Economic releases this week point to widely different growth momentum in the global economy. Chinese activity data for April were much weaker than expected with retail sales dropping 11.1% y/y and industrial production down 2.9% y/y. The weak batch of data points to a negative q/q growth rate in GDP in Q2 and also suggests downside risk to our 4.7% growth estimate for this year. The government’s 5.5% target will require a significant amount of stimulus, which China does not look prepared to provide. The credit impulse was slightly weaker in April, pointing to moderate stimulus. A key driver of the weak Chinese data has been the outbreak of Covid-19 and the lockdowns by the Chinese authorities implemented to maintain their zero-Covid policy. While Shanghai is improving challenges persist in other cities such as Beijing and surrounding areas. The continued outbreaks highlight the difficulty in keeping Omicron contained and warns of more future lockdowns and supply chain disruptions. On a more positive note, US data released this week showed quite resilient private consumption and industrial production despite geopolitical uncertainty and rising inflation. US retail sales data grew quite strongly in April both in nominal and real terms (taking into account the rise in inflation). At the same time, industrial production was also stronger than expected and capacity utilisation increased further to 79%. This week Fed Chair Jerome Powell said that interest rates will rise until there is “clear and convincing” evidence that inflation is retreating. Global risk appetite remains fragile amid the imminent US monetary policy tightening and weakening Chinese outlook with global equity markets seeing a significant setback this week. In the euro area, inflation pressures are also broadening as headline and core inflation in April rose 7.4% and 3.5% compared to a year earlier. Especially service price inflation jumped higher in April due to a seasonal rebound in transport and recreational services, but also other services categories continue to rise. Rising input costs are still working their way through the consumer pricing chain. The continued building of underlying inflation pressures leaves little room for complacency from ECB, where we expect a 25bp hike at the July meeting. This week, Finland and Sweden officially applied for NATO membership amid the Russian invasion of Ukraine. However, the application ran into problems as Turkey voiced opposition to Swedish and Finnish membership given concern about the countries’ stance on the Kurds. Meanwhile, Russian president Putin said that were Sweden and Finland to join NATO it would “certainly provoke our response”. There will be plenty of data to absorb for markets over the next two weeks. In the US, a key focus will be the FOMC minutes on 25 May, personal consumption expenditures on 27 May (not so much on the inflation component as we got the CPI already but more the consumption). The jobs report on 3 June will also be very important. In the euro area, the PMIs on 24 May will be key along with the May flash CPI on 31 May, as well as the EU leaders summit on 30-31 May, where an energy embargo will be high on the agenda. Download The Full Weekly Focus

EUR/USD The Euro is standing at the back foot on Friday, following 1.2% advance on Thursday, but dips were so far limited, adding to positive signal from Thursday’s bullish engulfing pattern. Fresh bullish momentum on daily chart and formation of 5/10DMA bull-cross, underpin the action for potential stronger short squeeze. Bulls need repeated close above 1.30532/45 (20DMA/Fibo 23.6% of 1.1184/1.0349) to confirm bullish stance and keep in play hopes for stronger correction. Extended recovery will need an extension through 1.0641/43 (May 5 lower top / daily Kijun-sen) and 1.0668 (Fibo 38.2% of 1.1184/1.0349) to generate initial reversal signal. Positive scenario is supported by formation of bullish engulfing pattern on weekly chart and RSI/stochastic indicators emerging from oversold territory. Also, formation of long-legged Doji on monthly chart suggests that larger downtrend might be running out of steam. However, caution is required as geopolitical and economic news remain in play as key risk sentiment drivers and may influence the performance of the pair at any time. Res: 1.0607; 1.0641; 1.0668; 1.0700. Sup: 1.0531; 1.0496; 1.0459; 1.0388. Interested in EUR/USD technicals? Check out the key levels

Risk appetite continued to recover on Thursday, with the US dollar once again giving back some of its recent advances against most major and emerging market currencies. Since the end of last week, the US Dollar Index has fallen by almost 2%. EUR/USD has rebounded back towards the 1.06 level, helped on its way by some hawkish comments from ECB members and heightened expectations that the bank will raise rates by 25 basis points at its July meeting. Sterling has edged back to just shy of the 1.25 mark, while all other G10 currencies have also posted gains against the greenback in the past week. While there has not necessarily been an obvious single catalyst for the rally, we largely attribute the move lower in the dollar to the below: 1) Market takes a breather As tends to be case following a prolonged rally, we may simply be seeing investors unwinding their long positions, and booking profits following the recent sharp move higher in the dollar. 2) China’s COVID-19 headlines improving Macroeconomic data out of China has taken a serious turn for the worst in the past few weeks, but headlines on the covid front have, at least, shown signs of improvement. Shanghai is set to ease its lockdown measures in the coming weeks, as new case numbers in the country fall sharply (down around 80% from the recent peak). 3) Global macroeconomic data holding up well Recent data out of the major economic areas suggests that calls for a sharp slowdown in growth, and possible recessions later in the year, maybe a slight overreaction. The G3 PMIs have remained firmly in expansionary territory (indeed all three are printing above the level of 55). Consumer spending also appears to be holding up well, with activity buoyant despite the recent surge in inflation. We actually think that the global economy will probably hold up slightly better than some economists expect this year. 4) Market has already fully priced in Fed tightening The lack of reaction in the US dollar to the very hawkish comments from FOMC Chair Powell earlier in the week, who said the Fed may have to raise interest rates above the ‘neutral’ level this year, provides further proof that it will be very difficult for the central bank to exceed market expectations this year. There won’t be too much in the way of major market-moving news today, aside from this morning’s UK retail sales figures that will be skewed by the base effect following the removal of lockdown measures in April 2021. A speech from ECB member Lane later in the day may be worth watching, although activity is likely to be largely driven by the factors listed above.

Risk sentiment is wavering as investors are constantly evaluating the likelihood of a recession. The flash PMIs for May might help guide those expectations in the coming week. In the US, there will be plenty of additional drivers for the dollar, such as the FOMC minutes and the PCE inflation readings. Markets remain fixated on seeing peak inflation so any trace of this might help calm nerves. In the world of central banks, the Reserve Bank of New Zealand is expected to hike interest rates again.

Fed minutes – 25/05 – as expected, the Federal Reserve raised rates by 50bps pushing the upper bound of the funds rate to 1%. There had been talk that some on the committee were keen on a 75bps move, however these concerns came to nought with all on the FOMC agreeing to a 50bps hike. The central bank also laid out the start of the balance sheet reduction program starting with $47.5bn in June, rising to $95bn a month after 3 months. This could be construed as being on the dovish side, given that they were starting the program from a lowish base and then ramping up, rather than going for $95bn straight out of the gate. Fed chair Jay Powell also said that based on current data, that the Fed had no intention of going faster than 50bps in a single month, firmly burying any prospect that the Fed would be much more aggressive in subsequent months. He specifically made the point that a 75bps hike wasn’t something the FOMC was actively considering, although in subsequent comments he’s being careful not to rule it out entirely. The discussion over balance sheet reduction is likely to be the more interesting one when it comes to this week’s minutes, particularly the decision to start off with $47.5bn, as opposed to going straight in with $95bn a month reduction.  The slow start to this program suggests that there might be some anxiety over how this might play out in the coming months. Recent comments from ex-Richmond Fed President Jeffrey Lacker suggest the scope for further financial markets volatility, with the Fed potentially being forced to choose between slowing the pace of runoffs in response to market volatility and widening credit spreads or keeping policy tight to fight inflation. The narrative has moved on a bit since then with a number of Fed officials including Chairman Powell coming across as much more hawkish in recent comments, raising the prospect of much more aggressive moves in the weeks and months ahead.  US Q1 GDP – 26/05 – the first iteration of US Q1 GDP was a bit of a shocker. We saw a contraction of -1.4% against an expectation of a 1% expansion, begging the question as to how the markets got it so wrong. A surprise -1.4% contraction in annualised GDP has raised concerns that the US economy could be heading towards a stagflationary style slowdown and possible recession, despite low levels of unemployment. There have been attempts to play down the extent of the slowdown in Q1, with the citing of slower inventory rebuilds after Q4 which saw a significant pull forward for Christmas. Net trade contributed to a -3.2% drag while inventories saw a -0.8% decline, on the back of supply chain disruption. Personal consumption was fairly resilient; however, this will face challenges in the months ahead due to higher prices. No material changes are expected in this week’s adjustment. US Core Deflator (Apr) – 24/05 – the battle to contain the inflation genie appears to have started in earnest, with the Federal Reserve fresh from raising rates by 25bps in March, then followed up with a 50bps rate rise in earlier this month, with the promise of another 50bps move in June and 25bps rate rises subsequently. In some of the more recent CPI numbers there does appear to be some optimism that inflationary pressures are starting to near their peak, although the jury remains out on that. While headline CPI has seen a modest fall to 8.3% in April, producer prices have proved to be slightly more resilient than perhaps Fed officials would like. The only positive is that the strength of the US dollar is likely to act as an anchor on upward inflationary pressure, and this could start to exert some downside pressure on the headline numbers. US PCE Core Deflator rose to 5.2% in March, and is expected to slip back in April to 4.9%.  Germany/France flash PMIs (May) – 17/05 – these flash PMI numbers are rapidly losing credibility in terms of the headline numbers at least, when it comes to assessing the resilience or otherwise of the French, German and UK economies. In terms of the wider economy, it is quite apparent that economic growth is struggling across the bloc as well as here in the UK. Yet to look at the PMI numbers it would be tempting to think that all is well. Nothing could be further from the truth with rising energy prices and supply chain disruptions posing significant challenges to business, large and small. Manufacturing and services PMIs are all expected to slow from the numbers we saw in April all of which were in the mid 50’s for all three of the UK, Germany and France.   Kingfisher Q1 23...

Producer inflation continues to accelerate as it reached a 33.5% y/y in April, setting another record for the indicator. Prices added 2.8% last month after jumping 4.9% during March, continuing to gain strength. Germany is said to have the most substantial fear of inflation of any European country, which is eating into German savings. However, the Bundesbank cannot act alone in tightening policy but can only form a hawkish coalition by bringing the moment of policy tightening closer. And we see some movement in that direction. Increasingly the consensus of the ECB officials is tilting towards a rate hike of 25 points in July. Furthermore, policymakers have not ruled out a further rate increase by 50 points. Whilst this ECB stance is softer than that of the Fed and Euro-region inflation is not inferior to that of the USA. There remains a medium-term pressure factor on the Euro against the Dollar. In the short term, however, the Euro is gathering strength after an oversold year of EURUSD declines with brief stoppages. A rebound in the movement of the last 12 months could correct the EURUSD towards 1.1080, Fibonacci’s 61.8% retracement. However, at 1.08, it might hit the resistance near the previous strong support with the 76.4% retracement level and the 50-day Moving Average.