Speaking in Berkshire Hathaway’s (BRK.B) annual meeting Warren Buffett said that there is “substantial inflation” that his businesses are observing and that they have to raise prices as a response. The Fed has taken a stance that they will not interfere and will let the inflation rise. The question in the back of the more conservative minds is: can the Fed get inflation under control later on or is there a danger of inflation running wild. Some markets, such as lumber, have already seen substantial and unprecedented price advances. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
Bitcoin has rallied about 730% and lumber futures approx. 500% since March 2020 low while the price of copper has more than doubled over the same period. While the above is not an exhaustive list of inflated markets these serve as examples of what trillions of stimulus dollars can do. It would be surprising if we didn’t see strong price advances in many other markets too, especially if the Fed continues sitting on its hands.
Last week we pointed to USD Index trading near to rising trendline support. When the downside becomes limited markets tend to rally, which is what happened in the DXA also. The index rallied to our confluence zone (green box) before traders took some profits. When DXA rallies EURUSD moves lower. This time the EURUSD reversal took place inside a zone we defined here. Nasdaq hasn’t been able to extend its rally and has been hovering near to the ATH values. Similarly, the price of gold has been ranging between the 1758.70 support and 1798 resistance. It seems that the USD is trying to reverse the recent weak trend and move higher for change. This could weigh (introduce a drag) on commodities over the coming weeks.
RBA kept the rates unchanged (as expected) at 0.10%. The central bank sees inflation and wage increases but believes them to be only modestly incremental. RBA forecasts inflation to be 1.5% in 2021 and 2% in mid-2023. The bank has said earlier that they are not looking to raise rates before 2023. US Manufacturing PMI disappointed yesterday (60.70 vs. 65 expected). The main reason was the challenges in supply chains. While this week presents us with a busy schedule in terms of macroeconomic releases the US payrolls coming up this Friday are the key risk event for investors and traders alike.
EURUSD rallied to 1.2150 (0.07%) above our resistance zone before the red team took over and drove the EURUSD pair lower. We highlighted earlier that EURUSD was trading near to a rising trendline resistance and that the USD Index (DXA) was moving close to an upward sloping trendline. As a result, EURUSD lost ground last week and could be heading now lower for a while. Most of the loss came on Friday (-0.79%) and the pair closed below a rising trendline. Now a probability of EURUSD creating a lower reactionary high below 1.2150 high is higher and only a decisive break above the said high would make the technical picture bullish again. Our confluence zone (1.2092 – 1.2141) was and still is relevant as so many technical factors coincide inside this zone. This is where the nearest key resistance lies at the moment while the nearest support is found at 1.1993. Seasonally USD has had strength in May which could be a factor in USD pairs over the next 4 four weeks.
We said earlier that the EURGBP has upside potential once the pair has created a higher low. Since then the pair has attracted buyers at 0.8588 and rallied from the level the bulls have once again challenged our confluence zone at 0.8701 – 0.8737. At the time of writing this, there is some loss of momentum and it looks like the pair could move lower.
If EURGBP can create another higher low above the 0.8588 swing point the likelihood of the market breaking above the resistance zone increases. The 50-day SMA and the 0.8588 swing point create the next confluence area. Additionally, Fibonacci retracement levels drawn from the 0.8471 low to the latest high brings the 50% retracement level into the same area. Even if this zone is violated we believe EURGBP is likely to create a higher low above the 0.8471 low.
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Market News & Facts
- RBA keeps rates unchanged at 0.10%
- Digital Dollar Project to generate data to help US policymakers to develop a digital dollar.
- Australian first-quarter export prices up by 11.2%
- Biden in his speech: We are in competition with China
- Apple reports EPS $1.40 (vs. $0.99 expected). Revenues exceed estimates ($89.58 Bn vs. $77.30 Bn).
- Australia and the UK are expected to sign a free trade agreement in June
- AUD CPI numbers come in below expectations.
- No change in policy or asset purchases expected from the Fed.
- Big consumer confidence surprise (121.7 vs. 113.1 expected) in the US
The Next Main Risk Events
- NZD – Employment Change
- NZD – Unemployment Rate
- USD – ADP Payrolls Data
- USD – ISM Services PMI
- OIL – US Crude Oil Inventories
- CAD – BOC Governor Macklem’s Speech
- NZD – Prelim ANZ Business Confidence
- GBP – Asset Purchase Facility
- GBP – BOE Monetary Policy Report & Summary
- GBP – Official Bank Rate
For more information see the TIOmarkets economic calendar here.
Chief Market Analyst
By reading further you agree with our disclaimer at the bottom of this page and acknowledge that we do not provide investment advice.
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