The Fed is likely to stick to its mantra about inflation being only transitory even if we keep on seeing higher inflation numbers. The major USD pairs have been ranging lately indicating that the market participants are not sure if they should believe the Fed. The Institute for Supply Management (ISM) index of U.S. manufacturing PMI came in at 61.2 (60.8 expected, 60.7 prior). Reopening of the US economy shows in the index as demand increases orders for goods. After some initial fluctuation, the positive number rallied the dollar creating a bearish shooting star candle in EURUSD. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
The US 10-yr Treasury yield moved slightly higher to 1.6181% from 1.615% yesterday while the two-year yield increased to 0.1505% from 0.147%. This together with the rally in USD weakened the bids in XAUUSD which closed 0.39% lower. Rally in silver also failed and XAGUSD shed 0.53%. USOIL rallied 1.36% on the back of the news that the OPEC+ will stick to the plan and return supply only cautiously in June and July. The US driving season is expected to keep the demand for oil high.
The leader among the US equity indices was Russell 2000 (+1.14%) while the DJIA (+0.13%) gained only modestly and Nasdaq Composite (-0.09%) and S&P 500 (-0.05%) closed slightly in the red. The best performing sector was energy with an impressive 3.85% rally. Real estate (1.71%), materials (1.40%) and financials (0.61%) gained while defensive sectors including healthcare (-1.64%) and utilities (-0.61%) were out of favour.
Selling in EURUSD started right below the significant resistance at 1.2266 we highlighted yesterday (here). The good PMI numbers from the US caused the USD to strengthen and created a bearish shooting star candle in the daily chart. At the time of writing this EURUSD is looking rather weak and the the 1.2132 – 1.2160 range (a significant support zone) could come into play.
USOIL rallied above the 67.83 resistance yesterday but failed to attract follow through buying. Instead the price closed below the resistance leaving questions about the bulls’ commitment to the market in short-term. Yesterday’s high in USOIL coincided with a bull channel high suggesting profit taking being the cause for the weakness. The nearest support level is at 65.40 – 66.00 (the 20-day SMA and the 23.6% Fibonacci retracement level). This range looks like a relevant support zone should the profit taking continue. The US driving season and the recovering global economy are supporting factors but we need need to see the price keep on creating higher lows and breaking resistance levels to have evidence for the thesis. The nearest resistance (above 67.83) is yesterday’s high at 68.75.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The FED||The Fed has on several occasions repeated its commitment to ultra-accommodative monetary policy. The rates are likely to stay near zero but now some Fed officials have said that the Fed should start considering potentially tapering their asset purchases.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus and the Biden administration has indicated it will seek to deliver another two trillion dollars in infrastructure spending.|
|Yields||After trending higher since the beginning of August 2020, the Treasury yields have been moving lower or sideways. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Payrolls||The latest miss in payrolls was the biggest in the recorded history. Analysts expected to see one million new jobs in April but the actual number came in at 266K (down from 770K in March).|
|Inflation||As per CPI inflation is running at a 5% annual pace over the last 6 months, while PPI shows annual inflation pace at 7.4% over the same period.|
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Market News & Facts
- Australian Q1 GDP +1.8% q/q (+1.5% expected)
- RBA’s Lowe taper talk not pushing the AUDUSD higher
- Ramsden at BOE suggests demand could get ahead of supply
- UK Nationwide m/m change in house prices +1.8% (+0.8% expected)
- Chinese authorities relax emission controls, iron ore and AUDUSD higher
- Chinese Caixin manufacturing PMI for May 52.0 (52.0 expected)
- Australian Net exports -0.6% relative to GDP (-1.2% expected)
- New Zealand Business confidence for May 1.8 (vs. previous -2)
- Japan April Retail sales +12% year on year
- Japan April Industrial Production +2.5% m/m (+3.9% expected)
- RBNZ Governor Orr: Downside risks to the economy have decreased
- Tokyo May headline CPI -0.4 % y/y (-0.5%, expected)
- Japan April unemployment rate 2.8% (2.7%, expected)
- Australian Q1 private capital expenditure +6.3% (+2% expected)
- China’s April industrial profits +57.0% (previous +92.3%)
- Tesla to buy a semiconductor factory to avoid shortage?
- Australian Construction work done +2.4% for Q1 (+2.2% expected)
- New Zealand trade balance surplus of 388m NZD for April
- Republicans to propose $1 trillion in infrastructure spending
- Several large Australian banks hiking mortgage rates
- Chinese Bitcoin miners to relocate due to increased regulation
The Next Main Risk Events
- AUD – RBA Deputy Gov Debelle’s Speech
- AUD – Retail Sales m/m
- USD – ADP Non-Farm Employment Report
- USD – Unemployment Claims
- USD – ISM Services PMI
- USD – Crude Oil Inventories
- GBP – BOE Gov Bailey Speaks
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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