EUR/USD erased most of its gains Monday as longs seem to lack conviction ahead of a slew of U.S. data and Fed risks, which could set the stage for a move below 1.0500.

EUR/USD neared the 50% Fibo of the 1.0885-1.0602 decline then began sliding despite April German CPI indicating inflation remains sticky, which could fuel doubts the ECB will begin a sustained rate cutting cycle.

German-U.S.
2-year yield spreads US2DE2=RR, which EUR/USD is correlated with, actually widened on the session and neared key -202/-205bps support, a break of which could bring out EUR/USD sellers.

Erosion of EUR/USD gains Monday should concern longs as suspected intervention driving USD/JPY sharply lower failed to fuel EUR/USD gains, a potential sign that rally sellers hold the reins.

EUR/USD's rally off the April 16 low might not bolster bulls' confidence since it appears corrective in nature and a bear flag continuation pattern formed on daily charts.
The flag reinforces bearish signs from Friday's daily doji, falling monthly RSI and the pair's inability to hold above the aforementioned Fibo.

Investors are now focused on U.S. employment reports and Fed risks.

Should robust jobs data emerge and the Fed take a hawkish lean, U.S. yields and the dollar may rally, heralding a fresh leg lower for EUR/USD.

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Synopsis:

MUFG analyzes the recent sharp movements in the yen, suggesting that the overnight volatility may indicate unofficial intervention by Japan to support its currency. This potential intervention comes after significant weakening of the yen, especially following the Bank of Japan's (BoJ) recent policy meeting.

Key Points:

• Yen Volatility and Potential Intervention: The USD/JPY experienced extreme volatility overnight, spiking to a high of 160.17 before dropping back to 155.06. This pattern is reminiscent of the market behavior observed during Japan's last intervention in the foreign exchange market in the autumn of 2022. Japan's top currency official's non-committal response to intervention queries further fuels speculation of government action.

• Lack of Official Confirmation: While there has been no official confirmation of intervention from Japanese authorities, the significant escalation in yen weakening post-BoJ meeting provides a plausible justification for such measures.

• BoJ's Recent Policy Stance: The BoJ's latest policy meeting did not strongly counter the trend of yen weakening, with Governor Ueda not signaling imminent rate hikes nor expressing significant concern over the yen's recent declines. This stance likely contributed to the market's continued bearish outlook on the yen.

• Impact of Yen Weakness on Inflation: The current level of yen depreciation is not deemed sufficient by the BoJ to significantly influence the underlying inflation trend, which would necessitate a shift in monetary tightening strategies.

• Effectiveness of Intervention: According to MUFG, direct intervention in the FX market may at best slow the pace of yen weakening but is unlikely to reverse the trend. The intervention, if confirmed, is seen as a temporary measure to buy time for potential shifts in economic fundamentals that could more sustainably support the yen.

Conclusion:

MUFG posits that recent actions suggestive of FX intervention by Japan are likely aimed at temporarily stemming the yen's decline rather than initiating a long-term reversal. The effectiveness of such measures may be limited unless accompanied by significant changes in Japan's economic fundamentals or monetary policy adjustments.

• AUD/USD hit 0.6522 in Asia, buyers emerged, 0.6587 traded, a 13-session high

• NY opened near 0.6565, pair traded up +0.47% with help from upbeat risk

• USD/CNH fell to 7.2483 (D3), stocks ESv1 & commodities HGv1XAU= gained

• USD/JPY drop to 154.40 (EBS) & US yield US2YT=RR slide helped buoy AUD/USD

• Pair rallied above 55- & 200-DMAs, pierced the daily cloud then pulled back

• Techs are bullish; RSIs rising & long lower wick in place on April candle

• US ADP, JOLTS, weekly claims, payrolls & ISM mfg are data risks this week

• Fed statement, Powell's presser are major event risks for Wednesday

• For more click on FXBUZ

• 1.2509 is low water-mark for cable since its 1.2548 Asian session peak

• 1.2548 is highest level since April 12 (1.2558 was high that day)

• BHP adviser canvassing investor views on improved Anglo bid, sources say

• News of BHP's 31 billion pound offer for Anglo lifted GBP/USD last week

• CFTC data showed net GBP position recently flipped from long to short

• Flip accompanied cable drop to 5-month low of 1.2299 at start of last week

What matters is how long USD/JPY stays down in the wake of suspected FX intervention that has seen the pair dive from 160.24 to 154.20 before rallying toward 156.

How far USD/JPY falls is less important than where the pair ends up, as an inability to hold the pair down will fuel greater demand.
Should USD/JPY exceed the level where BOJ was first suspected to have sold, a big rise could follow that the central bank cannot stop easily, and may fail to hold altogether without help.

The less time USD/JPY stays down, the greater the bullish reaction.
So once intervention begins it must continue, and perhaps grow in intensity if the central bank wishes to suppress USD/JPY at a lower level.

The influence of intervention when USD/JPY is high - as it was above 160 - is much greater than it will be once USD/JPY has dropped.

The bets against the yen will be reduced in the wake of this big drop.
The less wagered against the yen, the less the restraint on its drop.

While Japan's central bank maintains bond purchases, it's effectively fighting without itself for control of the yen.
Because bond buys are bigger, and are being sustained over a much longer period than intervention, their negative influence is greater, driving the yen to a record low in February this year.

For more click on FXBUZ

• Traders have wagered $14.5 billion that yen drops

• This is a much bigger bet than when BOJ intervened in 2022

• USD/JPY dropped from 151.94 in Oct 2022 to 127.22 EBS in Jan 2023

• Many of those short yen are making money

• There is never a bad time to book a profit, this may be a better one

• April 29 action certainly looks like intervention nL1N3H20EQ

• Friday's drop to 1.2549 freed up room for the pound to push higher again

• However, a long upper candle shadow so far today warns of demand fade

• The flat lining 200-day MA provides resistance at 1.2556

• A key 50% Fibo retracement above at 1.2596: taken off 1.2893-1.2299

• Fourteen day momentum is negative but RSI is rising

• On balance still a market but consolidation below 1.2600 likely

  For more click on FXBUZ

• AUD/USD spikes as high as 0.6587 from opening 0.6524

• Briefly peeked above 0.6586 top of Ichimoku cloud resistance

• Mon close above that will clear a path higher to 0.6600

• Sharp downmove in USD/JPY seen as a broader USD trigger

• FX intervention suspected after USD/JPY crossed 160.00

• Market have been eyeing psych barrier as a line-in-the-sand

• For more click on FXBUZ

• USD/JPY trades at the base of a 156.55-160.24 range today with Tokyo closed

• The move from 158.66 to 160.24 and back to 1.5930 took less than 10 minutes

• Stops and option structures around 160.00 were triggered by the jump

• USD/JPY has fallen from 159.60 to touch 156.24 in the last 15 minutes

• At this point there has been no confirmed Bank of Japan activity

• The moves are exaggerated by the Tokyo holiday, so liquidity is at a premium

• Initial support at 155.248 10-day moving average then Friday's 154.97 base

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• AUD/USD opened +0.23% at 0.6533 as AUD best performing major currency Friday

• Rally extended in Asia as carry demand and broad USD weakness underpinned

• Asian equity markets upbeat and helped to encourage AUD carry trade buying nL1N3H203A

• AUD/USD traded above the 38.2 of the Dec-April fall at 0.6556

• The high in Asia so far has been 0.65698 and its around 0.6560/65

• Support is at the 200-day MA at 0.6525 and 21-day MA at 0.6505

• FOMC decision on Wednesday may limit large directional move in meantime

• For more click on FXBUZ

• USD/CNH slips to 7.2633 from opening 7.2690; last 7.2668

• Bullish inside Bollinger uptrend channel if 7.2647 holds

• PBOC fix at 7.1066, around -1500 pips from neutral

• Stronger dampening applied following Friday's DXY surge

• Chinese FX authorities are still tightly controlling yuan

• Japan's yen hitting new 34-yr low helps support USD/CNH

• For more click on FXBUZ

• AUD/USD moving higher and is trading @ 0.6545 after closing Friday @ 0.6533

• USD starting off week on a soft note and is broadly lower in early trading

• Risk assets firm with the E-minis up 0.18% and the Australia ASX up 0.6%

• AUD/USD resistance is at the 38.2 of Dec-April fall at 0.6556

• Friday's high was at 0.6554 where selling is tipped

• Support is at 200-day MA at 0.6525 after it closed above that reading Friday

• For more click on FXBUZ

• USD/CNH ended Fri just above key resistance around 7.2680

• But fades slightly early Mon to last trade 7.2675

• Bullish momentum building with target set on 7.3000 barrier

• USD/JPY scaling new 34-year highs on Fri spurs USD/AXJ

• US core inflation rose as expected in Mar nL2N3GY39R

• China Apr PMIs due Tues; slower expansion expected

• For more click on FXBUZ

• USD/JPY recovers from minor dip in Asia after a 1.8% surge on Friday

• Opens at 158.00 from 158.33 New York close; Asia range 158.43-157.80

• Traders wary of BOJ intervention as rise "too far, too quick"

• Sticky U.S. inflation, yawning U.S.-Japan yield differentials underpin

• Benign Japanese inflation data, BOJ's dovish hold Friday undermine JPY

• Japan frets over relentless yen slide as BOJ keeps ultra-low rates

• Fri range 154.97-158.44; traders now eye 160.00 with support at 155.00

• FOMC meeting, US payrolls to set directionthis week

• For more click on FXBUZ

• AUD/USD managed to rise 0.23% Friday as AUD was best performing currency

• Rising commodities helping to broadly underpin AUD nL5N3GZ3G1nL2N3GZ0H9

• AUD/JPY carry trade demand - as market prices in chance of another RBA hike

• AUD/USD closed above the 200-day MA (0.6525) to conform bullish bias

• Resistance is at the 38.2 of the December-April fall at 0.6556

• A break above 0.6560 targets the 50% of that move at 0.6616

• Support is at the 21-day MA at 0.6505 where buying is tipped

• Key today will be AUD/JPY flows out of Tokyo after it rose 2.0% Friday

• For more click on FXBUZ

Repeats with no changes

• EUR net spec position swings to short of 9,989 contracts as of Tuesday

• Previous week, EUR had long of 12,224

• First EUR short since September 2022

• JPY short 179,919 -- biggest since mid-2007 -- vs 165,619 contracts the previous week

• GBP short 26,233 -- first short since November 2023 -- vs long of 8,619 contracts

• AUD short 96,239 contracts vs 101,083

• CHF short jumps to 42,562 contracts -- biggest short since September 2018 -- vs 36,212

• Dollar bounce back keeps pressure on cable, now sub-1.25

• U.S. PCE causes little stir on better than feared beat nL2N3GZ2A6

• 200-HMA and 23.6% fib of YTD range at 1.2430 offers support for now

• Focus turns to plethora of event risk - includes Fed, QRA and NFP

• COMMENT-Fedspeak round-up: More confidence needed to cut nL2N3GZ0OC

• Resistance: 1.25, 1.2515-25 (Feb low, 38.2% fib), 1.2555 (200-DMA)

For more click on FXBUZ

• AUD/USD opened NY near 0.6535, pair rallied to 0.65545 after US March PCE

• Sellers emerged however as US yields US2YT=RR, US$ started rallying

• USD/JPY hit a fresh 34-year high, USD/CNH rallied to 7.2680 on D3

• AUD/USD fell to 0.65175, slide stalled & buyers then took over

• Yields softened, gold XAU= rallied & equities ESv1 saw big gains

• AUD/USD neared 0.6535, pair traded up +0.21% late in the session

• Techs lean bullish; RSIs rising, pair traded above the 10- & 21-DMAs

• US ADP, JOLTS, claims, payroll reports will be in focus next week

• For more click on FXBUZ

Synopsis:

Credit Agricole predicts a continued downward pressure on EUR/USD due to diverging monetary policies between the European Central Bank (ECB) and the Federal Reserve. Despite potential inflationary pressures from a weak euro and high commodity prices, the bank sees limited impact from exchange rate movements on Eurozone inflation.

Key Points:

• Monetary Policy Divergence: The ongoing divergence in monetary policy between the ECB and the Fed is expected to be a key driver for EUR/USD. The Fed's outlook and the ECB's ability to match this stance will significantly influence the currency pair.

• ECB's Exchange Rate Concerns: ECB President Christine Lagarde has highlighted concerns that further weakening of the euro, coupled with high commodity prices, could increase inflationary pressures and potentially disrupt the ECB's plans for easing. However, Credit Agricole expresses skepticism about the market's reaction, suggesting that investors might test Lagarde's resolve on this issue.

• Exchange Rate Pass-through (ERPT) Effect: Recent data suggests that the pass-through effect of a weaker euro on Eurozone inflation has diminished compared to previous years. For instance, a 10% depreciation in the euro's nominal effective exchange rate (NEER) is now estimated to increase headline CPI by only 0.2-0.3% after four quarters, compared to 0.5% in earlier periods.

• Resilience of the Euro NEER: Despite the weakness observed in EUR/USD, the euro's nominal effective exchange rate has remained relatively stable, supporting the view that direct impacts on inflation might be subdued.

• Upcoming Inflation Data: The upcoming Eurozone April flash Harmonised Index of Consumer Prices (HICP) is expected to indicate further disinflation, reinforcing expectations for an ECB rate cut in June followed by additional easing measures later in the year.

• EUR/USD Outlook: Given these factors, Credit Agricole advises that EUR/USD should remain a sell on rallies next week, anticipating that any upward movements in the currency pair may be short-lived.

Conclusion: As the ECB and Fed continue on their divergent paths, EUR/USD is likely to face downward pressures, influenced by policy decisions and evolving economic indicators. Investors should closely monitor upcoming inflation data and ECB communications, as these will play crucial roles in shaping market expectations and the trajectory of EUR/USD. Selling on rallies could be a prudent strategy in this environment, given the limited efficacy of a weaker euro in driving up inflation and the anticipated monetary easing by the ECB.

Cable went on the back foot to close out the week, failing to maintain a foothold above the 1.25 handle and in need of a solid foray across the 200-day moving average beyond that figure to change the soft-sterling narrative.

After the worrying price data in the Q1 U.S. GDP report, traders appeared to breathe a sigh of relief following March PCE figures.

Despite a topside surprise relative to expectations, a 0.1ppt beat on both the core and headline figures were arguably less than what could’ve been given the GDP report.
In turn, market pricing over Fed policy was little changed with 35bps of easing seen by year-end 0#FEDWATCH.

The data reaffirms the current stance from Fed officials that more confidence is needed until they can consider cutting interest rates -- a message that will likely be reiterated at next week’s FOMC meeting.

For GBP/USD, while 1.25 is a key pivot zone – prior support, now resistance – the 200-DMA situated at 1.2555 needs clearing before bulls can get excited.
As previously highlighted, month-end flows will continue to favor the greenback in the immediate future.

For more click on FXBUZ

Synopsis:

Bank of America forecasts a ceiling on the potential rally of USD/CAD, despite imminent monetary policy divergence, citing inflation risks and structural financial concerns within Canada that could limit the pair’s upward movement.

Key Points:

• Monetary Policy Divergence: BofA expects the Bank of Canada (BoC) to begin its rate cutting cycle in the summer, while anticipating the first Federal Reserve rate cut towards the end of the year. This policy divergence is recognized by many investors, potentially influencing USD/CAD dynamics.

• Impact of CAD Weakness: A sharp sell-off in the CAD following the BoC’s rate cuts could lead to significant inflationary pressures within Canada. BofA estimates that for every significant rise in USD/CAD, there could be an additional 15 basis points added to Canadian CPI. A surge to 1.45 in USD/CAD could increase Canada’s CPI by a full percentage point.

• Market Reaction and Ceiling on Rally: The potential inflationary impact and structural portfolio outflows due to a weaker CAD may concern FX markets, thereby imposing a ceiling on how much USD/CAD can rally. This is in contrast to other currency pairs where similar dynamics may not be as pronounced.

• Relative Position of CAD: Compared to other major developed country currencies, the CAD is in a more favorable position, making it a less preferred option for those holding a bullish USD view.

• Bank of Canada’s Potential Interventions: While the current risk of FX intervention by the BoC is low, the bank has a history of intervening in the FX and repo markets. Such measures could be considered if USD/CAD movements threaten economic stability.

• Outlook and Forecasts: BofA maintains a downward forecast path for USD/CAD, expecting it to revisit the 200-day SMA of 1.35 by the end of the year. However, the long-term forecast for 2025 has been adjusted from 1.30 to 1.32 due to diverging terminal policy rates between the Fed and BoC.

Conclusion:

While the impending divergence in monetary policies between the U.S. and Canada suggests potential for a USD/CAD rally, BofA advises caution, highlighting structural and inflationary risks that could cap significant gains.

• EUR/GBP hits 0.8563 after extending south from 0.8643 (16-week high Tuesday)

• 0.8563 is lowest level since April 19 (0.8556 was low that day)

• GBP supported by lower risk of BoE rate cut before August, re: Pill Tuesday

• Probability of BoE June cut has halved to 32% since Pill spoke 0#BOEWATCH

• HSBC expects another 8-1 BoE MPC rate hold vote on May 9 (as per March)

• French President Macron calls on ECB to nuance its focus on inflation

Synopsis:

ANZ projects a rise in the AUD/CAD exchange rate, driven by robust Australian CPI data and improved risk sentiments. The bank anticipates that the Reserve Bank of Australia (RBA) will maintain its current policy stance until at least November, further supporting the Australian dollar's strength against the Canadian dollar and other major currencies.

Key Points:

• Australian CPI Data: The recent CPI print from Australia showed significant strength in non-tradable and services inflation, particularly in the health and education sectors. This robust inflationary pressure supports the view that the RBA will not alter its policy rate until November, providing a stable backdrop for the AUD.

• AUD/USD Outlook: Strengthened by the Q1 CPI data and a favorable risk environment, the AUD/USD pair is well-supported heading into the next week. A convincing breach of its 200-day moving average at 0.6527 could pave the way for further gains, potentially testing higher resistance levels at 0.6588 and 0.6650.

• AUD/CAD Dynamics: With Canadian inflation showing signs of easing and risk sentiment improving, ANZ sees a potential for higher AUD/CAD rates. The pair has previously overstretched beyond 0.90, yet changes in the economic landscape could push it towards 0.95 under favorable conditions.

• Comparative Inflationary Pressures: The AUD is expected to perform stronger on G10 crosses, particularly against currencies like the CAD, NZD, and JPY, where inflationary pressures are more evidently subsiding.

Conclusion:

ANZ's analysis indicates a bullish outlook for the AUD, especially against the CAD, driven by persistent inflationary pressures in Australia contrasted with easing inflation in Canada. The anticipated stability in Australian monetary policy, coupled with favorable global risk sentiments, may enhance the AUD's position in the forex markets.

Synopsis:

Société Générale assesses the potential for a final significant surge in USD/JPY, following the Bank of Japan's decision to maintain interest rates and adjust inflation forecasts upward. The analysis focuses on the impact of diverging yield dynamics between the U.S. and Japan and the fundamental valuation of the yen.

Key Points:

• Bank of Japan’s Policy Decision: As expected, the Bank of Japan held interest rates steady at its recent policy meeting but raised its inflation forecasts for the fiscal year 2025/26, anticipating core inflation at 2.1% and real GDP growth at 1%.

• Yield Differentials: The ongoing disparity between U.S. and Japanese yields, with U.S. yields on the rise and Japanese yields constrained by low short-term rates, continues to fuel the ascent of USD/JPY. This yield differential, historically aligned with more than nominal GDP growth over time, suggests potential narrowing in the future but remains wide for now.

• Long-Term Valuation of the Yen: According to SocGen, the yen is fundamentally undervalued, with purchasing power parity (PPP) for USD/JPY estimated in the mid-90s, while a fair value adjusted for U.S. exceptionalism and Japanification would be around 110. The current levels are significantly above these estimates due to the large yield gap.

• Potential for a Final Surge: There is a concern that unless Japanese policymakers adopt more aggressive measures, both in terms of intervention and monetary policy adjustments, the continued upward pressure on USD/JPY could lead to an excessive final spike before the eventual normalization.

Conclusion:

SocGen's analysis indicates that while a correction in USD/JPY is inevitable due to fundamental undervaluation and expected shifts in yield differentials, the timing and nature of this adjustment could be dramatic unless there is significant policy action from Japan. The firm suggests that market participants should prepare for potential volatility in USD/JPY, especially as U.S. yields continue to climb and Japanese rates remain low.