The PPI data (1.00% vs. 0.5% expected) from the US on Friday lifted inflation expectations as the opening of the US economy continues and the government plans to introduce a gigantic (almost 2 tr USD) infrastructure spending package. The CPI and retail data releases should provide us with further cues on inflation trends. Retail sales are expected to grow strongly (5.3% vs. -3.0% previous). This certainly is in line with the Fed Chair Jeremy Powell’s estimation that the economy about to start growing more quickly.  By reading further you agree with our disclaimer at the bottom of this page and acknowledge that we do not provide investment advice.

The strong pace of economic recovery in the US could mean inflation expectations continue to grow. This would be likely to start to slow down the rally in treasury bonds and push up the yields again. Such development would be dollar positive and put pressure on the price of gold while cyclical stocks would benefit. Finance dependent growth stocks, however, would be impacted negatively by the rise in yields. 

Fed has not indicated that they would believe inflation to stay high for an extended period of time. Instead, their view has been that they expect potential spikes in inflation to be temporary.  Even though the Fed has at the same time said repeatedly that they are not looking to withdraw their support from the US economy there has been some talk about the Fed possibly starting to taper with their bond purchases (to buy less). This would support the bond yields and be negative for the USD-priced commodities in general but especially for gold which is not a yielding asset class. 

According to Powell, the Fed is happy with inflation rising moderately but not ‘materially’ above the 2% target level. While they don’t want the latter, they are however fine with the latter to become a prevailing level for some time. 

This week’s key data releases are BOC Business Outlook Survey (Monday), US CPI (Tuesday), RBNZ Rate Statement, Fed Chair Jeremy Powell’s Speech (Wednesday), Australian Employment Change, US Retail sales (Thursday) and Chinese GDP (Friday). For more details on macroeconomic releases see our economic calendar.

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Last week we said that a rally above 1.1787 would indicate a more sustainable rally in EURUSD. The pair rallied to 1.1927 before starting to lose momentum. Now that the USD index is trading near to the 92.17 support the upside in EURUSD could be limited this week. The nearest technical confluence areas are 1.1942 – 1.1990 (23.6% Fibonacci retracement level, historical resistance, recent swing high and the 50-day SMA) and 1.1686 – 1.1715 (weekly low, 38.2% Fibonacci retracement level and a channel low). If the EURUSD rally extends from the current levels it is likely to hit supply inside the upper confluence zone. A break below 1.1860 would indicate the recent strength in EURUSD is over and a move towards the lower confluence zone would be likely.

GBPUSD is trading near to a support level created by a daily low (1.3670) on March 25th. This level bounced cable higher on Friday and has attracted buyers again today. Weakness in EURUSD could, however, slow the cable bulls down too but that remains to be seen. The lower daily swing high (1.3918) does suggest pressure against the 1.3670 support should (sooner or later) build up and take the pair lower. Should this happen the next significant support level can be found at 1.3565. But as long as the pair is trading above 1.3670 support GBPUSD is actually trading in a short-term price range between  1.3670 and 1.3918.

After breaking out a bullish wedge last week the price of gold rallied to the 1752.80 resistance and slightly above. The move was, however, met with supply above the resistance level and the price retraced to the 20-period SMA at 1731.20. A break below this level would indicate further downside. Possible EURUSD weakness would increase the risk of this taking place. Technical confluence zones in XAUUSD are 1758.90 – 1770.83 (the 23.6% Fibonacci retracement level, the 50-day SMA and a historical resistance) and 1677.60 – 1689.50 (the top of the wedge formation and a weekly low). 

XAUUSD has a strong negative correlation with the US treasury yields and should the inflation expectations strengthen in the US (CPI data out this week) this would have a negative impact on gold which doesn’t have a yield of its own. Interest rates tend to rise when inflation rising and bonds don’t do well in such an environment. This would drive the bond prices down and their yields higher. This is why (controlled) rising inflation would be bad for gold. Should there be concerns that the rise in inflation could be uncontrolled and very strong the dynamics would change as the yellow metal is seen as an inflation hedge.

Nasdaq rallied strongly last week. It was the only sector that gained significantly relative to the S&P 500 index. In relative terms, it was up 1.28% (when S&P 500 as the basis) on Friday’s close while in absolute terms the sector gained 0.96%. Nasdaq is now getting near the resistance level (13904.80) created by the reactionary high that was put in place on February 16th. S&P 500 and DJIA have been strong performers suggesting upside potential in the US stock markets. Smaller and mid-sized companies (Russell 2000 index) have not performed as well though and this indicates some reluctance to buy the more risky part of the market. The nearest technical confluence zone is at 13145 – 13250 (23.6% Fibonacci retracement level, the 20-day SMA, the 50-day SMA and a recent S&R level at 13183.20).

You may access the times and dates in the economic calendar here.

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Janne Muta
Chief Market Analyst

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