EUR/USD - 1.0520 Euro's decline to 1.0491 (New Yoyk) on Mon due to renewed usd's strength on gain in U.S. yields suggests correction from Thursday's 5-year bottom at 1.0472 has ended and re-test of this key sup is envisaged after consolidation, loss of downward momentum would limit weakness to 1.0435/40. Only above 1.0568 prolongs choppy swings above 1.0472 and may risk gain towards 1.0592 but reckon 1.0630/35 should cap upside. Data to be released on Tuesday New Zealand building permits, GDT price index, Australia RBA interest rate decision Japan Market Holiday, China Market Holiday. France budget balance, Germany unemployment rate, unemployment change, U.K. Markit manufacturing PMI, EU producer prices, unemployment rate. U.S. redbook, durable goods, durables ex-defense, factory orders, durables ex-transport, JOLTS job openings.

As UK markets get ready to go back to work on Tuesday after the May Day Bank Holiday, the FOMC meeting that concludes this Wednesday is the key focus for market watchers this week. The meeting concludes at 1900 BST, with the all-important press conference from Fed chair Powell at 1930 BST. The market is overwhelmingly priced for a 50bp rate hike from the Fed at this week’s meeting, which would be the first double rate hike for 22 years. What is more astonishing is that there is a 90% chance of a second 50 bp rate hike in June, and an 86% chance of a 50 bp hike to 200-225bps in July. By year end the market is expecting US interest rates to be in the 3% range, which is a huge move considering rates were essentially at 0% at the start of this year.  The Fed’s terminal rate  The hawkish shift in Fed policy is causing shock waves around the world as the terminal rate, which would mark the end of the current Fed hiking cycle, continues to move higher. A rough guide of where the market thinks the Fed’s terminal rate will be is the 5-year Treasury yield, this broke above 3% on Monday, as US and global bond yields surged higher. The US yield curve (10-year yield – 2-year yield) is dipping back towards inversion territory, which is considered a recession risk. However, at the start of this week, what is interesting about the US yield curve is that the entire curve is moving higher. This is unusual, since when equity risk aversion is high, as it has been recently, you usually see some areas of the US yield curve (such as 10-year Treasuries) act as haven assets. That is not the case this time, and the reason is that this economic cycle is different because inflation is out of the bottle. Everyone knows that this will be a difficult disease to treat. The medicine is also harsh: an extremely aggressive Fed tightening cycle, which is likely to hurt the economy.  The Fed and inflation: why the Fed needs to hike The Fed is likely to come up against some criticism for its aggressive hiking cycle on Wednesday, especially after the weak Q1 GDP report for the US. However, the Fed is likely to say that it will look through one quarter of bad growth, as it continues to believe that consumer spending is resilient on the back of strong wage growth for Q1. The BLS employment cost index for Q1 rose to a more than 22-year high. This is a clear sign that as we progress through 2022, the global inflation problem is more than just a supply chain issue. Added to this, labour market data for April is expected to show 390k jobs were created by the US economy last month. This suggests a robust economy and could also propagate further wage growth down the line. Thus, when people say that the Fed can’t target inflation because it’s caused by outside pressures and the war in Ukraine, this is not wholly true. If wage pressures are surging in the US, then the Fed can try to put the brakes on the US economy to make sure these wage increases are nipped in the bud before they get out of control. Thus, at this stage, we cannot guarantee that the US terminal rate will not rise above 3% when annualised wage growth is the highest in two decades. The surge in the BLS’s employment cost index, suggests that price rises are becoming embedded in the economy, and this is the reason why it's hard to find any doves left at the Fed.  QT is coming, but what will it look like?  While the market is fully priced for a 50 bp rate increase this week, the FOMC statement and press conference will be more interesting from the perspective of the Fed’s enormous $9trillion balance sheet. We expect a formal announcement about the Fed’s plans to reduce the size of this monstrosity, and we could get confirmation that it will sell assets to the tune of $98bn per month in the coming months. This would be a much larger pace of monetary tightening compared with 2017, although the Fed could start small with a $50bn shrinking of its balance sheet this month. Overall, the Fed is embarking on a supersized tightening cycle using both interest rates and QT in unison. This is something that the market has not had to deal with before, and it is causing severe risk aversion in equity markets. Will traders follow Warren Buffet and buy when there is blood on the streets?  There was a risk off tone to markets at the start of the week as the Fed-led shift in...

AUD/USD Current Price: 0.7042 The contracting Chinese economy added to global headwinds and weighed on the aussie. The Reserve Bank of Australia is set to raise the cash rate for the first time in over a decade. AUD/USD trades near the critical 0.7000 threshold with a bearish bias. The Australian Dollar was among the weakest greenback’s rivals on Monday, with AUD/USD trading in the 0.7030 price zone at the end of the American session. The American currency appreciated on the back of risk aversion, triggered by poor Chinese data released over the weekend, later fueled by persistent tensions in Europe. According to official figures, the Chinese economy suffered a major setback in April, mostly due to the latest coronavirus outbreak in the country. The NBS Manufacturing PMI contracted to 475, while the Non-Manufacturing PMI plunged to 41.9. Australian data released at the beginning of the week was generally encouraging but fell short of boosting the local currency. The S&P Global Manufacturing PMI beat expectations by reaching 58.8 in April, while the official AIG index improved from 55.7 to 58.5 in the same month. Gold prices plummeted despite a generalized dismal mood, adding pressure on the AUD. The bright metal traded as low as $1,854.37 a troy ounce before recovering some ground ahead of the close. The focus now shifts to the Reserve Bank of Australia, set to announce its latest monetary policy decision. The central bank is expected to raise rates for the first time in over a decade as inflationary pressures reach Australian shores. Still, the RBA has been quite behind the curve, maintaining a “patient” stance until a couple of months ago. Policymakers gave up on evidence that the country is not immune to global bottlenecks and higher energy prices that have put pressure on prices. Market participants are anticipating a between 15-25 bps hike, which may provide temporal support to the local currency. AUD/USD short-term technical outlook The AUD/USD pair keeps approaching the year’s low posted in January at 0.6966. The daily chart shows technical indicators maintaining their bearish slopes, despite being in extreme oversold territory, as the pair develops over 200 pips below its 100 and 200 SMAs. The 20 SMA, in the meantime, gains bearish traction above the longer ones. A corrective advance is possible, but the pair needs to regain at least the 0.7230 to have the potential strength for a bullish reversal. The pair is also bearish in the near term, and according to the 4-hour chart. The 20 SMA heads firmly lower, providing an intraday dynamic resistance at around 0.7090, while the longer ones offer bearish slopes far above the shorter one. Technical indicators, in the meantime, remain within negative levels, the Momentum aiming higher within range but the RSI stable at around 35. Support levels: 0.7030 0.6995 0.6960 Resistance levels: 0.7050 0.7090 0.7135 View Live Chart for the AUD/USD

The Reserve Bank of Australia is seen raising OCR by 15 bps to 0.25%. Hotter Australian inflation paves the way for earlier RBA rate lift-off. AUD/USD could see more pain if the RBA decides to stand pat ahead of the election. The Reserve Bank of Australia (RBA) is on course to deliver its first rate hike in 11 years, as it seeks to keep inflation in check, ignoring the upcoming federal election on May 21. The policy decision will be announced this Tuesday, May 3, at 0430 GMT.  Will the expected rate hike by the Australian central bank be able to save AUD bulls? RBA can’t miss the inflation surge The Australian central bank is widely expected to raise the Official Cash Rate (OCR) by 15 basis points (bps) to 0.25% from a record low of 0.10% at its May meeting. So far, the RBA has been behind the curve, as most major central banks have embarked upon its tightening journey to combat raging inflation. With Australia’s annualized Q1 2022 Consumer Price Index (CPI) at a 20-year high of 5.1%, however, it has set a clear path for the central bank to kick off its rate hike cycle earlier than previously thought. The latest Reuters poll of economists showed last week that a majority of them predicted the RBA to hike the key rate to 0.25% in May. “Median forecasts showed the benchmark rate would rise to 1.00% by end-September and to 1.50% by year-end, double the 0.75% predicted in the previous survey,” per Reuters. Last month, the RBA April meeting’s minutes revealed that a further increase in inflation is expected, while 'the evidence that inflation is sustainably within the 2-3% target range' is the prerequisite for an interest rate rise. Ahead of the country’s quarterly inflation release, markets thought that the RBA might not act until the federal election, making the case for a June rate hike inevitable. But the uptick in inflation has compelled the central bank to take the lead from its global peers. Although inflationary pressures are stemming from the external environment, in the face of the Russia-Ukraine war and China’s covid lockdowns affecting the global supply chain, the RBA has to act now to keep a check on higher inflation. The economy remains in better shape to cope with higher borrowing costs, with a strong trade surplus and a tighter labor market. The RBA, however, needs to act with caution to avoid a hard landing, as the economy puts behind the post-pandemic recovery. Trading AUD/USD on the RBA decision AUD/USD remains heavily battered near four-month lows just above 0.7000, as the hawkish Fed expectations, China’s economic slowdown concerns and pre-RBA anxiety keep the AUD bulls at bay. As mentioned above, a 15 bps rate hike is well priced-in by the market. Therefore, the aussie will need more than the given rate increase to stage any meaningful recovery beyond 0.7100. AUD bulls could receive the much-needed boost if the RBA front-loads rate hike prospects for this year, affirming markets’ expectations of 1.50% by end-2022. Should the bank stand pat or refrain from committing any big plans, AUD/USD could take a massive hit, with a test of the January lows of 0.6965 on the table. The reaction in the AUD/USD pair could also be influenced by the risk tone prevalent at the time of the central bank decision. 

Tech earnings disappointing with Apple the standout and Facebook a relief. Amazon was poor and Apple spoke worryingly on the conference call. US GDP shocked to the downside and yields and oil are back on the ascent. Equities are back at precarious levels as we approach the end of the week and the end of the month. Tech earnings season is now more or less done and dusted and the report card looks like its detention. Facebook (FB) rallied 15% but really those numbers were not great, it was just a relief rally that they were not as bad as last time. Amazon (AMZN) had a shocker which really we should have all seen coming as it became a pandemic stock. Now we all go back out, malls are packed and warehouses are quiet. Google (GOOGL) was also a bit of a disappointment. So we come to the good news if there is any on a day when the Nasdaq is staring at -4% at the time of writing. Microsoft (MSFT) and Apple (AAPL) beat the street and produced solid earnings. But even Apple managed to slap bulls in the face on the conference call when it spoke about significant headwinds from supply chain issues. Apple turned around 4%. That set up Friday's fright. With the Fed in a blackout at least they cannot add to it with more of their recent hawkishness. But investors are running scared. We will naturally get some relief or bear market rallies but we are in a bear market make no mistake about it. Deutsche Bank moved to pencil in a nailed-on US recession in 2023 and their Chief Economist seemed incredulous that the Fed is even contemplating a soft landing. As he pointed out it has never been achieved before so why is it different this time. It never is different this time, history repeats itself.  Elon Musk remained in the news as his deal to take Twitter (TWTR) drags on. Some interesting news hit the tape as he has had to sell a decent chunk of Tesla (TSLA) to stump up the cash for the deal and put down quite a bit more as collateral. This could get very ugly if things turn lower for Tesla. There is a decent chance the deal doesn't make it across the finish line or else he will have to sell more Tesla stock if the deal does go through and this bear market really takes hold. Twitter also got a put down from Donald Trump who said he would not return to it and instead popped up on Truth Social on Thursday evening.  DWAC stock naturally soared. So is there any good news out there? Well curiously yes. It is always important at times like these when bearish thoughts are rampant to try and take a contrarian view and see if it holds. That is where the best trades come from. So let's get to it, this is getting me down already and it's the weekend! Refinitiv Lipper Alpha shows us that as of April 29, 275 companies from the S&P 500 have reported earnings and 80.4% of them have beaten estimates. Doesn't feel like it but there you have it. The long-term average is 66%. Q1 2022 revenue growth is running at 12.5% and even excluding energy that is 9.3%.  So why the long face? Source: American Association of Individual Investors, AAII.com Source: CNN.com Both sentiment metrics are showing extremely bearish readings with the AAII, in particular, a noted low. The CNN Fear and Greed has moved from 38 to 29 in the space of one week. The put/call ratio has also spiked, so we're all buying puts now, hmm, looks like the perfect setup for a counter-rally fairly soon then! Put/call ratio CBOE Volatility has naturally spiked as fear has, so this makes all of you rushing into buying puts, paying the top of the recent market. Below shows VIX and VXN (Nasdaq volatility) versus MOVE which is bond market volatility. That has notably quietened so could see some stability for yields going forward. VIX, VXN and MOVE For April, the Energy (XLE) sector has not been the top-performing sector despite what many of you may think. That crown goes to, drum roll, XLP Consumer Staples, the green line in our chart above. XLE (Energy-blue line) is second while unsurprisingly XLK (tech orange line) is the worst-performing sector for the month. SPY forecast Still have massive support at $415 a potential triple bottom and then $410 the Ukraine invasion low. There is a volume gap from $405 to $395 so that could get a trigger if we move below $410. $400 is likely to see stops placed just below the level as well, we all love round numbers don't we! That move would likely flush...

Summary Consumer income is growing, but not as fast as inflation. Consumers had to dip into savings to pull it off, but not only did real personal expenditures rise in March, revisions listed real February spending into positive territory as well. Rainy day savings won't last forever, but for now, at least the desire to resume service-sector activity is more powerful than inflation. Experiences over stuff drives spending gains in March In the wake of yesterday's negative GDP print, the additional detail from today's March personal income and spending report point to consumer spending growth that is outpacing the fastest inflation in decades. Revisions to prior months' sales figures now confirm that despite initial reports that inflation outpaced spending in February, the opposite is true: real personal spending was positive in each of the first three months in the first quarter. Admittedly a downward revision to January keeps the level only slightly higher. Still, real PCE rose 0.2% in March, on top of upward revision to February that brought the monthly change to a +0.1% (-0.4% previously). For months, we have described our expectations for consumer spending to continue to be driven by service outlays and that some of the strength there might come at the cost of slower growth or outright declines in goods spending. That was certainly the case for March. Real durables outlays slipped 0.9% and non-durables outlays fell 0.3%. The much larger services category grew 0.6% after adjusting for inflation; that carried the day and allowed overall real PCE to finish the month up 0.2%. Gains were widespread across services categories and led by “other” services (notably international travel) and discretionary services categories (transportation, recreation & food services), where real spending rose 1.1% after a 2.5% gain in February (chart). Download The Full Economic Insights