Equities Extend Their Rebound, Eurozone CPIs and GDP Enter the Spotlight

Equities kept drifting north yesterday, mainly fueled by upbeat earnings results, with the positive morale rolling into the Asian session today, where the BoJ’s decision to defend its ultra-loose policy may have also helped. As for today, the spotlight is likely to turn to inflation and growth data from the Eurozone, as euro traders try to figure out how the ECB will move forwards in terms of monetary policy.

Earnings Keep Boosting Stocks, Eurozone Inflation is Forecast to Accelerate Further

The US dollar traded mixed against the other major currencies on Thursday and during the Asian session Friday. It gained against JPY, GBP, and slightly against CHF, while it underperformed versus AUD, CAD, and NZD, in that order. The greenback was found virtually unchanged against EUR.

The weakening of the yen and the strengthening of the commodity-linked AUD, CAD, and NZD, suggest that investors may have continued trading in a risk-on mood yesterday and today in Asia. Indeed, turning our gaze to the equity world, we see that major EU and US indices were a sea of green, with the upbeat morale rolling into the Asian session today.

European shares moved further off their latest lows, perhaps due to better-than-expected earnings results from firms including Total Energies and Volvo Car, with upbeat earnings perhaps being the driver behind Wall Steet’s rally as well. Meta Platforms, the Facebook parent, surged 17.6% after it reported a larger-than-expected profit and a rebound in users. At this point though, it is worth mentioning that, in extended trade, Amazon tumbled around 10%, after it estimated Q2 sales below the market consensus. In any case, this was not enough to change the upbeat morale, which rolled over into the Asian session today. Besides upbeat earnings, another reason to keep buying stocks in Asia, may have been the BoJ’s willingness to defend its ultra-loose policy. Remember that at yesterday’s decision, officials said that they will offer to buy unlimited amounts of 10-year government bonds to defend an implicit 0.25% cap around their zero target every market day.

Having said all that though, we still believe that the recovery in equity markets may be limited. After all, the developments which resulted in the latest slide are still there. The war in Ukraine is still raging, China is adopting even stricter policies to combat the coronavirus, which adds to concerns over its economic performance, while the Fed is expected to proceed with aggressive tightening in the months to come, in order to curb very-high inflation.

Even after the US GDP data showed that the economy contracted by 1.4% qoq SAAR, missing estimates of a slowdown to 1.1% from 6.9%, investors remained convinced what the Fed will proceed with a 50bps hike next week, and perhaps with a triple one in June. According to the CME FedWatch tool, a double hike for next week is fully priced in, while the probability for a triple one in June has actually risen to 84.1%. All this suggests that the US dollar may continue to benefit, especially against the Japanese yen, due to the very wide monetary policy divergence between the BoJ and the Fed. It could also keep outperforming the euro, due to the ECB adopting a more cautious stance, but we will discuss the euro and the ECB in a while.

Another currency which we expect to perform very well is the Canadian dollar. Remember that at its latest meeting, the BoC hiked by 50bps, with Governor Macklem stressing the need for higher rates and adding that they are prepared to move more aggressively if the situation warrants so. So, besides a higher USD/JPY and a lower EUR/USD, we also see the case for a higher CAD/JPY and a lower EUR/CAD.

Now, back to the euro and the ECB, today, the main releases may be Eurozone’s preliminary CPIs for April and the 1st estimate of the bloc’s GDP for Q1. With regards to the CPIs, the headline rate is forecast to have ticked up to +7.5% yoy from +7.4%, but the HICP excluding energy and food is expected to have inched up to +3.4% from +3.2%. The preliminary GDP rate is forecast to have held steady at +0.3% qoq.

With Russia’s decision to halt gas supplies to Bulgaria and Poland, there have been some fears over the future economic performance in Europe, which in turn may have raised speculation that the ECB may need to move more cautiously in terms of monetary policy. However, further acceleration in Eurozone’s inflation may revive speculation that the ECB may eventually need to lift rates in July. But, even if this is the case, the increasing expectations over an ultra-aggressive stance by the Fed still point to a wide divergence between those two banks, and thus, we still see the path of least resistance for EUR/USD as being to the downside.

CAD/JPY — Technical Outlook

CAD/JPY traded higher yesterday, after breaking above the 101.00 barrier, marked by the high of April 26th, Overall, the prevailing trend of this pair appears to be to the upside, but due to the latest deep low on April 26th, at 99.00, we prefer to wait for a break above the peak of April 21st, at 102.95, before we get confident on a trend continuation.

Such a break will confirm a forthcoming higher high and may initially target the 103.95 zone, marked by the highs of December 23rd and 24th, 2014. If that barrier doesn’t hold either, then we may see larger advances, perhaps towards the peaks of December 5th and 8th, 2014, at around 106.50.

We will start examining the case of a bearish trend reversal in case we see a dip below 98.25, a support marked by the lows of April 7th and 8th. A forthcoming lower low will already be confirmed and the first area to consider as a support after the break is the 97.05 level, marked by the lows of March 30th and 31st. Another break, below 97.05 could extend the fall towards the 95.65 barrier, which if also fails to hold, could allow for extensions towards the low of March 21st, at 94.30.

EUR/CAD — Technical Outlook

EUR/CAD has been in a sliding mode since April 25th, when it hit resistance at 1.3770. On Wednesday, the rate bell below the key support (now turned into resistance) zone of 1.3550, and yesterday, it hit support at 1.3435. Overall, the pair has been in a downtrend mode as marked by the downside line drawn from the high of March 10th, and thus, we will consider the short-term outlook to be negative.

A dip below 1.3435 could signal the continuation of the current trend and may pave the way towards the 1.3255 zone, defined as a support by the inside swing high of April 24th, 2015. If the bears stay in the driver’s seat, a break below 1.3255 could allow extensions towards the 1.3075 zone, which provided strong support between April 16th and 23rd.

On the upside, we would lie to see a clear recovery back above 1.3770 before we start examining a bullish reversal. This will not only confirm a forthcoming higher high on the 4-hour chart, but perhaps also the break above the aforementioned downside line. The bulls could get encouraged to climb towards the 1.3980 zone, marked by the high of March 31st, the break of which could see scope for extensions towards the 1.4075 level, marked by the high of March 17th, or the peak of March 15th, at 1.4165, which coincides with the lower end of the sideways range that contained the price action between October 4th and March 1st.

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