Last week, global markets were buoyed by widespread risk-on sentiment, with both the FTSE and DAX indexes setting new records and major US indexes posting big gains. Even the Hong Kong HSI increased its gain by 25% from its January lows, confirming the significant rise in investor confidence. In Europe, enthusiasm was particularly evident after the ECB reaffirmed its conditional guidance for a rate cut in June. The Bank of England also moved closer to monetary easing, further elevating the mood in financial markets.
However, currency movements were more subdued, with most major currency pairs and crosses ending within the previous week’s ranges. The Japanese yen underperformed, reversing some of its recent gains fueled by rumors of market intervention last week. Next worst were the British pound and the Swiss franc, with the pound reacting to the Bank of England’s dovish moves.
Conversely, the New Zealand dollar was the strongest performer of the week, supported by a rebound against the Australian dollar in the face of pressure from the RBA’s less hawkish stance. The Canadian dollar was in second place, driven by strong employment data that dampened hopes of an imminent rate cut by the central bank. The euro ranked as the third strongest currency, with the dollar and Australia finishing the week in middle position.
FTSE sets new record as UK economy recovers and Bank of England rate cut expected
The FTSE index soared to an all-time high following the release of UK GDP statistics, which confirmed that the UK economy is officially out of recession. Data showed that growth in the first quarter was a solid 0.6% quarter-on-quarter, the largest expansion since 2021. Moreover, the growth rate in March alone was 0.4% month-on-month, indicating that the economic recovery is not only underway but gaining momentum.
At the same time, the Bank of England appears to be inching closer to cutting interest rates. Despite leaving the bank interest rate unchanged at 5.25%, the tone of the meeting was decidedly dovish. Notably, Dovish MPs Dave Ramsden and Swati Dhingra both advocated lower interest rates, resulting in a 7-2 vote. The move, coupled with Governor Andrew Bailey’s statement that a June interest rate cut was “neither ruled out nor a fait accompli”, suggests monetary policy may be eased in the near term.
Nevertheless, chief economist Hugh Pill added a note of caution to the conversation, advising that it might be “perhaps a bit unwise” to focus too much on June. Despite this caution, markets are currently pricing in a roughly 50% chance of a rate cut in June. The rate cut in August is fully priced in, with further rate cuts expected in November.
Technically, FTSE is in an upward acceleration phase as seen in the D MACD and D RSI. As long as the support at 8199.95 holds, the short-term outlook will remain bullish. The next target is 100% predicted from 7404.08 to 8743.52 to 6707.62-8047.06.
As for the pound, it has recently been struggling against the euro and Swiss franc, partly due to expectations for interest rate cuts from the Bank of England. Given the bearish divergence conditions on the D MACD, short-term upside should form at 1.1509 ahead of key resistance at 1.1574. A solid break of the 55D EMA (currently at 1.1312) should confirm that GBP/CHF is in an overall upward correction from 1.0634. After that, we should see a deeper decline to the 1.1167 cluster support (38.2% retracement from 1.0634 to 1.1509 at 1.1175). There, strong support is expected to lead to a rebound and set a range for sideways consolidation.
DAX also hits record high, ECB on track to cut interest rates in June
The DAX also hit a new record high, supported by broad risk-on sentiment and expectations that the ECB will begin monetary easing soon. Minutes from the ECB’s April Governing Council meeting showed that while a “very large majority” wanted to keep interest rates on hold until the next meeting, a minority of members did not feel “sufficiently confident” to support a rate cut at the time. “Ta”. The report of the meeting suggested that “the Board is likely to be in a position to begin easing monetary policy restrictions at its June meeting.”
The near-term outlook for DAX will remain bullish as long as support at 18235.90 holds. The next target is 100% forecast from 19892.54 to 11862.84 to 8255.65 to 19892.54. However, given the bearish divergence situation in the D MACD, the upside potential is limited there and could lead to a consolidation.
The euro has also weakened somewhat against the Swiss franc recently, mainly due to expectations for ECB easing alongside the Swiss central bank’s rate cutting cycle being further along. The Swiss central bank has already started lowering interest rates since March. However, the Swiss National Bank’s policy rate is currently just 1.50%, compared to the ECB’s deposit rate of 4.00% and the central bank’s rate of 5.25%, which leaves a lot of room for interest rate cuts on the latter two. EUR/CHF and GBP/CHF are likely to remain weak in the short term until we have more ideas about what the final interest rates will be for these three central banks.
Regarding EUR/CHF, we are already seeing a correction pattern from 0.9847 as the third leg. Further decline is expected to the 55 D EMA (currently 0.9691). A solid break here will open the way to 0.9563. However, we expect strong support from 0.9252 to the 50% retracement of 0.9847 at 0.9550 to complete the pattern.
U.S. stocks expand their rise, and the dollar index remains strong
In the United States, the stock market continued its impressive recovery, but the dollar and government bond yields showed little movement. The stock market’s optimism stems from the Federal Reserve’s recent indication that interest rate hikes are not on the table. But the most important challenge remains, as the Fed has signaled that interest rates will remain higher than originally expected to combat stubborn inflationary pressures.
Meanwhile, investor enthusiasm was confirmed by the latest University of Michigan Consumer Survey, which showed further increases in short- and medium-term inflation expectations. According to the survey, one-year inflation expectations rose to 3.5% from 3.2% in May, while five-year inflation expectations rose slightly to 3.1% from 3.0%. These numbers remind the market that consumer fears about inflation are unabated. Traders are likely to remain cautious until upcoming U.S. Consumer Price Index (CPI) data provides further guidance.
Technically, the S&P 500’s rebound from 4953.45 is seen as the second leg of a correction pattern from 5263.95. Strong resistance should be seen from 5263.95 to cap the upside. The break of the 5123.49 support signals the beginning of the third leg. In this case, the call goes even deeper to 4953.56 and perhaps he could fall to 4817.92, the 38.2% retracement from 4096.32 to 5263.96. However, a decisive break at 5263.96 would invalidate this view and confirm the resumption of the larger uptrend.
The dollar index has recovered with support from the 55D EMA, but there is still no clear upward momentum. A corrective decline from 106.51 could still be resumed to lower channel support (currently 104.00). Strong support from there would sustain near-term bullishness for a resumption of the rally from 100.61 to 106.51 at a later stage. However, a continued break in the channel would argue that the rebound from 100.61 was completed as a three-wave corrective move. In this bearish case, we will see a deeper decline through the support at 102.35.
AUD/CAD gains pause as markets reassess RBA and BoC
The Australian dollar ended the week on a mixed note as market expectations for further interest rate hikes from the Reserve Bank of Australia (RBA) subsided significantly. “We don’t necessarily think there is a need to tighten again,” RBA Governor Michelle Bullock said at a press conference after the meeting. This stance suggests that the RBA plans to maintain current interest rates for an extended period of time to continue to effectively deal with inflationary pressures. Following this announcement, the cash rate implied yield curve has been adjusted to show a flattening trend with the forecast not exceeding the current cash rate of 4.35%. Meanwhile, the market is only fully pricing in the first rate cut next June.
Conversely, Canadian markets tempered expectations of an imminent rate cut by the central bank following very strong employment data. The economy added 90,000 jobs, marking the largest increase since January 2023. Although annual wage growth has slowed slightly from 5.1% to 4.8%, it remains at a high level. The probability of a June rate cut fell from 54% to 48%. The cuts are currently priced into September, and were expected to be delayed from July before the jobs report. Nevertheless, the inflation report scheduled for May 21 will be even more important in shaping the outcome of the June central bank meeting.
These developments capped AUD/CAD’s upward momentum, stalling 61.8% below expectations from 0.8779 to 0.9098 to 0.8562 to 0.9063. Still, the near-term outlook will remain bullish as long as support at 0.8977 holds. If 0.9098 is broken firmly, the upside could accelerate to 100% of the expected price at 0.9280.
USD/JPY weekly outlook
Last week’s USD/JPY rally suggests that the return from 160.20 has already been completed at 151.86. We are currently in the second leg of the corrected pattern from 160.20. Further upside is likely towards the resistance at 157.98. On the downside, a break at 154.23 would signal the beginning of the third leg and shift the bias back to the downside towards support at 151.86.
To put it in perspective, a medium-term upside could form at 160.20. However, as long as the resistance at 150.87, which has turned into support, holds, a decline from there is only expected to correct the rally from 150.25. However, a decisive break at 150.87 asserts that a larger correction could be underway, next targeting support at 146.47.
In the long term, as long as the support at 140.25 holds, the uptrend from 75.56 (2011 low) is still ongoing. The next target is a 138.2% forecast from 102.58 of 172.08 to 75.56 (2011 low) to 125.85 (2015 high).
