MARKET Given that the Fed pivot is the most clearly communicated rate hike cycle in modern history and will continue to be so, stocks moved higher as the market now seems convinced there will be few double paced rate hike twists in the future. That should lift some worries for equity investors about impending policy mistakes. Investors seem ok with what is currently priced, which is a very flat FED FUNDS futures at an implied 2.50-2.75% for the Fed far into the future. The FOMC minutes were a bit outdated anyway. Fed members have been pretty clear in their comments around 50bp hikes recently, while some have even softened the hawkish tone. So, equity traders quickly looked past the release moving from catch-down camp to short covering mode lifting stocks higher. But the S&P 500 benchmark remains well entrenched within the 3800-4100 range trade as investors stay in wait and see mode.  At 3800, the market is pricing a fair amount of P/E de-rating plus earnings risk. At the same time, ongoing headwinds from central bank tightening, the Ukraine conflict and the China lockdown should prevent any meaningful rally beyond 4100. Next up is US preliminary GDP, which is expected to fall from grace, but the markets know this is little more than a reset to the trend, so the weak print should not cause any hic-ups. In terms of financial stability, several Fed members mentioned the impact of monetary tightening. But seemingly, they are more worried about the commodity market due to Russia. Indeed, the recent oil shock is the most worrying price spike of the various inflationary inputs and the biggest driver of recession risk, not rate hikes.  OIL  Crude stocks were down below expectations which supports the tight supply bullish consensus. Oil traded higher on the day despite any change in the macro environment, suggesting market participants are positioning for a Russian embargo bounce.  The focus in oil markets is on The EU summit taking place next week (May 30-31), at which another attempt will be made to agree on an EU-wide embargo on Russian oil. Hungary remains opposed to an agreement in its current form and insists on more time and EU financial support for making the switch away from Russian oil. The EU agreement is a distraction, given individual member states and vital corporate buyers in Europe are already phasing out purchases of Russian oil. It may help the unity optics to have a deal agreed at an EU level. Still, whether or not this happens, there will be significantly less Russian oil flowing to Europe over the remainder of this year, which leaves the market in deficit with few immediate options to backfill that shortfall.

EUR/USD - 1.0728 Although euro's rally above 1.0697 (Mon) to a 1-month peak at 1.0748 in New York after hawkish comments from ECB's Lagarde suggests upmove from May's 5-year bottom at 1.0350 would extend marginally, reckon 1.0770/75 would remain intact and yield prospect of another fall due to loss of momentum. On the downside, daily close below 1.0697 would indicate a temporary top is in place and yield weakness towards 1.0662, break, 1.0608/10 later. Data to be released on Wednesday Australia construction work done, New Zealand RBNZ interest rate decision, Japan coincident index, leading indicator. Germany GDP, Gfk consumer confidence, France consumer confidence, Swiss investor sentiment, U.S. mortgage application, durable goods, durables ex-transport and durables ex-defense.

FOMC will release the minutes of the May policy meeting on Wednesday, May 25. Markets have already priced in two more 50 bps Fed rate hikes. Investors will pay close attention to discussions around the Fed's balance sheet reduction plan. The greenback is having a hard time preserving its strength toward the end of May and the US Dollar Index (DXY) remains on track to post monthly losses for the first time in 2022. Following the US Federal Reserve’s decision to hike its policy rate by 50 basis points (bps) earlier in the month, policymakers have been voicing their willingness to raise the policy rate by a total of another 100 bps in the next two meetings. Two more 50 bps Fed rate hikes a done deal  Markets seem to have already priced in those expectations with the CME Group FedWatch Tool pointing to a more-than-80% probability of the Fed hiking by 50 bps in June and July. Hence, the dollar is struggling to find demand as investors see the US central bank adopting a cautious stance moving forward. Renewed optimism about the annual Consumer Price Index (CPI) having peaked at 8.3% in April and the hawkish tilt in other major central banks’ policy outlook, especially the European Central Bank (ECB), play a part in the recent dollar weakness as well. Nevertheless, there is still a bit of room for a hawkish surprise in the FOMC’s May Meeting Minutes. Eyes on details surrounding QT In the May policy statement, the FOMC announced that it will begin trimming its balance sheet on June 1, starting with a $47.5 billion cap on monthly runoff and rising to $95 billion monthly after three months. As it currently stands, the Fed is on track to execute a monthly reduction of $60 billion in Treasury securities and $35 billion of mortgage-backed securities each month from September.  The meeting minutes could offer additional details on the Fed’s quantitative tightening plan. When the Fed decided to raise the policy rate in 2017, the prepayment rate on MBS, which represents the ratio of borrowers paying the principal on their mortgages ahead of schedule, declined significantly. Jefferies economist Aneta Markowska thinks that if the prepayment rate were to fall to 10% from about 30%, as witnessed in the previous tightening cycle, MBS outflows could average about $20 billion a month. In such a scenario, the Fed would have to start selling MBS to reach the monthly reduction target of $95 billion. While speaking at an event last week, New York Federal Reserve President John Williams said that their forecasts suggested that they won’t be able to reach the $35 billion monthly target for MBS redemptions and added that selling MBS could be an option down the road. The issue with MBS sales, however, is that they could translate into losses for the Fed. "A potential drawback of sales is that, depending on the interest rate path, they could result in realized market-to-market losses," Cleveland Federal Reserve President Loretta Mester said earlier in the month. Mester acknowledged that it would be a difficult problem to solve, especially at the political level.  In case the Fed’s publication shows that policymakers are willing to sell MBS to stay on the monthly QT target of $95 billion regardless of the potential political pushback, this could be seen as a hawkish development and help the greenback start outperforming its rivals. On the other hand, the dollar could extend its downward correction if the minutes don’t offer any fresh insight into the Fed’s QT plan and reaffirm that policymakers remain reluctant to commit further policy moves after two more 50 basis points rate hikes.

The Reserve Bank of New Zealand is set to hike OCR by 50 bps to 2% in May. The pace of future tightening will hold the key amid global recession risks. The kiwi needs more than a 50 bps hike to extend the ongoing recovery. Another double-dose rate hike is on the table from the Reserve Bank of New Zealand (RBNZ) when it meets this Wednesday to decide on its monetary policy at 0200 GMT. The central bank’s outlook on the pace of tightening, however, will be key in determining NZD/USD’s next price direction. RBNZ: A 50 bps hike already baked in A 50 bps hike to the Official Cash Rate (OCR) from 1.50% to 2% on Wednesday is well priced in by the market. The RBNZ will raise the key rate for the fourth consecutive time since last October, accounting for two back-to-back double-dose lift-offs. With the half percentage point rate hike coming this time, the central bank will become the first major central bank to achieve a neutral stance for the first time since 2015. The policy announcement will be followed by Governor Adrian Orr’s press conference at 0300 GMT. 20 out of the 21 economists surveyed by Reuters projected a 50 bps rate hike this month. Markets are predicting additional 25 bps rate hikes in July, August, October, and November, which would bring the OCR to 3% at the end of 2022. In its April policy meeting, the RBNZ delivered a hawkish surprise by raising rates by 50 bps. The accompanying monetary policy statement also read hawkish, citing that the board members “agreed that moving the OCR to a more neutral stance sooner will reduce the risks of rising inflation expectations.” The South Pacific Island nation’s economic performance remains solid, with New Zealand’s unemployment rate at a record low of 3.2% in Q1 and an increase in wage growth. The economy returned to a 3% growth in the final quarter of 2021, emerging firmly from COVID-19 lockdowns. As highlighted by the central bank, the country’s two-year ahead inflation expectations rose to a fresh 31-year high of 3.29% from 3.27% in the first quarter. Meanwhile, annual inflation rose 6.9% from 5.9% in the previous quarter, the fastest rate since a 7.6% annual increase in the year to the June quarter of 1990, according to the latest data published by Statistics New Zealand. The RBNZ’s inflation target range is 1-3%. Against the backdrop of raging inflationary pressures, the RBNZ could be compelled to act aggressively, as the New Zealand financial system remains well placed to support the economy. In increased evidence of confidence on the economy, Orr said earlier this month that he doesn't see stagflation as a core risk, although he did not rule out a global recession in the coming months. Trading NZD/USD with RBNZ decision Wednesday’s RBNZ announcement could likely help NZD/USD revive its recovery momentum towards 0.6500 should the bank offer more than just a 50 bps hike. Hints of an aggressive pace of tightening in the coming months, with combating inflation on top of the central bank’s agenda, could drive the kiwi pair towards the May highs of 0.6568. The currency pair could witness a ‘sell the fact’ trading on an expected 50 bps hike with dovish forward guidance, as the RBNZ could be worried about hard-landing risks. In such a case, an extended correction towards May 20 lows of 0.6363 could be in the offing. The market’s perception at the time of the policy announcement and the US dollar price action ahead of Wednesday’s FOMC Minutes could also affect NZD/USD’s reaction. 

Hawkish comments by ECB policymakers lifted EUR/USD to a fresh monthly peak on Monday. The emergence of some USD buying on Tuesday kept a lid on any further gains for the major. Recession fears, aggressive Fed rate hike bets helped revive demand for the safe-haven buck. The EUR/USD pair witnessed an aggressive short-covering move on Monday and rallied to a fresh monthly peak in reaction to hawkish comments by the European Central Bank (ECB) policymakers. In fact, ECB President Christina Lagarde said in a blog post that the central bank was likely to lift the euro area deposit rate out of the negative territory by the end of September. She added that the ECB could raise interest rates further if it saw inflation stabilizing at 2%. Separately, ECB Governing Council member Francois Villeroy de Galhau noted that the deal is probably done because there is a growing consensus on a July rate hike. Apart from this, broad-based US dollar weakness was seen as another factor that contributed to the pair's strong move up. Given that a 50 bps Fed rate hike move is already priced in, the risk-on impulse weighed heavily on the safe-haven buck. Hopes that loosening of COVID-19 lockdowns in China would boost the global economy lifted investors' confidence. This was evident from a generally positive tone around the equity markets, which, in turn, dragged the USD to its lowest level since April 26. That said, the worsening global economic outlook kept a lid on the optimistic move and extended some support to the greenback and capped the major. Investors remain worried that a more aggressive move by major central banks to curb soaring inflation could pose challenges to global economic growth. Adding to this, the Russia-Ukraine war and the latest COVID-19 outbreak in China have been fueling recession fears. This, along with expectations that the Fed would need to take more drastic action to bring inflation under control, helped revive the USD demand during the Asian session on Tuesday. The EUR/USD pair struggled to capitalize on the overnight strong move up and met with a fresh supply in the vicinity of the 1.0700 mark. Traders now look forward to the release of the flash PMI prints from the Eurozone and the US. Apart from this, a scheduled speech by Fed Chair Jerome Powell and ECB President Christina Lagarde should produce some meaningful trading opportunities around the EUR/USD pair. The focus, however, will remain on the release of the FOMC monetary policy meeting minutes, due on Wednesday. Market participants will look for clues about the possibility of a jumbo 75 bps rate hike by the Fed in June. This will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the major. Technical outlook From a technical perspective, the overnight broke through the 38.2% Fibonacci retracement level of the 1.1185-1.0350 downfall could be seen as a fresh trigger for bullish traders. Moreover, oscillators on the daily chart have just started moving into positive territory and support prospects for additional gains. Hence, some follow-through strength, towards testing the 1.0770-1.0775 confluence resistance, now looks like a distinct possibility. The said barrier comprises the 50-day SMA and the 50% Fibo. level, which if cleared decisively should pave the way for an extension of the recent strong recovery move from the YTD low touched earlier this month. On the flip side, the 1.0640-1.0630 zone now seems to protect the immediate downside ahead of the 1.0600 round-figure mark, below which the pair could fall to the 23.6% Fibo. level, around mid-1.0500s. Failure to defend the latter would shift the bias back in favour of bearish traders and make the EUR/USD pair vulnerable. Spot prices could then accelerate the fall towards the next relevant support, around the 1.0470 region, before eventually dropping to test sub-1.0400 levels in the near term.

Key highlights EUR/USD started an upside correction above 1.0500. It broke a key bearish trend line with resistance near 1.0490 on the 4-hours chart. EUR/USD technical analysis Looking at the 4-hours chart, the pair formed a base above 1.0350 and recovered higher. There was a clear move above a key bearish trend line with resistance near 1.0490. The pair surpassed the 1.0520 resistance zone and the 100 simple moving average (red, 4-hours). It even climbed above the 50% Fib retracement level of the key decline from the 1.0641 swing high to 1.0349 low. On the upside, the pair is now facing resistance near the 1.0650 level and the 200 simple moving average (green, 4-hours). The next major resistance is near the 1.0720. A clear move above the 1.0720 level might push the pair towards the key 1.0800 resistance zone. If not, there is a risk of another decline below the 1.0500 level. The next key support is near 1.0450. A clear move below the 1.0450 level could stage a strong decline in the near term.