Euro weakness and the comparative strength of sterling remained the main theme in the forex markets as the weekly close is approaching. The main focus today is German IFO business climate, which is expected to show deterioration from 111.2 to 110.9 in May. The current assessment gauge is expected to improve slightly to 115.4 while expectations gauge is expected to drop to 106.5. There is some risk for downside surprises today but overall, even some stronger than expected readings won't be able to give sustainable lift to the common currency. Markets are fully pricing in easing actions from the ECB in June. And the euro will remain weak until we're clear on what actions ECB would actually take. The majority expects the central bank to cut all of the three interests rates, pushing the deposit rate into negative territory, plus measures to boost lending to SMEs.
Another main focus today is Canadian inflation. CPI is expected to jump sharply to 2.0% yoy in April, back to BoC's target after 23 consecutive months of sub- target readings. Core CPI is expected to rise slightly to 1.4% yoy. Aussie and Kiwi are even weaker than the euro this week. But the Canadian dollar has been rather resilient despite yesterday's retail sales miss. Following up from yesterday's report, the fall from 1.0349 short term top accelerates this week and breached 1.0047 already. The development suggests that rebound from 0.9169 has completed with three waves up to 1.0349 after hitting channel resistance. This is also supported by bearish divergence condition in daily MACD. We'd likely see a test on the channel support (now at 0.9643) next.
Meanwhile, another pair to watch is GBP/AUD. The cross breached 1.8296 resistance this week, which suggests that the rebound from 1.7735 is resuming. Current developments indicate that the fall from 1.9185 has completed with three waves down to 1.7735. Based on current momentum, the rebound from 1.7735 is possibly the second leg of the consolidation pattern from 1.9185. Further rises would be seen to the 61.8% retracement of 1.9185 to 1.7735 at 1.8631. We'd expect strong resistance above there to bring a reversal for the third leg.