The Morning Update

The US$ steadies, oil prices slip, equity markets are mixed, while US yields ease as markets prepare for the Fed meeting starting Wednesday. The US$ tests multi-week highs, equity markets slip after Australia's unexpected 25bps rate hike showed central banks remain in inflation fighting mode, increasing expectations for further policy-tightening by the Fed Thursday. Today focus will remain on corporate earnings includes Ford Corp, the economic docket is quite light with just US Factory Orders, & JOLTS Jobs opening.

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In other news. The US could hit the debit ceiling by June 1st, much sooner than expected, Treasury Secretary Yellen warns-CNBC. Eurozone inflation picks up but core inflation unexpectedly slows. BP's profit rises to $5 billion as share buyback slows. Australia's central bank stuns investors with 25-bps hike, warning more might be needed. The IMF raises Asia's economic forecast on China recovery, but warns of risks from persistent inflation & global market volatility driven by Western banking-sector concerns. Japan & South Korea revive stalled economic talks as global risks grow.

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In currency news. The AUD rallies aggressively after the central banks surprise 25bps rate hike. JPY tumbles to 15-year lows vs EUR on increasing interest rate divergence. The US$ extends gains as expectations remain that the Fed will hike 25bps on Thursday and the potential that the central bank may maintain its hawkish tone for longer. CNY firms 0.15%, while Asian currencies are flat on average vs US$. Trading currencies are mixed with NOK & CHF weaken 0.3%, ZAR, MXN & SEK are down 0.1%, while JPY is up 0.1%, NZD firms 0.4%, while AUD rallies 0.9% vs US$.

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Oil slips on continuing weak demand from China and US rate rise expectations. C$ continues under pressure looking set to retest 1.3600 after the Australian central bank surprised markets by hiking rates and increasing their hawkish tone which is setting the stage that we could see the ECB & Fed increase their hawkish tone in an effort to tackle persistent inflation levels. The prospect of further Fed hikes is expected to keep pressure on commodity prices, would favor the US$ and could see the loonie retest towards March highs of 1.3850. Support holds at 1.3520 while resistance resets to 1.3650.

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EURCAD bounces off April lows as investors await the ECB rate decision on Thursday. Support holds at 1.4850 and resistance sits at 1.4950.

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EUR steadies at 1.0950 after EU inflation. Euro continues under selling pressure vs US$ after the ECB's banking lending survey identified the negative impact of high interest rates on financing conditions within the EU. EUR inflation edged higher from 6.9% to 7% in April, but analysts focused on the core inflation number which slipped from 5.7% to 5.6% which may be seen as a positive note for the EBC heading into their interest rate decision on Thursday. Intraday we see a light US economic docket, so we expect markets to be somewhat sidelined as investors remain focused on the interest rate decision on Thursday. Support resets to 1.0910 while resistance lowers to 1.1020.

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GBPEUR holds steady, with the pound year to date up +1/2% vs its European counterpart as markets remain sidelined heading into the EBC rate decision.

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GBP weakens as investors return to the US$ heading into the FOMC Wednesday & Thursday. The pound lost its bullish momentum, weakening through 1.2500, looking vulnerable to potentially 1.2350. Thursday sees the ECB & FED expected to hike rates by 25bps, UK heads to local polls which is anticipated to put pressure on the conservative party and continuing national strikes could be the perfect storm for the pound to serum to bearish momentum. Intraday US data is not expected to have any major impact on markets, as investors are expected to remain sidelined until Thursday. Support lowers to 1.2400 while resistance resets to 1.2500.

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