The FOMC meet next week and markets are expecting a 50 bps rate hike from the Fed as well as QT being announced. The Fed is also widely expected to announce another 50 bps rate hike to come. So, this means the bar is set very high for the fed to surprise markets and send the USD even higher. With so much bullish expectations priced in a ‘buy the rumour sell the fact response’ may be the path of least resistance for the USD next week. One interesting pair to look at for next month is the NZDUSD. Over the last 22 years, the pair has risen 14 times. If the Fed fails to give reasons for more USD strength then the NZDUSD could gain as the RBNZ is still on its hawkish rate path cycle. Over the last 22 years, between May 17 and June 10, the NZDUSD has risen 14 times. It has had an average return of over 1.5%. The maximum gain was nearly 10% in 2020 and the largest loss was in 2008’s global financial crisis with more than a 2.5% loss. Will the NZDUSD pair rise again this year? Major Trade Risks: If earnings releases from Apple disappoint on Thursday then that could weigh on broader stock sentiment on growth concerns.

The Russian-Ukrainian war entered its third month, without any signs that the conflict will be resolved any time soon. After failing to capture Kyiv, Russian forces are focussing their attacks on the Donbass region in the Southeast and with the 9 May Victory Day approaching, we think Russia is likely to step up their offensive against Ukraine (read more in Research Russia-Ukraine - Several signals point to an escalation in the war in Ukraine as Victory Day looms, 26 April). Global growth concerns have again hit the market mood. Assets that tend to trade closely in tandem with the cyclical outlook have performed poorly and market volatility has increased. News that Russia halted gas deliveries to Poland and Bulgaria after they failed to make payments in Ruble did nothing to turn around sour risk sentiment and sent oil and gas prices higher. Market concerns have been amplified by another COVID-19 outbreak in Beijing, which could trigger a shut-down of the city similar to Shanghai, putting further pressure on global supply chains. Amid broad USD strength, CNY has seen the sharpest weekly decline since 2015, EUR/USD fell to the lowest level since 2017 and USD/JPY moved higher after Bank of Japan stuck to its dovish policy and yield curve cap. The combination of higher energy prices and a weaker growth outlook put central banks in a tough spot. Yet Riksbank felt no need to wait and hiked its repo rate by 25bp already in April and we look for further rate increases in June, September and November this year. In line with recent comments from Governing Council members, we now expect a first 25bp hike from ECB already in July, followed by continued hikes in September, December and March, taking the deposit rate back to 0.5% in Q1 23. Incumbent French President Emmanuel Macron secured another five-year term. His re-election bodes well for further EU integration, but he is also facing increasing economic and political headwinds. With only 59% of voters endorsing him for a second term, he has to govern a divided country and the weaker mandate could make it challenging to push ahead with ambitious reforms of the pension, health and education systems. To what degree Macron can implement his plans will depend on parliamentary elections held in June. Chinese Covid-19 developments will remain in focus next week, while a further decline in Chinese PMIs from already low levels seems likely due to the Shanghai lockdown. A busy week awaits markets also in the US, where the FOMC meeting on Wednesday is the highlight. We expect the Federal Reserve to hike the target range by 50bp, a view shared by consensus and market pricing, and signal that further 50bp rate hikes are looming this year (read more in Fed Preview, 28 April). The US jobs report released on Friday will be interesting in that respect. We expect the job market continued to tighten in April, with an increase in nonfarm payrolls of ~400k and possibly a further drop in the unemployment rate to 3.5%. On Thursday, we expect Bank of England to hike the Bank Rate to 1.00% from 0.75%, but stick to its softer guidance on the hiking pace from last time. In the euro area, focus will remain on further potential cuts to Russian energy supplies, as the EU is working on another sanctions package that might include an oil embargo. An emergency meeting among EU energy ministers is scheduled for Monday. Download The Full Weekly Focus

Gold prices declined amid a worsening demand outlook this week. Fed's rate outlook and balance sheet reduction plan to impact dollar valuation. XAU/USD faces the next significant resistance at $1,930. Gold started the new week under heavy bearish pressure and lost nearly 2% on Monday. Following a meagre recovery attempt on Tuesday, XAU/USD failed to hold above $1,900 and touched its weakest level in more than two months at $1,872 on Tuesday but erased a large portion of its losses to close the week above $1,900. What happened last week? As Shanghai’s coronavirus lockdown dragged into the fourth week, China ordered mass coronavirus testing in Beijing on Monday, escalating fears over a lockdown in the capital city of the world’s second-biggest economy. In turn, XAU/USD dropped below $1,900 for the first time in nearly a month. “After a strong start to Q1 in China, demand came to a virtual halt in March,” the World Council noted in a recently published research. “Tough new lockdowns imposed to contain a resurgence of COVID-19 had a marked impact on demand for jewellery, bars and coins,” the publication further read, suggesting that the gold price is likely to struggle to gain traction as long as China sticks to its zero-COVID policy. Meanwhile, the greenback capitalized on safe-haven flows and put additional weight on XAU/USD’s shoulders. On top of China-related concerns, the protracted Russia-Ukraine conflict caused investors to grow increasingly worried about a global economic slowdown.  Although gold managed to stage a modest rebound amid a more-than-3% decline witnessed in the benchmark 10-year US Treasury bond yield on Tuesday, the relentless dollar-buying made it difficult for XAU/USD to gather bullish momentum. Meanwhile, Russia's Foreign Minister Sergei Lavrov said that they rejected Ukraine's proposal to hold peace talks in Ukraine and warned that they must not underestimate the risks of a nuclear conflict, boosting the dollar even further.  The unabated dollar rally continued on Wednesday and gold ended up losing more than 1%. On Thursday, data from the US showed that the economy contracted at an annualized rate of 1.4% in the first quarter of the year following the impressive 6.9% expansion recorded in the fourth quarter of 2021. The initial market reaction to the disappointing growth data forced the dollar to lose some interest and gold closed the day in positive territory. With the dollar selloff picking up steam ahead of the weekend, gold extended its rebound beyond $1,900. The US Bureau of Economic Analysis announced on Friday that the Personal Consumption Expenditures (PCE) Price Index climbed to 6.6% on a yearly basis in March from 6.3% in February. On an encouraging note, the Core PCE Price Index, the Fed’s preferred gauge of inflation, edged lower to 5.2% from 5.3%.  Next week The ISM will release the US Manufacturing PMI on Monday. Markets expect the report to show that the business activity in the manufacturing sector continued to expand at a robust pace in April. A weaker-than-expected PMI reading is likely to force the greenback to stay under bearish pressure and help XAU/USD push higher. In case the headline PMI surprises to the upside, the dollar might have a tough time capitalizing on it ahead of Wednesday’s all-important FOMC meeting.  The Fed is widely expected to hike its policy rate by 50 basis points and unveil its plan to shrink the balance sheet. The most likely scenario for the Fed is to trim its holdings of US Treasury bonds and mortgage-backed securities by $60 billion and $35 billion, respectively, per month from June, bringing the total reduction to $95 billion.  It’s worth noting that markets have already priced in these actions. A QE reduction of less than $95 billion could be seen as a slight dovish tilt in the Fed’s policy outlook and trigger a voluminous dollar selloff. Such an action is likely to cause US Treasury bond yields to fall sharply and provide a boost to XAU/USD.  The Fed’s forward guidance on the rate outlook will also be scrutinized intensely by investors. According to the CME Group FedWatch Tool, markets are pricing a 94.5% probability of a total of 125 basis points (bps) rate hikes in the next two meetings. In case either the policy statement or FOMC Chairman Jerome Powell outright dismisses the possibility of 75 bps rate hikes in 2022, the dollar will have more room for a downward correction. On the other hand, any mention of a 75 bps rate hike being on the table in the near future would be assessed as a confirmation of the Fed’s willingness to tighten the policy in an aggressive way and not allow gold to hold its ground. On Friday, the US Bureau of Labor Statistics will release the April jobs report. Nonfarm Payrolls (NFP) are expected to rise by 400,000 following March’s increase...

Oh, to be back in Japan now. Next week is Golden Week in Japan. That means there are three consecutive holidays: Tuesday: Constitutional Memorial Day. Wednesday: Greenery Day (like St. Patrick’s Day, when everyone wears green? More like Arbor Day.). Thursday: Children’s Day (traditionally 3/3 was Girl’s Day and 5/5 was Boy’s Day, now they’re one public holiday). That means most Japanese will simply take the whole week off, which is what the Japanese government intends. Japan has the most public holidays of any country (19) because the culture frowns on workers taking personal days off and so the government compensates. (Ask Glen Wood about this.) In olden days only New Year’s Day was a holiday – one day a year. Alas the rest of us will still be beavering away. It’s a pretty intense week, with Three major central bank meetings: The Reserve Bank of Australia (RBA) on Monday, the US Federal Open Market Committee (FOMC) on Wednesday, and the Bank of England on Thursday. UK local elections on Thursday. The ever-popular US nonfarm payrolls on Friday, heralded by the ADP report on Wednesday. The final manufacturing PMIs on Monday and service-sector PMIs on Wednesday (with some adjustment for the UK, which is on holiday on Monday). Also the US Institute of Supply Management (ISM) version of those reports. German unemployment (Tue), factory orders (Thu), and industrial production (Fri). New Zealand and Canadian employment data (Wed & Fri, respectively). Tokyo CPI (Fri). The regular monthly OPEC+ meeting (Fri). The central bank meetings will no doubt be the focus of attention. This past week only one major central bank that I follow closely, the Bank of Japan, met. They’re a total outlier so their decision is no guide to what other central banks might do. Contrary to the trend almost everywhere else, they decided to double down on their “yield curve control” (YCC) program to make sure that interest rates don’t rise. By contrast, every other central bank seems to be channeling Sylvester Stone: I want to take you higher. The only question is, as Tosca said, how much higher? Sweden’s Riksbank, which I don’t follow closely, did meet this past week as well. They joined the global rate-hike bandwagon, finally raising their policy rate to 0.25% from zero and promising another two or three hikes this year. For next week the main question will be whether the RBA follows the Riksbank and joins the global hiking trend or whether it sticks with its view that Australia’s inflation is not “sustainably” within its 2%-35% target range. Until now it’s said that it wants to see “actual evidence” that inflation is “sustainably” within its 2%-3% target range before hiking. “Over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labour costs,” it said last month, while noting that it will have “an updated set of forecasts to be published in May.” Under normal circumstances one might infer that those updated forecasts would be the trigger for a rate hike. I don’t think they’ll need to wait for those forecasts. The surge in inflation in Q1 to 5.1% yoy from 3.5% reported this week was outside the range of all forecasts (4.0% to 4.9%, median 4.6%) and the highest in 21 years (since Q2 2001). The quarter-on-quarter rate of increase (2.1% qoq) met their target for the year-on-year rate! And both their core measures are now above the target zone. This was followed by a surge in the producer price index (PPI) to 4.9% yoy from 3.7% yoy, the highest since Q4 2008, as reported this morning. Accordingly, the market thinks – and I agree – that they will hike rates 15 bps to 0.25%. The expectation then is that once the RBA gets its new forecasts in May it might have to start playing “catch-up” and hike by 50 bps at a time. To make up for its slow start, the RBA is expected to tighten policy by the most of any of the major central banks over the next year. That’s a tall order. Will the RBA validate these expectations? That’s what Tuesday’s meeting will have to decide. I think it may take until May, when they have the new forecasts, before they fully change their tune. I think AUD could stumble after next week’s meeting if the RBA fails to confirm the market’s expectations. The Fed, by contrast, is pretty much a done deal. Last week (April 21st) Fed Chair Powell said that a 50 bps hike was “on the table” for the May meeting. Other Committee members have since chimed in with their support. The market now assumes it’s not only on the table but wrapped up and ready to go. Powell also said “it is appropriate” in his...

GBP/USD battered to 21-month lows just above 1.2400. The US dollar index surged to its highest level in 20 years. Cable could see a technical rebound ahead of the Fed and BOE decisions. There was no reprieve for GBP bulls, as the previous week’s selling spiral gathered steam and smashed GBP/USD to its lowest level since July 2020 at 1.2410. King dollar reigned supreme amid heightening volatility within the G10 fx space throughout the week. The monetary policy divergence between the Fed and BOE will remain the main underlying theme ahead of policy announcements and US Nonfarm Payrolls. GBP/USD: A brutal week GBP/USD set off the week on the wrong footing, extending Friday’s 200 pip meltdown below the 1.3000 level. Over the week, the currency pair lost roughly 2.5% and hit 21-month lows, as the US dollar was on a rampage amid varied factors and a relatively better market mood. The US dollar index reached its highest in 20-years just shy of the 104.00 level. In the absence of any first-tier economic releases from the UK, the major remained at the mercy of dollar price action. The greenback remained the most sought-after currency, as aggressive Fed rate hike expectations shot through the roof, with the CME’s FedWatch tool showing a 96.5% probability of a 50 bps rate hike in May and a 85% chance of a 50 bps June lift-off. Further, China’s covid lockdowns extended into Beijing while the Shanghai-reopening hopes faltered on a fresh uptick in infections. Chinese lockdowns-induced supply chain constraints raised concerns over global growth prospects, while Europe battled an energy crisis, in the face of the Russia-Ukraine war. In times of uncertainty and market unrest, investors took refuge in the ultimate safe-haven, the dollar. Additionally, the dovish BOJ policy outcome triggered a massive slump in the yen, which powered the unrelenting dollar upsurge. Meanwhile, the divergence between the Fed and BOE also remained in play and kept GBP bulls at bay. Although a 1.4% contraction in the US economy in the first quarter of 2021 prompted a profit-taking decline in the buck heading into the weekly close. This helped the pound breathe a sigh of relief but it remains to be seen if the GBP/USD recovery has additional legs. Week ahead: The Fed, BOE and NFP The first week of May is likely to be the most eventful and busy week of the month, loaded with the critical Fed and BOE interest rate decisions midweek while the US NFP release will come out on Friday. On Monday, light trading will likely persist in GBP/USD, as Chinese and the UK markets remain closed in observance of Labor Day. Therefore, thin liquidity could exaggerate moves, aiding the turnaround in cable. The US ISM and S&P Global Manufacturing PMIs, however, could offer some incentives. Tuesday’s UK S&P Global Final Manufacturing PMI and US JOLTS Job Openings will have little to no impact on the pair, as the Fed meeting commences. The US ADP employment data due on Wednesday will be largely ignored, as the Fed decision and Chair Jerome Powell’s press conference will hog the limelight. Fed and BOE expectations will have a significant influence on the pair ahead of policy announcement. The US central bank is seen raising interest rates by 50 bps, lifting the target range to 0.75%-1%. In contrast, the BOE will hike the key rate by 25 bps to 1%. The forward guidance on monetary policy, as well as, on the inflation and growth outlook from both the central banks will hold the key for a fresh direction in GBP/USD. Markets will have little time to settle the dust over the central banks’ events, as US employment data for April will drop in on Friday. The American employment sector remains solid and will continue to justify the hawkish Fed outlook.   GBP/USD: Technical outlook Despite edging higher on Friday, the Relative Strength Index (RSI) indicator on the daily chart stays below 30, suggesting that GBP/USD has more room on the upside to correct its oversold conditions. 1.2600 (Fibonacci 23.6% retracement of the weekly decline) aligns as initial resistance. If that level turns into support, the next recovery targets could be seen at 1.2700 (Fibonacci 38.2% retracement) and 1.2780 (Fibonacci 50% retracement). In case the pair comes under bearish pressure and makes a daily close below 1.2410 (21-month low touched on April 28), additional losses toward 1.2300 (static level from June 2020) and 1.2160 (static level) could be witnessed.   

The Eurozone will update its CPI inflation and GDP growth readings on Friday at 09:00 GMT. While investors expect a firmer economic expansion and another upturn in inflation, the data could produce only temporary volatility as the war in Ukraine will remain the major, if not, the only driver for the battered euro in the short term. Euro may shrug off new record inflation The euro has been hammered badly this week, depreciating by more than 2.0% against the US dollar in the face of hawkish Fed rate hike talk and Russia’s gas supply cuts to NATO members Poland and Bulgaria. That is the largest damage since March 2020, but the week is not over yet and the common currency may have one more opportunity to rebound before the focus solely turns to the 2017 trough of 1.0339 as Friday’s preliminary CPI inflation and GDP growth data appear on the radar. Looking first at CPI readings, there is growing speculation that global inflation is nearing a peak, as year-on-year comparisons with 2021 high levels could produce softer CPI figures. The ECB’s vice president Luis de Guindos reaffirmed his hopes for a peak in inflation today, though the forecasts for the Eurozone flash estimates for April suggest this phenomenon may arise at a later stage, as they point to a new record high of 7.5% y/y from 7.4% previously. Excluding volatile food and energy prices, the core measure is also projected to run beyond the central bank’s symmetrical 2.0% target, unlocking a fresh high at 3.4% y/y, up from 3.2% in March. The above outcome or even a stronger-than-expected print could amplify calls for a July 25bps rate hike, which is currently almost fully priced in futures markets. However, whether the inflation data will provide the much-needed upturn in the euro remains to be seen. Under normal circumstances, a continuous inflation spiral would raise the stakes for tighter monetary policy, stirring fresh bullish volatility in the currency as in the greenback's case. That said, another record CPI mark in the Eurozone may not be very surprising to investors after all. Stronger-than-expected German CPI figures have already foreshadowed this scenario. Also, the war in Ukraine and lately Russia's gas supply cuts could add more fuel to the already rocketing energy and food crisis in the coming months. GDP growth may not help the euro either Perhaps, the euro could recoup some lost ground if a potential upbeat inflation report is accompanied by firmer GDP stats. Analysts believe that the Eurozone economy has expanded at a faster annual pace of 5.0% y/y in Q1 versus 4.6% reported in the preceding quarter, and at a steady quarterly rate of 0.3%. Nevertheless, investors could again barely react to the data since Ukraine’s negative economic spillovers may become more evident in the next GDP releases. Perhaps a sudden pullback in the US core PCE inflation index could give a second chance to euro bulls later on Friday, increasing the likelihood of a narrowing monetary divergence between the Fed and the ECB. But again, given the non-existing support from the recent negative US GDP print, as well as the short-lived impact from the ECB’s recent hawkish rate hike comments, it’s hard to see what can come to the euro’s rescue if not a ceasefire in Russia-Ukraine geopolitical tensions. EUR/USD From a technical perspective, the devastating loss in euro/dollar has opened the door for the 2017 trough of 1.0335 but traders may wait for a close below 1.0500 before they engage in additional selling activities. Beneath the crucial 1.0339 threshold, the pair will re-activate the 2008 downtrend, bringing the scenario of parity back into scope after two decades. In the event of an upside reversal, there is a nearby resistance at 1.056, which the pair needs to claim to continue towards the 1.0750 – 1.0800 region. The 1.0900 round level could be the next obstacle and perhaps the green light for an acceleration towards 1.1045.