesting case to watch.

Read: Fed expected to raise rates by 50bps, but guidance is expected to be key

Technical analysis

A clear upside break of the two-week-old resistance line, now support around 0.7040, keeps AUD/USD buyers hopeful to aim for March’s low of 0.7165.

Markets expect the Norges Bank to hold rates at 0.75% tomorrow. Economists at Credit Suisse leave their Q2 EUR/NOK target unchanged at 9.80 as new headwinds for NOK limit the extent to which the currency can benefit from a more hawkish than expected outcome.

Market pricing leaves limited scope for an enduring NOK rally

“We think 9.80 remains an appropriate EUR/NOK target for Q2. We acknowledge risks from the meeting tilt in a hawkish direction, but we do not think these risks are sufficient to justify a more ambitious EUR/NOK downside target.”

“The market’s priced-in tightening expectations are mostly aligned with the Norges Bank’s guidance, in contrast with other G10 markets that are pricing in larger hawkish pivots. As such, market pricing leaves limited scope for an enduring NOK rally, even in the event of a surprise rate hike.”

“News from 28 Apr confirming that the Norges Bank would continue to sell 2bn NOK per day through May on behalf of the government reinforces our expectations that NOK longs now face more headwinds.”

This week’s Bank of England (BoE) meeting is widely expected to deliver another 25bp rate hike, taking the base rate to 1.00%. In the view of economists at Credit Suisse, the “Old Lady” would have to deliver a hawkish outcome to lift the pound.

GBP unlikely to present a clear case to buy any time soon

“We suspect the BoE would need to deliver a clear hawkish outcome such as a 50bp rate hike to change the negativity surrounding the currency.” 

“With the May 5 UK local elections in focus, and the prospect of poor outcomes and perhaps a leadership challenge for Boris Johnson, it seems unlikely that GBP will present a clear case to buy any time soon.”

In opinion of FX Strategists at UOB Group Lee Sue Ann and Quek Ser Leang, USD/JPY is now seen navigating within the 129.00-131.25 range in the next weeks.

Key Quotes

24-hour view: “USD traded in a relatively quiet manner yesterday. Momentum indicators are mostly flat and USD is likely to consolidate further and trade between 129.60 and 130.35.”

Next 1-3 weeks: “After surging to a high 131.24 last Thursday (28 Apr), USD pulled back and traded sideways the past few days. Upward momentum is beginning to wane and USD could continue to consolidate from here, likely between 129.00 and 131.25. Looking ahead, USD has to move and stay above 131.25 before further sustained advance is likely.”

Considering preliminary figures from CME Group for natural gas futures markets, open interest rose by more than 1K contracts on Tuesday, while volume followed suit and rose for the second straight session, this time by around 91.2K contracts.

Natural Gas remains focused on $8.30

Prices of natural gas edged higher and clinched new 13-year highs past the $8.00 mark per MMBtu on Tuesday, although they closed below this level. The move was against the backdrop of increasing open interest and volume, allowing for the continuation of the uptrend in the very near term and with the next target at the $8.30 region, or September 2018 highs.

• NZD/USD has slipped below 0.6430 despite stable NZ labor data.
• Volumes are returning in the Fx domain after a quiet Asian session.
• The DXY is attempting to establish above 103.50 ahead of the Fed’s policy.

The NZD/USD pair has surrendered its entire intraday gains after Statistics New Zealand reported the Unemployment Rate at 3.2%. The NZ jobless rate has come in line with the market consensus and prior print. The asset has tumbled below 0.6430 and is likely to remain vulnerable ahead of the Federal Reserve (Fed)’s monetary policy.

Flat Unemployment data printed by Statistics New Zealand seems encouraging amid a lower growth rate on a broader note.  It is worth noting that the NZ administration is consistently maintaining the full employment levels. Also, the Employment Change has been recorded at 0.1%, similar to the forecasts, which indicates a tight labor market. Moreover, the yearly Labor Cost Index has jumped to 3.1% from the previous print of 2.8%. Higher wage prices along with consistent Employment Change and jobless rate dictate a healthy labor market, which bolsters the odds of one more rate hike by the Reserve Bank of New Zealand (RBNZ) in its next monetary policy meeting.

On the dollar front, the US dollar index (DXY) has managed to sustain above 103.50 as volumes are returning to the Fx domain after a quiet Asian session. Investors are facing anxiety attacks ahead of the interest rate decision announcement by the Federal Reserve (Fed). The roadmap of balance sheet reduction and guidance on the remaining five monetary policy committee (MPC) meetings will remain in focus.

Further downside pressure in AUD/USD is expected to meet strong support at 0.6995 in the near term, commented FX Strategists at UOB Group Lee Sue Ann and Quek Ser Leang.

Key Quotes

24-hour view: “AUD soared to a high of 0.7148 during Asian session yesterday before easing off to trade sideways. Upward momentum has not improved by much and AUD is unlikely to strengthen much further. For today, AUD is more likely to trade sideways, expected to be within a range of 0.7055/0.7140.”

Next 1-3 weeks: “AUD snapped it losing streak yesterday as it rebounded and closed higher for the first time in 8 days. Despite the rebound, it is premature to expect an end to the current weakness in AUD. However, any further decline is expected to face solid support at 0.6995. On the upside, a breach of 0.7180 (‘strong resistance’ level) would indicate that the weak phase in AUD that started more than a week ago has come to an end.”

• Palladium remains sidelined after bouncing off one-week low.
• Steady RSI, SMA breakout keep buyers hopeful, five-week-old rising trend line adds to the downside filters.

Palladium (XPD/USD) treads water around $2,255 heading into Wednesday’s European session, following the previous day’s stellar rebound from the weekly bottom.

Even so, the precious metal keeps Tuesday’s upside break of the 50-SMA amid a mostly steady RSI, which in turn suggests the quote’s further advances.

That said, the latest swing high and the 200-SMA, respectively around $2,300 and $2,330, could lure the short-term buyers. However, a downward sloping trend line from April 11, close to $2,375 at the latest, will be decisive to watch during the quote’s upside past-$2,330.

Alternatively, pullback moves remain elusive until dropping back below the 50-SMA level of $2,242.

Following that, the 61.8% Fibonacci retracement level of March 29 to April 11 upside and recent low, close to $2,228 and $2,190 in that order, will test the XPD/USD bears.

Should the palladium sellers dominate past $2,190, a short-term support line from late March, around $2,150, will be crucial to watch for further directions.

Palladium: Four-hour chart

Trend: Further recovery expected

Gold Price is trading in the red after Tuesday’s dead cat bounce ahead of the all-important Federal Reserve showdown. As FXStreet’s Dhwanie Mehta notes, XAU/USD is set to test the 200-day moving average (DMA) at $1,835 on aggressive Fed stance.

Daily close above100-DMA at $1,879 needed to confirm a bullish reversal

“With a 50 bps rate hike and the commencement of the Fed’s balance sheet reduction almost a done deal on Wednesday, gold bears need an aggressively hawkish forward guidance to extend the ongoing downtrend.”

“Gold could revisit Tuesday’s low of $1,850. On an aggressive Fed policy outlook, hinting at a more than 50 bps hike in June, XAU/USD could accelerate the downside momentum to hit the 200-DMA at $1,835.”

“If the Fed disappoints the hawks, then gold bulls will likely challenge the 100-DMA at $1,879 again. Acceptance above the latter is needed on a daily closing basis to affirm a bullish reversal from over three-month lows. The next upside target for buyers is envisioned at Monday’s high of $1,900.”

See – Fed Preview: Forecasts from 18 major banks, 50bps is universally expected

FX option expiries for May 4 NY cut at 10:00 Eastern Time, via DTCC, can be found below.

- EUR/USD: EUR amounts        

• 1.0570 458m
• 1.0600 1.9b
• 1.0700 1.1b

- USD/JPY: USD amounts                     

• 129.00 380m
• 130.50 515m

- USD/CHF: USD amounts        

• 0.9025 1.2b

- AUD/USD: AUD amounts  

• 0.7130 345m
• 0.7250 570m

CME Group’s flash data for crude oil futures markets noted traders trimmed their open interest positions by around 4.5K contracts on Tuesday following five consecutive daily builds. In the same line, volume dropped for the third consecutive session, this time by around 37.1K contracts.

WTI: Bulls continue to target $109.00

Prices of the barrel of WTI traded on the defensive on Tuesday. The daily decline, however, came in tandem with shrinking open interest and volume and is indicative that further weakness appears not favoured in the very near term. Occasional bullish attempts, in the meantime, remain focused on the April high at $109.00 per barrel.

Cable’s selling bias could be alleviated on a breakout of the 1.2600 mark, noted FX Strategists at UOB Group Lee Sue Ann and Quek Ser Leang.

Key Quotes

24-hour view: “Yesterday, GBP traded sideways between 1.2472 and 1.2567 before closing largely unchanged at 1.2496 (+0.01%). Further sideway trading would not be surprising even though the slightly weakened underlying tone suggests a lower trading range of 1.2460/1.2555.”

Next 1-3 weeks: “GBP traded sideways the past few days and downward momentum is beginning to ease. That said, there is still chance, albeit not a high one for GBP drop below last week’s low near 1.2410. Only a breach of the ‘strong resistance’ level at 1.2600 would indicate that the downside risk has dissipated.”

• GBP/USD renews intraday low by staying inside the weekly range near two-year low.
• Brexit jitters renew ahead of NI elections as polls reject DUP victory.
• UK’s economic hardships can stop BOE but Fed’s moves are also priced-in, suggesting mixed play ahead of crucial events.

Following a second failure to break the weekly trading range, GBP/USD drops 0.20% during a lackluster Asian session on Wednesday.

The cable’s latest weakness could be linked to the US dollar’s recent pick-up, as well as negative headlines concerning Brexit and challenges for the Bank of England’s (BOE) hawkish move. Even so, the pair sellers remain cautious as the Fed’s expected hawkish actions seem mostly priced in.

Given the major opinion polls favoring Sinn Fein’s victory during the Northern Ireland (NI) victory, fears that the Democratic Unionist Party (DUP) will have to relinquish controls over the Brexit demand grew stronger. The same will add to Boris Johnson’s struggle to convince the European Union (EU) of UK-favored Brexit terms and weigh on the GBP/USD too. “Northern Ireland elections on Thursday could mark a major shift in the region’s sensitive political balance, and undermine Boris Johnson’s bid to redraw the terms of the U.K.’s split from the European Union,” said Bloomberg in this regard.

Elsewhere, fears that the UK will enter into recession should finance turn low battle the strong inflation to highlight the importance of the Bank of England’s (BOE) monetary policy verdict on Thursday. “The BoE may try to convince investors again that it will not raise rates as much as they expect. Rate futures are pricing Bank Rate hitting 2.25% by the end of this year with an outside chance of a 50 basis-point hike next week,” said Reuters.

On an immediate basis, markets are more interested in how the Fed tackles the inflation problem on hand. Though, a 0.50% rate hike and clues for balance-sheet normalization are mostly priced in and hence the Fed needs to do more to keep the USD bulls happy.

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

Technical analysis

GBP/USD broke an ascending triangle to the south and favored bears on Tuesday. Also suggesting the quote’s further downsides are the bearish MACD signals and the pair’s sustained trading below 200-HMA, around 1.2635 by the press time.

Open interest in gold futures markets rose by just 575 contracts on Tuesday, partially reversing the previous daily drop according to advanced prints from CME Group. Volume, instead, dropped by around 5.5K contracts following two consecutive daily builds.

Gold: Next support of note comes at the 200-day SMA

Tuesday’s uptick in gold prices was amidst a small build in open interest, which opens the door to a potential continuation of the ongoing bounce in the very near term. However, the imminence of the FOMC event and a potential hawkish outcome could force the yellow metal to lose further ground and test the key 200-day SMA, today at $1834.

• The cross is oscillating in a wider range that is indicating a prolonged consolidation.
• Momentum oscillator RSI (14) is facing resistance at 60.00.
• Euro bulls are firmer above the trendline placed from 0.8250.

The EUR/GBP pair has struggled while overstepping Tuesday’s high at 0.8430 as the volatility contraction ahead of the Fed’s monetary policy announcement has paused the Fx domain. The cross is experiencing significant barricades above 0.8450 and has been dragged lower on multiple failed attempts.

A wide consolidation range has been witnessed in a 0.8367-0.8467 gamut on the hourly scale. Usually, a wide consolidation range denotes range-bound moves for a longer period. The trendline placed from April 14 low at 0.8250, adjoining  April 20 low at 0.8289 and May’s low at 0.8367 respectively, will continue to act as major support going forward.

The 20- and 50-period Exponential Moving Averages (EMAs) at 0.8420 and 0.8410 respectively are overlapping each other, which signals a lackluster performance.

Also, the Relative Strength Index (RSI) (14) is struggling to overstep 60.00 decisively, indicating directionless trading sessions ahead.

Should the asset violates the upper boundary of the consolidation range at 0.8460, a bullish momentum will get triggered, which will drive the asset towards the psychological resistance of 0.8500, followed by a 20 December 2021 high at 0.8550.

On the flip side, pound bulls may regain control if the asset drops below the 50-EMA at 0.8410. This will drag the asset towards Tuesday’s low and April 20 high at 0.8373 and 0.8335 respectively.

EUR/GBP hourly chart

FX Strategists at UOB Group Lee Sue Ann and Quek Ser Leang suggested EUR/USD could slip back below the so far 2022 low at 1.0470 in the next weeks.

Key Quotes

24-hour view: “EUR popped briefly to 1.0577 before easing to close slightly higher at 1.0520 (+0.15%). Despite the advance, momentum indicators are ‘flattish’ and the risk of a sustained rise in EUR is low. Overall, EUR is likely to trade sideways for today, expected to be within a range of 1.0490/1.0570.”

Next 1-3 weeks: “After dropping sharply to a low of 1.0470 last Thursday (28 Apr), EUR traded sideways the past few days. The price actions are viewed as part of a short-term consolidation. In other words, EUR could extend its decline below 1.0470. In view of the oversold conditions, EUR may not be able to maintain a foothold below this level. On the upside, a breach of 1.0610 (‘strong resistance’ level) would suggest that 1.0470 could be a short-term bottom.”

• Platinum stays firmer around fortnight top, pokes resistance line of a bullish chart pattern.
• Oscillators favor buyers but 200-DMA acts as an additional upside filter.
• Multiple supports around $900 could challenge bears during further downside.

Platinum (XPT/USD) prices remain on the front foot around a two-week high flashed the previous day, up half a percent surrounding $971 by the press time. In doing so, the precious metal extends the previous day’s rebound from the yearly low during the two-day uptrend heading into Wednesday’s European session.

From a technical perspective, the commodity prices portray a falling wedge bullish chart formation if observing XPT/USD moves since early March. That said, the buyers attack the wedge’s resistance line near $973 at the latest.

Given the bullish MACD signals and recently improving RSI line, not overbought, the commodity is expected to stay on the buyer’s table. However, a clear upside break of the $975 becomes necessary to convince bulls.

Following that, the 200-DMA and tops marked during late March, respectively around $1,005 and $1,045, could test the buyers ahead of the $1,100 threshold and the theoretical target of the wedge breakout, around $1,250.

Meanwhile, pullback moves could aim for the $943-45 nearby support zone before the previous month’s bottom close to $908.

It should be observed, however, that multiple levels between $905 and $898 could challenge the platinum bears during the quote’s weakness past $908.

Platinum: Daily chart

Trend: Further upside expected

• USD/JPY has cemented around 103.00 on lower volumes in the Fx domain.
• A 50 bps has already priced in, so focus shifts to further guidance.
• An ultra-loose monetary policy by the BOJ has kept the Japanese yen on the edge.

The USD/JPY pair is sustaining itself above the round level support of 103.00 in a quiet trading session.  It looks like the anxiety over the interest rate decision by the Federal Reserve (Fed) has sucked volumes from the market, which has left the market in the doldrums.

Fed chair Jerome Powell is expected to stand by his statement dictated in his testimony at the International Monetary Fund (IMF) last month that a rate hike by 50 basis points (bps) is on the cards. An elevation of the interest rates by a jumbo rate hike is going to expand volatility in the market. However, a mega rate hike statement is already discounted by the market participants but what matters most now is the announcement of the balance sheet reduction and guidance for the remaining five monetary policies this year.

Meanwhile, the US dollar index (DXY) is struggling to establish above 103.50 and is likely to perform lackluster until the Fed chair Jerome Powell dictates the decision of the policymakers.

The Japanese yen has remained vulnerable for the past few trading sessions on ultra-loose monetary policy announcement by the Bank of Japan (BOJ). Prudent guidance is promised by BOJ Governor Haruhiko Kuroda to spurt the aggregate demand in the economy by keeping the rates to near ground levels and additional stimulus packages at some intervals. The holiday-truncated week in Japan will participate lesser in the week, therefore focus will remain shifted to the Fed’s policy majorly.

• USD/INR remains pressured for the fourth consecutive day as it renews intraday low.
• LIC IPO hints at heavy inflow of funds in Indian markets.
• Hopes that Fed won’t offer any surprises also underpin rupee strength.

USD/INR holds onto the latest southward grind, down 0.05% intraday while refreshing daily lows to 76.40 by the press time.

Market’s expectations from no additional hawkish measures from the Fed, apart from what is already anticipated and priced in, seem to have recently probed the US dollar bulls around a 20-year high. On the same line is the lack of an action at the bond markets in Asia due to holidays in China and Japan.

At home, the start of India’s largest insurance company’s public offer, namely the Life Insurance Corporation (LIC) of India, hints at the heavy inflow of funds to the equity markets. Also supporting the INR is the recent weakness of oil prices, a major burden on the Indian finances due to the reliance on energy imports.

On the flip side, a light calendar in Asia and global inflation fears, coupled with the geopolitical crisis in Ukraine and covid woes from China, challenge the USD/INR bears of late.

That said, the US Treasury yields eased from the highest since late 2018 by the end of Tuesday, unchanged at around 2.97% of late, whereas the US stock futures and Indian equities print mild gains as we write.

Given the dicey markets ahead of a major event, the USD/INR downside seems limited before the Fed’s move. Though, US ISM Services PMI and ADP Employment Change for April may entertain intraday traders.

Technical analysis

A clear downside break of the monthly support line, now resistance around 76.70, directs USD/INR bears toward the 21-DMA level surrounding 76.30.

• Loss of momentum around 0.7030 has triggered responsive buyers.
• A bull cross of 20- and 50 EMAs advocates a bullish bias.
• The asset needs to overstep the trendline placed from 0.7230 for further upside.

The AUD/USD pair is advancing higher gradually unlike the other assets which are trading lackluster ahead of the Fed’s monetary policy meeting. The pair have witnessed a firmer rebound after hitting a low of 0.7033 on Monday and is eyeing the 200-period Exponential Moving Average (EMA) at 0.7159.

A loss of downside momentum to near 0.7030 has triggered the responsive buyers, which have driven the asset higher. The exhaustion in the downtrend is visible from the Bullish Divergence formation on the momentum oscillator Relative Strength Index (RSI) (14). The continuation of lower lows by the asset was not accompanied by the RSI (14), which resulted in a bullish reversal. Also, the RSI (14) has shifted into a 40.00-60.00 range from the bearish range of 20.00-40.00, which fades the optimism of the greenback bulls.

A bull cross, represented by the 20- and 50-period EMAs at 0.7086 adds to the upside filters.

For a bullish momentum, the asset needs to overstep the trendline (placed from April 26 high at 0.7230) at 0.7150 decisively. This will send the asset towards the round level resistance at 0.7200, followed by April 22 low at 0.7234.

On the flip side, greenback bulls could regain strength if the pair drops below Monday’s low at 0.7033, which will send the asset towards the psychological support at 0.7000. Breach of the latter will drag the asset towards a 14 July 2020 low at 0.6921.

AUD/USD hourly chart

• Gold prices fade the previous day’s bounce off important support amid failures to cross short-term resistance confluence.
• Sentiment dwindles as traders anticipate Fed to match already priced in forecasts, off in China, Japan restricts moves.
• US ISM Services PMI, ADP Employment Change will also be important for trading directions.

Gold (XAU/USD) picks up bids to $1,865 within a strong trading range of $25 amid a pre-Fed trading lull. That said, the yellow metal bounced off a three-month low surrounding $1,855 the previous day before retreating from the $1,880 resistance confluence. Both these levels define the short-term trading range of the bullion as traders await the all-important Federal Open Market Committee (FOMC).

The metal’s latest weakness could be linked to the US dollar’s refrain from extending Tuesday’s pullback, as well as an absence of major catalysts amid holidays in China and Japan. However, broad expectations that the Fed will refrain from crossing the previously defined hawkish boundaries, amid challenges to the economy emanating from the Russia-Ukraine crisis and covid resurgence, seem to keep the gold buyers hopeful around a multi-month-old support line.

It’s worth noting, that the US Dollar Index (DXY) remains steady around a 20-year high, unchanged at 103.50, whereas the S&P 500 Futures print a three-day rebound from the yearly low, up 0.08% intraday by the press time. The US Treasury yields, however, remain unchanged after the previous day’s pullback to 2.97% as holidays in China and Japan restrict bond moves in Asia.

Although the European session may offer fresh life to the Treasury yields and can help move the XAU/USD prices, the cautious mood ahead of the US Federal Reserve (Fed) verdict may keep the metal traders on their toes.

Should the Fed match broadly priced-in market forecasts, the gold prices may recover and could cross the immediate hurdle surrounding $1,880, which in turn could confirm a short-term bullish trajectory. Though, any surprise won’t be taken tightly and hence need to be traded with caution. In addition to the Fed’s action, April’s outcome of the US ISM Services PMI and ADP Employment Change, as well as geopolitical and covid-linked headlines, will also be important to forecast gold moves.

Also read: Gold Price Forecast: Fear-related selling pauses ahead of Fed’s decision

Technical analysis

Having failed to cross the $1,880 resistance confluence, including the 100-DMA and 50% Fibonacci retracement (Fibo.) of August 2021 to March 2022 upside, gold eyes to retest the nine-month-old ascending support line, around $1,855 by the press time.

While the bearish MACD signals and failures to cross the $1,880 hurdle keep sellers hopeful, a limited room appears on the downside as RSI approaches the oversold territory.

Even if the gold bears manage to conquer the $1,855 support, the 200-DMA and 61.8% Fibo. will challenge the precious metal’s further downside near $1,834.

On the flip side, XAU/USD recovery beyond $1,880 will need validation from March’s low of $1,890 and the $1,900 threshold before highlighting the 50-DMA level of $1,936 for the bulls.

Gold: Daily chart

Trend: Limited downside expected

• EUR/USD is stuck around 1.0520 amid fears of Fed’s policy in broader market mood.
• Investors should brace for balance sheet reduction and aggressive hawkish guidance.
• Euro’s jobless rate has been recorded at 6.8%, weaker than the expectation of 6.7%.

The EUR/USD pair is trading lackluster in a quiet market mood as anxiety over the rate hike decision by the Federal Reserve (Fed) has paused the market participants to take any potential decision. The quiet and paused market movement signals the extent of fear in the sentiment of the market participants. Also, it dictates how significant the event is for the Fx domain.

A rate hike by 50 basis points (bps) is highly expected from Fed chair Jerome Powell as stated by him in his testimony at the International Monetary Fund (IMF) meeting. Therefore, the focus has shifted completely to balance sheet reduction and hawkish guidance. Considering the multi-decade high Consumer Price Index (CPI) and tight labor market, the Fed will definitely dictate the quantitative tightening and roadmap of returning to neutral rates. After the Fed's policy, investors will keep the US Nonfarm Payrolls (NFP) on the radar. A preliminary estimate shows the addition of 400k jobs against the prior figure of 431k.

Meanwhile, euro bulls see more downside on lower than expected Unemployment Rate reported by the Eurostat on Tuesday. A higher reading of 6.8% against the consensus of 6.7% has displayed a subdued performance from its labor market. Lower employment levels may push the European Central Bank (ECB) to hold a neutral stance going forward. However, the Euro Producer Price Index (PPI) has jumped to 36.8% from a forecast of 36.3% on a yearly basis while the monthly figure has climbed to 5.3%. Later on, the market participants will await the release of Euro Retail Sales. The yearly and monthly figures are seen at 1.4% and -0.1% respectively.

Analysts at Scotiabank believe that “a half-point hike in the fed funds target range to 0.75%–1.0% is expected alongside the implementation of plans to shrink the balance sheet.”

Additional quotes

“A move other than a half percentage point hike would be a surprise to markets.”

“One thing to watch for would be any signs of a shift in the explanation of the drivers of inflation toward something that is now believed to be longer-lived.”

“Nothing in the March dot plot indicates that the Fed plans on pausing rate hikes any time soon.”

“The direction of risks to inflationary pressures remains pointed higher and is likely to result in Chair Powell maintaining a hawkish stance.”

Related reads

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

• AUD/JPY hovers around intraday high as it extends week-start recovery.
• Market sentiment remains mildly positive amid expectations of no unexpected negatives from the Fed.
• Off in Japan, China restricts activity, Aussie Retail Sales rose past forecasts in March.
• Risk catalysts to keep the driver’s seat ahead of FOMC.

AUD/JPY remains on the front foot around 92.55, extending the two-day uptrend while poking a short-term key hurdle.

The risk barometer pair justifies recently positive Aussie data, as well as slightly positive market sentiment. However, holidays in Japan and a pre-Fed trading lull restrict the pair’s immediate moves.

That said, Australia’s Retail Sales for March rose past 0.6% market consensus to 1.6%, versus 1.8% prior. Earlier in the day, Australia’s S&P Global Services and Composite PMIs eased below the previous readouts of 56.2 and 56.6 to 55.9 and 56.1 in that order.

On the other hand, firmer S&P 500 Futures portray the market’s cautious optimism even as the Fed is anticipated to announce 50 basis points (bps) of a rate hike, as well as norms for balance sheet debt reduction. As the likely action is already priced in, as well as the Fed’s hesitance to stretch the boundaries considering the geopolitical and covid-led challenges to the economy, traders feel comfortable in placing small bids ahead of the key event.

Also supporting the AUD/JPY bulls is the Reserve Bank of Australia’s (RBA) hawkish bias and readiness for more such moves, considering inflation fears and economic resilience. The Aussie central bank superseded market expectations of a 0.15% rate hike with 25 basis points (bps) of a lift to the benchmark rate.

Alternatively, risk-negative headlines from China and Russia, mainly linked to the coronavirus resurgence and Ukraine invasion, join the fears that the Fed will need to tame the reflation woes to weigh on the AUD/JPY prices.

Looking forward, European traders’ actions ahead of the Fed and the US Treasury yields’ performance will direct intraday AUD/JPY moves ahead of the key Federal Open Market Committee (FOMC).

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

Technical analysis

AUD/JPY pokes a two-week-old resistance line surrounding 92.55 while extending the previous week’s rebound. Also acting as an upside filter is the 21-DMA around 92.95. Meanwhile, pullback moves remain elusive until staying beyond the weekly support line, at 91.95 by the press time.

• USD/CHF remains sidelined around two-year high amid pre-Fed trading lull.
• Bearish candlestick formation, RSI conditions hint at the profit booking moves.
• Bullish chart pattern, 10-DMA could challenge the bears.

USD/CHF bulls run out of steam inside a 15-pip trading area surrounding the highest levels since April 2020 during early Wednesday.

In doing so, the Swiss currency (CHF) pair respects the previous day’s bearish candlestick formation, namely the “Hanging Man”, as well as the overbought RSI conditions.

However, a one-month-old ascending trend channel could challenge the USD/CHF bears unless the quote drops below 0.9733 support.

Even if the pair defies the bullish channel formation, the 10-DMA level surrounding 0.9680 will act as an additional filter to the south before welcoming the bears.

Meanwhile, April 2020 peak, near 0.9805, will act as an immediate upside filter during the USD/CHF pair’s further advances.

Following that, the aforementioned channel’s resistance line and March 2020’s high, respectively around 0.9875 and the 0.9900 threshold, will be in focus.

Overall, USD/CHF prices are likely to trim some gains but the bears have a long way to go before retaking control.

USD/CHF: Daily chart

Trend: Pullback expected

• USD/CAD bears are moving in and challenging the bulls ahead of the Fed.
• The bulls will need to commit to the daily support structure or otherwise face a bearish onslaught. 

USD/CAD is on the verge of completing a significant correction ahead of the Federal Reserve later today. Nevertheless, the prospects are bullish at this juncture, although should the bears move in, it could result in a few scenarios as illustrated below. The first scenario, however, is staying with the trend as follows:

USD/CAD daily charts

A correction into the support structure could entice the bulls in at a discount and lead to a bullish extension for the days ahead. 

On the other hand, a bearish head & shoulders could be one of the scenarios if the bears continue to commit and challenge the bulls at this juncture. 

However, should the markets move out of the US dollar, perhaps as a result of a surprising less hawkish outcome at the Fed, then there is scope for a significant move to the downside, taking out the support structure as follows: 

• AUD/USD renews intraday high as Aussie Retail Sales crossed forecasts.
• Australia’s Retail Sales rose 1.6% MoM in March.
• Sluggish sentiment ahead of the key FOMC, off in Japan, China also restricts the pair’s moves.
• US data, risk catalysts will also be important for trading directions.

AUD/USD grinds higher as it renews intraday top around 0.7110 on firmer Aussie Retail Sales data for March. In doing so, the Aussie pair extends the previous day’s recovery from a three-month low amid pre-Fed anxiety.

Australia’s Retail Sales for March rose past 0.6% market consensus to 1.6%, versus 1.8% prior. Earlier in the day, Australia’s S&P Global Services and Composite PMIs eased below the previous readouts of 56.2 and 56.6 to 55.9 and 56.1 in that order.

Despite the recently softer data, the Reserve Bank of Australia’s (RBA) hawkish play, as well as hopes of no major positive surprise from the Fed, underpin the AUD/USD rebound of late. Adding to the corrective pullback are the mild gains of equities in the US.

It should be observed that holidays in China and Japan also restrict bond moves in Asia and allow the Aussie pair to portray recovery moves.

That being said, the AUD/USD prices rallied the previous day the most in a fortnight after the RBA superseded market expectations of a 0.15% rate hike with 25 basis points (bps) of a lift to the benchmark rate. Not only that, the Australian central bank’s readiness for more such moves, considering inflation fears and economic resilience, also favored the pair on Tuesday.

The AUD/USD recovery, however, was against the strong prints of the US JOLTS Job Openings and Factory Orders for March. The reason for the pair’s latest recovery could also be linked to the hopes that the Fed won’t go beyond the already priced-in measures.

Even so, the Fed is known for surprises and the hot inflation requires attention, which in turn makes today’s Federal Open Market Committee (FOMC) the key event. Also important will be April’s outcome of the US ISM Services PMI and ADP Employment Change, as well as geopolitical and covid-linked headlines.

Technical analysis

March’s low of 0.7165 appears as a short-term ceiling for the AUD/USD prices even as the RSI rebound challenges bears targeting the yearly low surrounding 0.6965.

Australian retail spending and home loans have been released.

Weather and fuel price effects were expected to weigh on Retail Sales in March while housing finance approvals were set to fall in March given the housing cycle peak has started this year. Owner-occupier loans are expected to outstrip investor loans in the decline for the month.

The main data monitored by the markets were Retail Sales, and has, however, surprised to the upside as follows: 

Retail Sales in March arrived at 1.6% vs. expected 0.6%. As a consequence, the Aussie is making tracks to the upside in otherwise slow markets ahead of the Federal Reserve later today. 

The data compliments a hawkish Reserve Bank of Australia that surprised markets yesterday with a 0.25% hike. 

AUD/USD update

The price has popped on the better news from the retail sector amid a hawkish RBA environment. The bank hiked by 0.25% but the consensus expectation had been for a 15bp hike to 0.25%.

''The move was on the hawkish end of the spectrum, with the RBA emphasising that 'a further lift in interest rates over the period ahead' will be 'necessary to ensure that inflation… returns to target over time','' analysts at ANZ Bank explained.

''After last week’s surprisingly strong 5.1% print for headline inflation, the RBA is now expecting inflation to reach 6% by the end of the year, with core inflation at 4¾ percent. High time for rate hikes.''

Markets will now look ahead to the Federal Reserve which is expected to raise the Fed Funds rate by 50bp to 0.875% and provide a confirmation of the quantitative tightening process. A surprise either way could make for volatility in AUD/USD later today. 

About Retail Sales

The Retail Sales released by the Australian Bureau of Statistics is a survey of goods sold by retailers is based on a sampling of retail stores of different types and sizes and it''s considered as an indicator of the pace of the Australian economy. It shows the performance of the retail sector over the short and mid-term. Positive economic growth anticipates bullish trends for the AUD, while a low reading is seen as negative or bearish.

• Gold prices have displayed exhaustion in the downtrend as the RSI (14) showed a bullish divergence.
• The anxiety over the interest rate decision by the Fed has paused the Fx domain.
• The US labor market sees 400k additions in April.

Gold Price (XAU/USD) is hovering around $1,865.00 and is likely to remain on tenterhooks as uncertainty over the announcement of the monetary policy by the Federal Reserve (Fed) has paused the whole Fx domain. The precious metal has displayed a subdued performance in the early Tokyo session and is likely to perform lackluster till the announcement of the interest rate decision.

Gold prices are going to witness a lack of attention from investors for a prolonged period as the determination of the Fed to return to neutral rates will keep pushing itself to raise interest rates sooner rather than later.  An interest rate hike by 50 basis points (bps) is on the cards but taking into consideration the multi-decade high inflation and consistency in full employment levels and wage-price hikes, one more jumbo rate hike by the Fed looks imminent.

Meanwhile, the US dollar index (DXY) is attempting to overstep 103.50 in this session. Apart from the Fed’s policy, the DXY is also focusing on the release of the US Nonfarm Payrolls (NFP), which is due on Friday. The job additions by the US administration in April are expected to land at 400k against the prior print of 431k. Also, the Unemployment Rate looks to decline to 3.5% from the previous figure of 3.6%.

Gold technical analysis

The formation of bullish divergence on an hourly scale is signaling a reversal in the downtrend.  The asset made a lower low while the momentum oscillator Relative Strength Index (RSI) (14) didn’t register a fresh low, which showed exhaustion in the downside momentum. The 50- and 200- Exponential Moving Averages (EMAs) at $1,871.63 and $1,890.96 respectively, still favor the downside. The RSI (14) is likely to find a cushion at around 40.00, which will result in a fresh bullish impulsive wave ahead.

Gold hourly chart

• S&P 500 Futures extend bounce off yearly low, US Treasury yields stay near multi-year high.
• Off in Japan, China adds strength to the pre-Fed trading lull.
• Fed’s preference for orderly markets, geopolitical and covid-led challenges test hawks amid mostly priced-in outcomes.
• US ISM Services PMI, ADP Employment Change will be important to watch as well.

Global markets remain jittery, mildly positive though, as traders remain cautious ahead of the key Federal Open Market Committee (FOMC) meeting outcome, up for release late Wednesday. In addition to the pre-Fed anxiety, holidays in China and Japan also restrict the market moves.

Even so, the S&P 500 Futures print mild gains while marching towards 4,200, up for the third consecutive day. However, the US 10-year Treasury yields remain inactive at around a 3.0% rate as an off in Tokyo limits bond moves in Asia.

Underpinning the latest optimism could be a pullback in the US bond yields from the highest levels since December 2018. More importantly, expectations that the US Federal Reserve (Fed) will match the widely anticipated, as well as priced in, 50 basis points (bps) of a rate hike and provide hints of balance sheet normalization also back the latest consolidation.

While considering the same, the Australia and New Zealand Banking Group (ANZ) said, “Given the weight the FOMC puts on forward guidance and a preference for orderly market moves, particularly given current geopolitics and the slowdown in China, such a surprise seems unlikely.”

It’s worth noting that the US dollar bears the burden of the market’s indecision as it stays ground around its 20-year top, recently sidelined near 103.50. This ignores the strong JOLTS Job Openings and Factory Orders for March data published the previous day. Also, escalating geopolitical fears and covid woes would have also underpinned the US dollar strength but could not.

Looking forward, the Fed’s battle to tame the inflation will be crucial to watch but the monthly print of US ISM Services PMI and ADP Employment Change will also be important for clear directions. Additionally, updates from Russia and China are likely to help in making trade decisions as well.

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

• GBP/USD bulls have stepped in as the US dollar is faded ahead of the Fed. 
• The Fed is widely expected to announce a hawkish hike. 

At 1.2495, GBP/USD is flat in Asia in what could the quiet before the storm should there be any surprises in the Federal Reserve interest rate decision. 

The US dollar retreated against a basket of currencies on Tuesday, wilting below the dollar index hit a 20-year high last week on expectations the Fed will be more aggressive than peers as it contends with inflation running at its fastest pace in 40 years. Markets traded positively, despite what is expected to be a 50bps rise accompanied by more hawkish guidance as well as the announcement of quantitative tightening.

''The market is expecting that the ceiling for the fed funds rate will be over 200bps by September. Of course, the Fed could always raise by more than expected, reversing more quickly the pandemic interest rate cuts,'' analysts at ANZ Bank explained.

''But given the weight that the FOMC puts on forward guidance and a preference for orderly market moves, particularly given current geopolitics and the slowdown in China, such a surprise seems unlikely. So it is understandable how markets may be sensing a relief rally.''

Eyes on BoE

Meanwhile, the focus is also on the Bank of England. We had a ‘dovish hike’ in March yet a further 25bp rate hike is expected at its meeting on Thursday 5 May.

''We see rates rising twice more this year and once in early 2023 for a terminal rate of 1.75%,'' analysts at Nomura said.

''This is lower than markets expect, and while we acknowledge the upside risks to our Bank Rate forecast we think the economic cycle will ultimately prevent the Bank from raising rates further than that.''

''Higher near-term inflation view is almost inevitable, but the key question is whether the Bank continues to see inflation sub-target at the end of the horizon – driven down in the Bank’s February forecasts by spare capacity as high spot inflation destroys demand. A lower GDP and higher unemployment profile look likely too.''

EUR/USD fails to extend the previous day’s recovery moves and stays inside the weekly range surrounding the 1.0490-570 area. That said, the major currency pair takes rounds to 1.0524 by the press time of Wednesday’s Asian session.

In doing so, the quote portrays the options market’s indecision, as well as anxiety ahead of the key Federal Open Market Committee (FOMC).

That said, the risk reversals (RR) of the EUR/USD, a measure of the spread between the call and put prices, remain dicey on a weekly and monthly basis despite the daily print rebound to 0.125. It’s worth noting that the weekly and monthly RR prints recover from the previous negative readouts with 0.013 figures.

Given the options market’s indecision, as well as hopes of a disappointment from the Fed, considering the 0.50% rate hike being mostly priced in, EUR/USD prices may witness a rebound should the Federal Reserve (Fed) chose not to go beyond the limits already anticipated.

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

• NZD/USD bulls are moving in at weekly support. 
• Wycoff style accumulation could be playing out. 

The antipodeans have been wrong-footed by a strong US dollar ahead of the Federal Reserve meeting this week. The kiwi has been sent down to fresh cycle lows vs. the greenback where it is now consolidating as per the following analysis:

NZD/USD H1 chart

The price has moved into a phase of consolidation as it comes within a stone's throw of the weekly support structure as illustrated below. The schematic on the hourly chart is shaping up to be a Wycoff style accumulation and a bullish correction could be on the cards on the longer-term charts. 

NZD/USD weekly chart

If the bulls commit at this juncture, then a move into the test of the various prior support structures would be probable.  

• WTI oscillates in a tight range as China’s oil purchase from Russia eases supply concerns.
• Lower oil stockpiles in the US could postpone the decision of an embargo by Europe.
• The API reported a fall in the oil inventories by 3.5 million barrels.

West Texas Intermediate (WTI), futures on NYMEX, is oscillating in a narrow range of 103.33-103.59 on easing supply concerns.  China’s independent refineries have started importing oil from Russia at a steep discount, as per Financial Times.  It looks like the commodity traders in China have a veto on the sanctions imposed on Russia by the Western leaders after its invasion of Ukraine.

It is worth noting that China is the biggest importer of oil in the world and the resumption of oil imports from Russia by the dragon economy will weigh pressure on the oil prices. Earlier, demand worries from China on the resurgence of the Covid-19 in Shanghai and Beijing were impacting the oil prices. Now, the multiplier effect from increasing demand worries and easing supply concerns will keep the oil prices in check.

Meanwhile, oil stockpiles reported by the American Petroleum Institute (API) have fallen by 3.5 million barrels against the forecast of a buildup of 4.5 million barrels. Lower oil inventories in the US are an outcome of the higher exports of oil by the US recently. The US administration has turned out as an exporter of oil as its exports remained higher by three million barrels daily last month against its imports. This has provided some cushion to the oil prices. Going forward, investors will keep an eye on the OPEC meeting, which is due on Thursday. The OPEC cartel is expected to reduce oil production in order to keep the oil prices above $100.

• GBP/JPY fades the bounce off weekly low, stays below short-term important Daily Moving Averages (DMAs).
• One-week-old retreat, steady RSI also underpin bearish bias.
• Convergence of 50-DMA, April’s low and 50% Fibonacci retracement appears tough nut to crack for sellers.

GBP/JPY remains pressured around 162.55, grinding lower of late, while portraying the market’s pre-Fed anxiety during early Wednesday.

The cross-currency pair bounced off the weekly low on Tuesday but failed to cross the 10-DMA and 21-DMA confluence. The resulted pullback also gained support from steady RSI and a U-turn during the last week to keep sellers hopeful.

That said, 38.2% Fibonacci retracement (Fibo.) of March-April upside, around 161.75, appears immediate support to the GBP/JPY prices.

Should the quote drops below 161.75, the odds of witnessing a further fall towards the 159.50-55 support confluence, comprising 50-DMA, 50% Fibo and the previous monthly low, can’t be ruled out.

Alternatively, 10-DMA and 21-DMA restrict the GBP/JPY pair’s short-term rebound near 163.00 and 163.70 respectively.

Following that, March’s high of 164.65 will test the bulls before directing them to the previous monthly peak of 168.43.

To sum up, GBP/JPY prices tilt southwards but the bears will have a tough task breaking 159.60-55 support.

GBP/JPY: Daily chart

Trend: Further weakness expected

• AUD/USD fails to extend Tuesday’s rebound despite refreshing daily top of late.
• Market sentiment remains mildly positive but cautious mood ahead of FOMC tests buyers.
• RBA pleased bulls but Fed needs to validate further upside.

AUD/USD pierces the 0.7100 threshold to renew its intraday high during a mostly quiet Asian session on Wednesday.

The Aussie pair rallied the most in two weeks the previous day on the Reserve Bank of Australia’s (RBA) higher-than-expected rate hike, as well as the US dollar pullback during the pre-Fed consolidation. The latest rebound, however, remains doubtful ahead of the key data/events scheduled for publish during the day.

Among them, Australia’s TD Securities Inflation for April, prior 4.0% YoY, as well as Retail Sales for March, expected 0.6% versus 1.8% prior, will be the immediate catalysts to watch. Following that, the US ISM Services PMI for April may entertain the AUD/USD traders. However, major attention will be given to how the US central bank (Federal Reserve) will respond to the recently heavy inflation fears.

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

On Tuesday, the RBA raised the benchmark rate to 0.35% versus an expected lift to 0.25%. The Aussie central bank also signaled further moves ahead while citing inflation fears and economic resilience. Also supporting the AUD/USD prices was the US Dollar Index (DXY) pullback as traders brace for the Fed’s widely anticipated 0.50% rate lift, with hidden hopes of doing more than expected to save the US dollar.

That being said, global markets remain mostly sidelined amid a holiday in Japan and China. Even so, risks emanating from Russia and China, due to Ukraine’s invasion and covid resurgence, probe the AUD/USD buyers.

Technical analysis

AUD/USD recovery remains elusive until crossing March’s low of 0.7165. The downside move, however, has a bumpy road before hitting the yearly low surrounding 0.6965.

• USD/JPY is struggling to breach its 14-pips range as investors are awaiting the release of the Fed’s policy.
• The DXY could continue its upside move on the announcement of balance sheet reduction and hawkish guidance.
• The Japanese yen will remain in the doldrums of BOJ’s ultra-loose monetary policy.

The USD/JPY pair is displaying a lackluster performance in the Asian session as investors are playing the waiting game ahead of the announcement of the interest rate decision by the Federal Reserve (Fed). The asset is juggling in a 14-pips range as investors have trimmed their positions significantly.

Fed chair Jerome Powell is going to feature a 50 basis point (bps) rate hike as per the market consensus. To tame the multi-decade high inflation, a rate hike cycle with a mega start looks highly required. Meanwhile, the US dollar index (DXY) is stuck around 103.50 amid anxiety over the dictation from Fed Powell. It is worth noting that the DXY has witnessed a juggernaut rally on the expectation of an extreme hawkish tone by the Fed. Usually, the happening of a certain event, results in an intense sell-off in the asset, however, the asset could gain further on the announcements of quantitative tightening and hawkish guidance.

On the Japanese yen front, the broader weakness in Tokyo on the continuation of ultra-loose monetary policy by the Bank of Japan (BOJ) has favored the asset for a while. The BOJ is sticking to releasing more stimulus to spurt the growth rate as the economy has yet not reached its pre-pandemic growth levels.  

Apart from the Fed’s policy, US ISM Services PMI will remain in focus, which is seen at 58.5. While Japanese markets will be on holiday on account of Greenery Day.