FX Weekly Outlook: Rigid FX markets; USD losses modest after soft inflation and retail sales miss – data schedule light next week. Plenty of UK data, as inflation, jobs and consumer reports all due – GBP reluctant to give up ground.

In the US next week we are limited to some second tier data to a larger degree, with the stand out release coming due on Tuesday in the form of industrial and manufacturing production. This will be accompanied by some housing data, and preceded by the NY manufacturing index. The Philly Fed is due on Thursday, while Friday is empty. Friday’s inflation numbers came a touch weaker than expected, while retail sales also missed, but in light of widespread expectations of a Jun Fed hike, negative USD reactions are limited in the meantime.

USD/JPY topped out ahead of 114.50 this week, but dip buyers have rate differentials onside, so the move into the lower 113.00’s was extremely laboured, with support seen around 113.00 – if we get there!

Industrial production numbers also out in Japan, but focus here will be on Thursday’s growth data, as Q1 GDP is expected to rise slightly to 0.4%, but capital expenditure seen falling by 0.4%.

A host of growth and inflation data reads out of the Euro zone to look to, and with anecdotal evidence suggesting the longer term view on the EUR has turned, we have the prospect of a return on 1.1000. That said, EU composite numbers are the second readings, and barring any revisions to the downside, the EUR/USD base from 1.0850-1.0750 will be tough to break in light of the US data today. German ZEW also due out on Tuesday, while Italian trade is also worth watching after some healthy PMI results recently. Late Tuesday, a report in the German press suggested the ECB are ready to signal a shift in policy mid-year, but Germany’s stance is well established.

In the UK, amid the Brexit to-and-fro with the EU, inflation is back on the agenda after this week’s longer term BoE forecasts were revised lower. CPI seen at 0.4% for Apr, unchanged from Mar, but this seen pushing the yearly rate from 2.3% to 2.6% as price increases hit. However, there is good inflation and bad, and this will be reflected in the jobs data on Wednesday which is swiftly followed up by retail sales on Thursday. The UK consumer is the lifeline of the economy given the potential drag from a possible (London) exclusion from the single market. Some of the retail ‘monitors’ (BRC and CBI) have recorded some healthy readings however, and after a soft Mar reading, it is unsurprising to see consensus looking for notable comeback in Apr.

Not that we are getting any meaningful pullback in GBP, as pundits call for a return to fair value levels and traders are all too quick to jump in on dips. Support in the 1.2830-50 area has been fighting the near term selling pressure in the wake of this week’s BoE disappointment, but given the strong resistance seen ahead of 1.3000, it is only a matter of time before the late comers to the party throw in the towel. Gone are the days of achieving medium term targets in a matter of weeks, so a more meaningful pullback in GBP looks to be on the cards.

Factors away from commodities for AUD traders to look to as we have the RBA minutes on Monday. The main takeaway from the May meeting is that the board is at a stalemate on rates, with confidence in growth and inflation tempered by domestic household debt to signal an on hold policy for now. Thursday’s employment report could show some moderation in jobs growth after the 60k+ rise in Mar, but is still expected to show gains – consensus +5k while rate sticks at 5.9%.

AUD has managed to hold pre 0.7300 support in the meantime, but this has come off the back of a revival of AUD/NZD, as well as Copper prices holding off range lows, where the lower limit at USD2.45 is intact for now.

In light of the RBNZ’s refusal to acknowledge the positive factors supporting the economy, the NZD came off hard this week and we sense upside pressures (from data) will be limited as a result. This will no doubt be welcomed by the central bank ever concerned with exchange rate levels in the current climate. Retail sales to kick off the week early Monday, and on Tuesday the Fonterra auctions will give fresh light on dairy prices which have risen steadily of late.

In Canada, while the growth and jobs data have tentatively shown encouraging signs, inflation has not so. Friday’s CPI read for Apr, alongside Mar retail sales will see if we are getting any pick up in asset prices, and given the prominent gains seen in house prices and supposed household indebtedness, we would have expected a little more follow through that we have seen. This does not bode well for the CAD, but have we seen much of the adjustment already? Plenty of calls for 1.4000 in the spot rate, but this will only fuel interest to fade gains, especially with Oil prices stabilising after the recent sell off.

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Dollar Index Daily

Market is sideways and price has failed to make a higher since March with price coming off of resistance at our bearish trend line. Our daily stoch is moving towards overbought levels and the bullish target for the month is MM4 with support at MPP.

Dollar Index H4

In the last post we identified price at the weekly target with a bullish market and support at WR1, the top of the previous range, price closed at this support on Friday and is currently at the 55. We expect to see a double top. Our H4 stoch is currently oversold.

US10Y Daily

Market is currently flat and our daily stoch is oversold. While price broke through the support that marked the top of the previous range, support at MS1 has held. This gives Bulls a target of MR1, which is in line with the previous high and the 200 EMA. H4 indicates a bullish reversal.

US10Y H4

That's a double bottom at a monthly support pivot point followed by a higher high. That is not bearish. Price is at resistance and so we expect price to move lower initially and make a higher low at support marked by the fib zone or the previous high at last week's WM2. Anyone who has followed the US10Y will know the impact it has on Yen and Gold and looking at this chart would definitely tell you that we could be in for short term Yen and Gold weakness long term Yen and Gold strength. Of course the Yen will not move on the US10Y alone, indices are also important - specifically the NK225.

NK225 Daily

Anyone who trades using monthly pivots knows that price is at a level where Bulls do not buy. In fact this is where Bulls take profit. Price action shows support off the top of the previous range at MR1 and while we haven't seen a massive drop as a result of profit taking yet, our daily stoch is not bullish. When this moves lower and our US10Y is moving higher Yen is going to get strong.

NK225 H4

Market has been very bullish since 17 April though recent price action shows price having broken through the 21 and consolidating below MM4. Sideways is not up and in fact indicates that we are in for a correction. Take a moment and open a NK225 chart and compare the price action to that of USDJPY and other Yen pairs and you'll start to see why keeping an eye on indices, and specifically NK225, is so important when trading Yen. H4 currently oversold so technically speaking short term up long term down.

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