RBA Minutes Come Out Hawkish, UK Data in Focus

The Aussie traded higher against all the other major currencies during the Asian session today, perhaps as the RBA meeting minutes revealed that the Bank considered a 40bps at its latest gathering. The pound also gained somewhat today, after the better-than-expected UK employment data, and may drift a bit higher tomorrow if data tomorrow shows that UK inflation continued to accelerate in April.

Aussie Gains After RBA Minutes, Pound Benefits from Jobs Data, Awaits CPIs

The US dollar traded lower against all but one of the other major currencies on Monday and during the Asian session Tuesday. It gained only versus JPY, while it lost the most ground versus AUD, NZD, and CAD.

The weakening of the US dollar and the safe-haven yen, combined with the strengthening of the commodity-linked Aussie, Kiwi, and Loonie, suggests that market appetite improved again at some point yesterday or today in Asia. Looking at the performance in the equity world, we see that all-but-two of the European indices under our radar have traded in the red, with Wall Street following suit. Only Dow Jones gained fractionally. Both the S&P and Nasdaq slid. Having said that though, appetite improved during the Asian session today, with Hong Kong’s Hang Seng surging 3.20%.

In our view, EU and US shares may have traded largely south because of the disappointing Chinese data released during the Asian session yesterday. Remember that, on Friday, we saw decent advances, but we argued this was due to short covering and portfolio rebalancing at the last trading day of the week. The fundamentals of the broader financial landscape have not changed, with the market drivers still being concerns over global growth, expectations over fast tightening, and the uncertainty surrounding the war in Ukraine. The Chinese data enhanced the former, and that’s why we saw appetite subdued yesterday. Yes, but what about the improvement today? To be honest, we cannot sufficiently explain that and thus, with no obvious catalyst, we will treat the recovery as a corrective move.

Now back to the FX world, the Aussie was the main gainer, and this may have been due to the RBA minutes being more hawkish than anticipated. Remember that at the last gathering, the Bank hiked by 25bps, surprising most market participants who have been expecting a 15bps liftoff, and also noted that it remains willing to proceed with more increments in order to bring inflation to the target. That said, the minutes revealed that the Bank included in its options a 40bps hike, which supports the narrative that officials may continue hiking at a faster pace. Remember that market expectations have been overly hawkish for some time now, but the Bank had yet to confirm them. Now, it is providing more and more evidence that this might be the case, and that’s why we saw the Aussie trading higher.

However, we are still very reluctant to call for a bullish reversal, as global growth concerns weigh against that risk-linked currency. Remember that Australia is a main trading partner of China, the world’s second largest economy, and supply chain concerns related to China may well hurt the Australian dollar. If it was only monetary policy, we would expect AUD/JPY to continue trading north. A more hawkish than expected RBA, combined with an ultra-dovish BoJ, is theoretically a recipe for just that. Nonetheless, the global landscape is a bit peculiar. Central banks are not raising interest rates because economies are doing very well and, alongside that, inflation is rising. It’s because inflation is very high, at a time when there are signs of economic slowdown and concerns over a global recession. This is called stagflation. So, with such concerns now being on the front page on investors’ agenda, we do see the case for AUD/JPY to turn south again.

As for today, during the early European session, we already got the UK employment report for March. The unemployment rate slid to 3.7%, against expectations of 3.8%, while the employment change revealed that the economy has added much more than expected jobs. Average earnings also beat expectations. This may be a relief for those concerned over a recension in the UK, and that’s why we saw the pound trading higher. Accelerating inflation tomorrow, early morning, could revive expectations over a somewhat faster tightening path by the BoE, and may allow for some further advances. However, the signs that the UK economy is not performing that well overweigh the positive ones. And after all, the employment report is for March. We prefer to focus on data concerning more recent periods. We believe that it is to early to call for a reversal in the pound, especially against the US dollar. We believe that recession concerns are still there, at a time when the Fed is expected to continue delivering 50bps liftoffs for the next couple of months. We will get to hear from Fed Chair Powell later today, and we expect him to confirm that narrative.

AUD/JPY — Technical Outlook

AUD/JPY has been in a recovery mode since yesterday, when it hit support at 88.45, and today, I broke above yesterday’s high of 90.15, after the RBA minutes revealed a more hawkish language than investors have been anticipating. Nevertheless, the rate is still trading below the downside resistance line taken from the high of April 20th. So, with that in mind, even if the recovery continues for a while more, there is decent chance for the bears to take charge again soon.

A break below 88.45 may confirm the bearish bias and could initially target the low of May 12th, at 87.25. Another dip, below 87.25, would confirm a forthcoming lower low on the daily chart and may extend the slide towards the inside swing high of March 11th, at 85.85. If that barrier doesn’t hold either, then we could see the bears diving towards the low of March 15th, at 84.60.

On the upside, we would like to see a clear break above 94.05 before we start examining the bullish case. The rate will be well above the downside resistance line taken from the high of April 20th, and we could see the bulls climbing towards that high, at around 95.75. A break higher could extend the advance towards the 97.35 barrier, marked by the high of May 14th, or the 98.35 zone, marked by the peak of December 29th.

GBP/USD — Technical Outlook

GBP/USD traded higher after hitting support near 1.2165. Overall, the rate remains below the key resistance zone between the 1.2410 and 1.2470 zone, and well below the downside resistance line drawn from the high of March 22nd. With that in mind, we cannot rule out another selling activity soon.

The bears could take charge from near the 1.2410/70 territory and perhaps target once again the 1.2165 zone, which provided strong support on Thursday and Friday. If that territory fails to hold this time, then a break lower would confirm a forthcoming lower low on the daily chart and could carry extensions towards the 1.2080 area, marked by the low of May 18th, 2020, or even the 1.1980 zone, marked by the inside swing high of March 25th, 2020.

Now, in case the rate overcomes the 1.2470 barrier, it would still be trading below the aforementioned downside line, but we would start considering a larger upside correction. The bulls could pave the way towards the high of May 4th, at 1.2635, the break of which could carry extensions towards the peak of April 26th, at 1.2775.

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