Headlines

* UK inflation falls less than expected, peak rate seen above 5.3%

* NZD crushed as RBNZ raises rates but signals no more tightening needed

* McCarthy, Graves signal impasse in White House debt talks

* Copper falls below $8,000 for first time since November

* Chinese stocks close to erasing 2023 gain as headwinds intensify

FX: USD traded to a two-month high. A lack of progress in talks over raising the US debt limit hurt investors’ appetite for risk taking. The 2-year yield printed a high last seen in March at 4.40% before closing near its low at 4.32%. It looks like a bearish “shooting star” candle printed on the day with yields sinking today. The 10-year yield hit a two-month high at 3.76% but settled on its low at 3.69%.

EUR pushed up to its 100-day SMA at 1.0811 but that capped the upside. Support sits around recent lows at 1.0759/62. GBP dropped to a one-month low at 1.2372 before bouncing. Cable continued to trade around its 50-day SMA at 1.2427 before pushing higher after today’s hot CPI data. USD/JPY closed little changed printing a “doji” candle. This signals indecision as it printed a six-month top at 138.91 after yield differentials spiked. AUD closed at a one-month low and looks like it will test strong support around 0.6560/70. NZD plunged as the RBNZ shocked markets by signaling an end to its hiking cycle after raising rates by 25bps as expected. The peak rate forecast was maintained at 5.50% but was forecast to be increased. The 200-day SMA in NZD/USD is at 0.6153.

Stocks: US equities fell sharply with most sectors lower. The benchmark S&P 500 dropped 1.12% and finished at 4145. The Dow lost 0.69% and the Nasdaq 100 sunk 1.28%. It was a broad sell-off in some of the areas that have been winning year-to-date. Policymakers in Washington struggled to lock in a debt ceiling deal. There is less than two weeks until the government is due to default. There probably needs to be a prolonged sell-off to bang heads together and get a resolution. Sentiment was also dampened after US lawmakers threatened retaliation to China’s Micron ban.

Asian stocks were mostly lower after the negative lead Stateside. US-China frictions ramped up as the US House China Select Committee Chair called for retaliation against the Micron ban. The Nikkei 225 was pressured after its recent pullback to beneath 31,000.  The Hang Seng was lower amid political frictions.

US equity futures are contained.  European equity futures are pointing to a lower open (-0.4%). The Euro Stoxx 50 closed down 1.0% yesterday.

Gold closed higher as yields eventually fell. Prices touched $1959 but that held as support.

Day Ahead – Dollar still solid

The dollar has been trading a little firmer as it tries to make it three consecutive weeks of gains which last happened back in February. Changing the long-term downtrend in the greenback will be tough, though the break of seven-month bear trend resistance looks good for now.

Numerous FX volatility measures are still relatively low. There has been a clear rise in US short-term rates with the two-year yield pushing up to the highest since early March. But this has primarily come on the back of hawkish Fedspeak. Resistance in the DXY sits around 103.61/65 which the index has failed to close above on three recent occasions. If we manage that, then 104 comes into view. Tonight’s FOMC minutes may be overlooked. We have had numerous Fed officials on the wires since the April meeting, including Chair Powell so they could be a bit stale.

Chart of the Day – Cable trading around 50-day SMA support

The UK finally saw softer single-digit CPI data this morning after seven straight months of ten-something headline prints. But the core rose sharply and yesterday’s tale of two economies in the PMIs also adds to policymaker’s concerns in the months ahead. That is because although the manufacturing sector is still struggling, the much bigger services side of the economy still points to decent momentum and elevated price pressures. Friday’s UK retail sales will inform further on the state of the UK consumer after a bleak March report. 

GBP/USD is trading around the 50-day simple moving average but the April low at 1.2344 looms large if bulls lose this. Loss of trendline support from last September’s spike low also points to possible more downside. Buyers need to stay above long-term support at 1.2447 with trendline resistance above 1.25.