EUR/USD turned lower Thursday after striking a four-session high, and the pair's corrective rally may be finished as U.S. data appears to be delaying Fed rate cuts and bearish technical signals emerge.

April Philly Fed business conditions came in at 15.5, which was well above estimates of 2.3 and also above March's 3.2 result.
The prices paid component spiked up to 23.0 from 3.7 in March.

The pricing data fueled concerns inflation is running hot again in the U.S.

U.S.
yields rallied with the 2-year US2YT=RR approaching the psychological 5.0% level.

German-U.S.
yield spreads US2DE2=RR reversed earlier tightening and widened, increasing as the dollar's yield advantage over the euro.

Fed rate-cut expectations are being pushed back by investors and analysts as a result of recent U.S. pricing reports.

The latest Reuters survey of economists indicated the first Fed cut will come in September compared a June cut, which was indicated in the March survey.

Technical signals suggest downside risks are growing.

Daily RSI diverged on the four-session high and a daily inverted hammer formed.
Those signals emerged after EUR/USD neared key short-term resistance in the 1.0690/1.0700 area.

The fresh bearish daily signals reinforce already bearish monthly signals.

EUR/USD still seems set to test 1.0450/1.0500.

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Synopsis:

MUFG anticipates potential appreciation in the AUD/CAD exchange rate due to differing monetary policy paths between the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC). Recent labor market data from Australia shows resilience, suggesting the RBA may delay rate cuts, while Canadian economic indicators align towards earlier rate reductions by the BoC.

Key Points:

• Australia's Labor Market Resilience: The latest labor report from Australia revealed a stronger-than-expected job market, with only a minor pullback in March following significant gains in February. The unemployment rate edged up slightly to 3.8%, lower than the anticipated 3.9%. This resilience supports expectations that the RBA may delay rate cuts until Q4 of this year.

• Canada's Economic Indicators: In contrast, Canadian core inflation figures for March continued to undershoot expectations, recording the lowest rate since July 2021 at 3.0%. These developments suggest that the BoC could initiate rate cuts as early as June, contrasting with the more cautious approach expected from the RBA.

• Implications for AUD/CAD: The diverging economic outlooks and monetary policy expectations between Australia and Canada are likely to influence the AUD/CAD exchange rate. With the RBA on a slower path to rate cuts compared to the BoC, the AUD is poised to strengthen relative to the CAD.

• Broader Market Impact: The anticipated policy divergence is also affecting other currency pairs, notably USD/CAD, which is being pushed towards the 1.4000 level due to expectations of a widening policy gap between the BoC and the U.S. Federal Reserve.

Conclusion: The contrasting economic signals and monetary policy directions from the RBA and BoC provide a basis for potential AUD/CAD appreciation.

GBP/USD edged slightly higher in early NorAm, +0.1% at 1.2465, though the outlook remains slightly pessimistic as traders seek further clarity on BoE rate expectations after Wednesday's lower, but slightly above forecast, UK CPI data.

This year's GBP/USD performance has been dominated by rate expectations as market views became more hawkish on the Fed and more dovish on the BoE, contributing to sterling's slide from its 2024 high at 1.2894 on March 8, to current levels just above the 2024 low of 1.2405 struck on April 16.

High inflation in the UK remains the key data point for sterling traders while the inability to maintain downward momentum in U.S. price pressures has fueled a reduction in Fed rate-cut expectations, with markets now discounting a scant 42bp of easing through December versus -150bp earlier this year.

Should UK core inflation stall above 4%, similar to U.S. core inflation's inability to move below 3%, GBP/USD may drift higher.

However, if UK inflation resumes its decline toward the BoE's 2% target, more dovish BoE expectations will send GBP/USD careening lower still, putting October 2023 lows just above 1.20 in sharper focus.

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Synopsis:

Bank of America reports a significant divergence in USD positioning between hedge funds and real money investors. While hedge funds have escalated their net long positions on the USD to the highest levels since the COVID-19 pandemic began, real money investors have shown more restraint, maintaining a largely neutral stance since the start of the year. This dynamic has been a key factor in the dollar's recent resilience.

Key Points:

• Hedge Funds' Aggressive Betting: Hedge funds are now holding their largest net long positions in the USD post-COVID, second only in size to their short positions on the New Zealand Dollar (NZD) among major G10 currencies. This aggressive positioning underscores hedge funds' bullish outlook on the dollar amidst current global economic conditions.

• Real Money's Neutral Posture: In contrast to hedge funds, real money investors have been more cautious. Despite a neutral positioning at the beginning of the year, there has been a reluctance to increase USD holdings significantly during the first quarter. This caution reflects a more conservative approach to the USD amidst mixed economic signals.

• Impact on USD Strength: The resilience of the USD can be attributed in part to these positioning trends. While hedge funds have provided strong buying pressure, the absence of robust participation from real money investors has tempered the potential for a more pronounced rally in the USD.

• Future USD Movements: Recent purchases by real money investors have been notable but not overwhelming. For the USD to continue its upward trajectory, it would likely require sustained or increased buying from these more conservative investors.

Conclusion:

The USD's position is currently bolstered by significant long positions from hedge funds, contrasting with more tepid engagement from real money investors. Bank of America highlights that for further USD appreciation, continued or enhanced support from real money will be crucial. As global economic conditions evolve, both types of investors will play key roles in shaping the trajectory of the USD in the forex markets. Investors should monitor these trends closely, as shifts in hedge fund or real money sentiment could signal important changes in USD dynamics.

Synopsis:

ANZ provides a cautious outlook on the EUR/USD, maintaining a neutral to bearish stance while highlighting upcoming PMI data from Germany and France as potential catalysts for movement. The bank emphasizes the significance of economic indicators from Europe's largest economies in determining the euro's trajectory against the dollar and other G10 currencies.

Key Points:

• Focus on Major European Economies: The forthcoming PMIs from Germany and France are particularly crucial. These economies have shown lagging performance in both manufacturing and services sectors compared to smaller EU countries. A strong showing in these PMIs could be pivotal for the euro's recovery on the broader FX landscape.

• Current Positioning: ANZ expresses reluctance to adopt a long position on the EUR across most currency pairs, except for EUR/CHF. This exception is due to the Swiss National Bank's (SNB) preference for a weaker Swiss franc.

• EUR/USD and EUR/GBP Outlook: The bank maintains a neutral to bearish view on EUR/USD and EUR/GBP. For EUR/USD, the downside risk is seen as limited to a floor of around 1.05 in the near term, unless the PMI data released next Tuesday significantly underperforms expectations.

• Economic Divergence in the EU: ANZ notes ongoing concerns about the disparity in economic recovery rates between major and minor EU economies. This bifurcation could continue to dampen the euro's prospects in the medium term unless major economies like Germany start showing more robust signs of recovery.

Conclusion:

'ANZ signals cautious optimism that forthcoming PMI data from Germany and France could temporarily boost the EUR, especially if the indicators exceed expectations. However, the broader outlook for the euro remains guarded, with structural economic disparities within the EU posing ongoing challenges. Investors and traders should closely watch the upcoming PMI releases, as they will likely be key drivers of the EUR's performance in the near term.

• AUD/USD dipped to 0.6432 then rallied to 0.64565 in overnight trading

• NY opened near 0.6445, traded up +0.19% with help from buoyed risk assets

• Commodities DCIOc2HGv1 & equities ESv1 gained to help rally risk

• US yield US10YT=RR slip & USD/CNH slide from session high aided risk gains

• AUD/USD remains below short-term structural resistance near 0.6490

• Falling monthly RSI, monthly inverted hammer are concerns for AUD/USD longs

• US weekly claims, April Philly Fed, March existing home sales are data risks

• Remarks from Fed's Williams, Bowman, Bostic may impact risk Thursday

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• Risk appetite returns and potential policy divergence is being questioned

• That's forced the paring of the recent and rapid rise in FX option premium

• Implied volatility surged earlier this week, with USD/JPY at the fore

• Benchmark 1-month expiry USD/JPY implied vol reached 10.1 Tues from 8.5 Fri

• Its now retraced all of those gains - tri-lateral statement plays its part

• Broader 1-month implied volatility also drops, but still above Fri lows

• USD call premiums against the likes of EUR and GBP are slower to ease

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Whether traders have speculated on a EUR/USD rise or a fall the pair has continually failed to comply by repeatedly returning to the centre of well trodden ranges.

The flip-flop in expectations between a hoped for rise or a fall has helped to fuel a series of moves from the top to the base of the 20-day Bollinger Bands.
Effectively the pair is going nowhere, repeatedly returning to the centre of its recent extremes regardless of the many swings in opinion about fundamental or technical factors.

This year, when expectations for U.S. interest rates have undergone a monumental change and traders have abandoned bets on EUR/USD rising, the pair has done little.

Boosted to 1.1139 at the end of December when bullish bets topped $20 billion, the pair dropped toward 1.0700 when wagers were slashed to $2 billion at the start of April.
The subsequent fall to 1.0601, which resulted from a potential extremely risk-averse situation when Iran attacked Israel, may well have led traders to bet on a drop.

However, EUR/USD has unexpectedly rallied and a surprisingly big drop in oil prices - totally out of keeping with an escalation in hostilities - may lead to changes in expectations about the U.S. interest rate that leads EUR/USD back to neutral ground.

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• EUR/USD narrowly recorded a bullish engulfing candle Wed

• Early Thurs gains adding some confirmation but today's close now key

• A minimum correction level met at 1.0669-EBS

• The next Fibonacci retracement levels re at 1.0710 and 1.0744

• Fourteen day momentum still negative and RSI has lifted from o/s levels

• We offer by 1.0725 but might reevaluate our strategy later today

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Conflicting chart signals and monetary policy uncertainty are currently gripping sterling and clouding near-term direction.

A key week reversal recorded for the week ending Apr.
12, higher high, lower low and close clear below previous closes, took GBP/USD into its weekly Ichimoku cloud.
Despite the lack of a preceding bull trend the key week signal served to reinforce the drop from 1.2893, March high.
Sterling remains inside its weekly Ichimoku cloud, another bearish signal.

However, the daily chart is showing signs of sterling strength, albeit only over the last two sessions.
A base in place at 1.2406 and price pulling up and away from the 30-day lower Bollinger band, 1.2405.

Fourteen period momentum readings are negative on both the weekly and daily chart and give warning that sterling is not in the clear just yet.
The daily relative strength indicator is, however, confirming the rebound from 1.2406, lifting away from over sold values.

On balance, sterling remains vulnerable to market sentiment swings linked to U.S. and UK monetary policy outlooks but there could be scope for GBP/USD to regain ground above 1.2500.
Fibonacci retracement levels, 38.2% and 50%, taken off the recent 1.2709-1.2406 drop, provide targets at 1.2522 and 1.2558, respectively.

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• Cable hits 1.2484 (three-day high) after extending north from 1.2425

• 1.2425 was Wednesday's NY session low following guidance from BoE's Bailey

• Bailey said latest UK inflation fall matched BoE expectations nL2N3GQ0PY

• 1.2482 was Wednesday's high, after higher than forecast UK inflation data

• Offers expected pre-1.25 (former support level). 1.2498 was Monday's high

• US nods to 'serious' Japan, S.Korea concerns over slumping currencies

• Sterling pulling up and away from the lower daily

• A low in place at 1.2406, 2024 low

• We have a 1.2415 long in play for 1.2550 and have a stop at entry

• Fourteen day momentum remains negative but RSI is rising

• Fibo retrace levels off the recent 1.2709-1.2406 drop provide bull targets

• The 38.2% is at 1.2522 and 50% retracement is at 1.2558

• Climb above 1.2498, Apr. 15 high, could bolster the pound

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• +0.1% in an active 1.2448-1.2468 range as risk appetite resurfaces in Asia

• Asian stocks are higher, E-mini S&P +0.25%, UST yields a touch softer

• Central banks believe inflation is falling, but remain data-driven on rates

• Uncertainty on the timing of upcoming rate moves and currency response leads

• Charts; 5, 10 & 21-day moving averages fall as 21-day Bolli bands contract

• Neutral daily momentum studies - daily charts retain the bearish bias

• Move targets 1.2369, 0.618% Oct-March rise, and then the 1.2045 Oct 23 base

• 1.2482 early London high then Monday's 1.2498 high are initial resistances

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Synopsis:

BNP Paribas reassesses the Japanese Yen's (JPY) status as a safe-haven currency in light of recent shifts in global geopolitical and economic conditions. Historically, the JPY would strengthen during geopolitical crises, but recent trends since 2018 suggest a pattern of weakening instead. BNPP explores the implications of these changes on Japan's economy and the Bank of Japan's (BoJ) monetary policy.

Key Points:

• Changing Safe-Haven Status: Unlike past decades, the JPY has tended to weaken in response to geopolitical risks since 2018. This shift reduces the currency's role as a global safe-haven asset, particularly under current global financial conditions.

• Impact of Fed Rate Decisions and Trade Deficits: If the Federal Reserve delays or reduces expected rate cuts, coupled with concerns over Japan's growing trade deficit due to rising international commodity prices, the JPY could face increased downward pressure. This scenario is further complicated by the dual burden of a weaker currency and higher import costs, which could exacerbate inflationary pressures within Japan.

• BoJ's Monetary Policy Challenges: The potential for heightened inflation expectations might prompt the BoJ to reconsider its pace of interest rate hikes. Initially, the BoJ may view higher commodity prices as a dampener on spending, but persistent inflation pressures could necessitate a quicker and more aggressive rate hike strategy.

• Risk Management and Rate Hikes: In response to further weakening of the JPY, the BoJ might accelerate its rate hikes as a precautionary measure. If inflationary pressures remain high, the BoJ could target the lower end of its estimated 'neutral' rate range through consistent quarterly increases.

• Monetary Policy Outlook: Despite the complex backdrop of geopolitical tensions and the evolving role of the JPY as a safe haven, BNPP maintains a base case where the BoJ will continue to hike rates every six months, with the next increase projected for September.

Conclusion:

As the traditional safe-haven status of the JPY comes under scrutiny, BNPP highlights significant challenges for Japan's monetary policy amidst evolving global economic conditions. The combination of a weakening yen and rising commodity prices poses inflationary risks that may force the BoJ to adjust its approach to interest rate hikes more frequently than anticipated. Investors and policymakers must monitor these developments closely, as they could have profound implications for Japan's economic stability and the valuation of its currency.

• AUD/USD easing after jobs report that came in near expectations nAZN1NUMLB

• Aus jobs less than expected but unemployment slightly lower than expected

• Data unlikely to impact RBA expectations

• AUD/USD was trading around 0.6440 before and is now 0.6430/35

• Sellers ahead of 0.6450 capped when it rallied to 0.6447 earlier

• Buyers are tipped ahead of 0.6400 to keep AUD/USD in a range for now

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• Flat after closing up 0.25% with the US dollar closing 0.35% lower

• UK inflation slowed less than forecast but met Bank of England expectations

• BOEWATCH fully prices 28bp of cuts in September and 45.48bp by December

• There is no tier one UK data or events today, so risk appetite, USD lead GBP

• Charts; 5, 10 & 21 day moving averages fall with the 21-day Bollinger bands

• Daily momentum studies slip - daily charts still show a strong bearish trend

• Move targets 1.2369, 0.618% Oct-March rise, and then the 1.2045 Oct 23 base

• 1.2482 early London high then Monday's 1.2498 high are initial resistances

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• Steady after closing up 0.5% as yield spreads tightened, USD slipped

• Yield spreads tightened, 10yr bund off 1bp, 10yr UST -7bp 4.585%

• June ECB cut likely, but there are divergent views on what will follow

• ECB's Vasle sees rates 'much closer' to 3% at year-end from the current 4%

• Charts - mixed daily momentum studies, 21-day Bollinger bands head lower

• 5, 10, and 21-day moving averages fall - the daily charts remain bearish

• Close above the prior Feb 1.0695 base would suggest a base is in place

• 0.786 of the October-December rise proved resilient support this week

• 1.0650 909mln and 1.0700 910mln are the close strikes for April 18th

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Synopsis:

Goldman Sachs evaluates the potential impact of recent commodity price movements on currency values, emphasizing copper's significant role. While the Chilean Peso (CLP) is positioned to benefit from rising copper prices, the influence on major G10 currencies like the Australian Dollar (AUD) and Canadian Dollar (CAD) is expected to be less pronounced. The firm notes that broader economic policies and cyclical factors continue to overshadow the effects of terms of trade on short-term currency performance.

Key Points:

• Commodity Spotlight and Copper's Role: Recent geopolitical tensions and positive manufacturing data have kept commodities, especially copper, in focus. Goldman's bullish outlook on copper is highlighted as having notable potential to influence currency markets.

• Currency Implications of Copper Prices: Using Goldman's Terms of Trade (ToT) framework, the analysis suggests that the Chilean Peso could see significant gains if copper prices reach the forecasted levels, due to the country's heavy reliance on copper exports. The impact on G10 currencies such as the AUD and CAD is expected to be positive but more modest.

• Pass-Through Effects on FX: The firm's rule-of-thumb indicates that about half of the changes in export prices pass through to FX, compared to only about two-tenths for import prices. This differential suggests stronger currency responses in export-heavy economies, particularly those reliant on copper.

• Recent Performance of Commodity Currencies: Despite copper's price movements, most commodity currencies have not matched the commodity rally since the year's start. This underperformance highlights the limited role of terms of trade in driving short-term currency moves.

• Broader Economic Influences: While significant shifts in terms of trade due to commodity price changes can impact FX, recent currency movements are primarily driven by broader policy decisions and cyclical economic factors rather than changes in trade terms.

Conclusion:

Goldman Sachs' analysis indicates that while copper prices provide a potential tailwind for certain currencies, particularly the CLP, the broader influence on G10 currencies is likely to remain subdued. The analysis reinforces the idea that short-term FX performance is more heavily influenced by macroeconomic policies and global economic cycles than by changes in commodity prices or terms of trade. Investors should continue to focus on these broader drivers when considering currency investments.

• Overbought pressures forced first lower high since 152 breakout

• Daily RSIs falling from highest since 2022, still at 77.6

• Trailing 10-DMA, tenkan & up TL from March lows now near 153

• The 155 level and twin Fibos by 155.20 remain key hurdles

• 10-wk Bolli and weekly ATR tops are also at 154.80/5.22

• They leave little space for further gains until next week

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• USD/JPY retreated amid falling Tsy-JGB yld spreads and crude prices

• Prices had gotten heavily O/B and in need of consolidation/setback

• Failure to clear Tues's 154.77 34-yr highs by key 155 weighed

• As did that stall coming after Fed Chair crushed rate cut hopes on Tues

• Wed's Fed beige book report was less hawkish than recent data implied

• That as there's little key US data until GDP, PCEs on April 25, 26

• Speculation re BoJ yen intervention got a small lift from FinMin comments

• So far Wed's range is just an inside day, consolidating big gains

• 10-DMA, daily on-close pivot pt and tenkan props are at 152.80-97

• There is a massive $6.08bln of 153 expiries on Thur, 155s ongoing above

• Japan CPI data is out Friday, core f/c at 2.6% vs 2.8% in Feb

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• NY opened near 0.6425, pair rallied to 0.64375 early then hit 0.6409

• Firm US$, yields & equity ESv1, gold XAU= slides weighed on AUD/USD

• Buyers emerged however and AUD/USD neared 0.6430, traded up +0.42% late

• Yields US2YT=RRUS10YT=RR fell & USD/CNH fell towards 7.2450

• Bounces for equities and gold also helped drive AUD/USD's late day lift

• Daily RSI lifted but monthly RSI fell, monthly inverted hammer in place

• Australia March employment report is a data risk during Asia hours

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Synopsis:

ING reports a shift in the People’s Bank of China's (PBOC) stance on the renminbi (CNY), suggesting a growing ease with allowing gradual depreciation of the currency. This comes amid continued strength in the USD, influenced by recent Federal Reserve communications and market dynamics, positioning the dollar for potential further gains.

Key Points:

• PBOC Fixing and CNY Movement: The PBOC set the USD/CNY fixing nearly unchanged from the previous day at 7.1025, suggesting a controlled approach to managing the renminbi's value. Despite this, USD/CNY and USD/CNH have shown movements that indicate a trend towards a weaker CNY, with USD/CNY trading at 7.2400 and USD/CNH just below 7.2600.

• Trade-Weighted Renminbi Strength: Despite the nominal depreciation against the USD, the renminbi has strengthened on a trade-weighted basis due to the broader decline in the currencies of China's trading partners. This dynamic, coupled with China's soft inflation and export figures, supports the PBOC’s comfort with a gradual weakening of the CNY.

• U.S. Monetary Policy Influence: Recent comments from Federal Reserve Chair Jay Powell and Vice Chair Philip Jefferson have highlighted slower progress on inflation control, hinting at potential delays in rate cuts. This has bolstered the USD, with 2-year Treasury yields touching 5.0%, a level not seen since November.

• Impact on U.S. Equities and DXY: The strengthening dollar and high Treasury yields pose challenges for U.S. equities, potentially leading to a sell-off that could further enhance the dollar's position. The Dollar Index (DXY) is now eyeing the 107.00 mark, reflecting October highs.

Conclusion:

The combination of PBOC’s management of the CNY and the U.S. Federal Reserve’s signals on monetary policy are contributing to a stronger USD environment. ING notes that the risks remain tilted towards further dollar gains, with potential impacts across global financial markets. Investors should closely monitor these developments, as they hold significant implications for currency valuations and international trade dynamics.

GBP/USD firmed modestly following above-forecast CPI figures, which prompted a slight hawkish repricing in the rates market, but cable must recapture 1.25 to alleviate downside pressure.

The Bank of England will have access to two additional CPI reports by the time of the June meeting.
This may affect the relative importance of the April figures, which will be impacted by the base effects.
Thus, June remains a live meeting.

That said, the data will not provide policymakers with more confidence that inflation is sustainably heading to target.
As such, upcoming speeches from several BoE officials, including, Andrew Bailey, Jonathan Haskel, Catherine Mann and Dave Ramsden will be closely watched.

For now, GBP/USD shorts remain in control with the pair holding below the 1.25 handle.
Since breaking below, 1.25 has put a lid on upside, which has somewhat emboldened shorts.

However, with rate differentials beginning to move in favor of sterling, downside pressures may soon abate, unless of course there is a further escalation in geopolitical tensions.

What’s more, the dollar’s inability to rally on hawkish comments from Fed Chair Jerome Powell does suggest that upside in the greenback is becoming exhausted.

With this in mind, a daily close above 1.25 would go some way in alleviating downside risks.

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Synopsis:

HSBC assesses the impact of recent geopolitical events on oil prices, noting a slight decline following Iran's strike on Israel, with Brent crude dipping to just under USD 90 per barrel. The bank highlights that the market's restrained response suggests a significant level of geopolitical risk was already factored into prices. Despite potential escalations, other market dynamics are expected to maintain stability in oil prices.

Key Points:

• Immediate Price Impact: Brent crude experienced a minor decrease of about 1% to under USD 90 per barrel after the recent military actions, indicating that previous price increases had already accounted for potential risks.

• Geopolitical Tensions: Although the situation remains tense, the market's current outlook suggests that a wider regional conflict is unlikely. This perception is bolstered by Iran’s declaration that it considers its retaliatory action as concluding the matter, reducing fears of further immediate escalation.

• Oil Market Fundamentals: HSBC points to supportive fundamental factors in the oil market, estimating a supply-demand deficit of approximately 1.4 million barrels per day in the second and third quarters of the year. These conditions suggest underlying strength in the market despite geopolitical fluctuations.

• OPEC+ Dynamics: There is an increasing likelihood that OPEC+ may begin to scale back some of its supply cuts in the third quarter if high oil prices persist. This potential action, coupled with the group's upcoming meeting on June 1, could influence market dynamics and help moderate prices.

• Price Forecasts: HSBC maintains its Brent price forecast at USD 82.5 per barrel for 2024, with expectations of USD 85 per barrel in the first half of the year, and a reduction to USD 76.5 per barrel starting in 2025.

Conclusion:

HSBC's analysis suggests that while geopolitical risks continue to influence oil markets, a combination of robust market fundamentals and potential adjustments in OPEC+ supply policies are likely to keep oil prices relatively stable. Investors should closely monitor upcoming OPEC+ decisions and further geopolitical developments, as these factors will be key in shaping oil price trajectories in the near to medium term.