Stocks and oil rallied even though US GDP growth slumped (-1.4% vs. 6.9% previous). The analysts had expected to see some growth (1.1%) in the US economy but a Covid related drop in foreign demand and rising imports led to a 3.2% subtraction from the headline GDP growth. Supply chain disruptions, diminishing Inventories and a fall in government spending cut another 1.3%. On the more positive side, there were no signs of domestic demand slumping. Instead consumer spending grew by 2.7%. That’s very healthy for an economy that’s strongly dependent to private consumption. Therefore the number actually isn’t as bad as it looks like. This might have encouraged some institutions to buy into stocks, oil and commodity currencies. At the same time, there must have been buyers that looked to benefit from the “bad news is good news” mentality. This refers to the logic that if the economic news gets too negative the Fed starts to falter in their commitment to aggressive interest rate hikes. Today’s key risk events are the German GDP, EU CPI and the US PCE (Fed’s favourite inflation gauge). By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
EURUSD downtrend stalled yesterday after moving to levels not traded since 2017. Yields have stopped rising lately which helped to ease off the rampant USD buying which had pressured EURUSD. The big picture (macroeconomic) stays the same but traders react to technical levels from time to time as markets, like EURUSD in this case, become over extended to the downside. This creates a tug of war between the bulls and the bears, which eventually will be resolved with another trending move to the upside or to the downside.
I said yesterday that EURUSD is deeply oversold. It was my view that even though the market was in a downtrend further downside could be limited. Now the market is moving sideways and out of the bearish trend channel. The pair is also breaking out of a tight range (between 1.0471 – 1.0531). The breakout seems to be successful and the market could therefore be moving to the resistance area at 1.0564 – 1.0628.. A failure to stay above the level would be likely to lead to testing of yesterday’s low (1.0471).
Gold has rallied strongly after hitting my measured move target. This could be just a technical move but it could be also a move that was triggered by the comments from the UK defence minister. Accordinig to The Daily Telegraph Britain’s Defence Secretary Ben Wallace said Putin might use traditional Victory Day celebrations on May 9 to declare a war on Ukraine. This would allow Russia to call Russian men on arms and attack Ukraine with more force. Such an escalation in the war would be likely to rally gold and send the equities lower. At the time of writing this, gold is trading at a key resistance level (1911.15). If the level is penetrated decisively, we should expect to see the market moving to the 1927.30 – 1936 range. My T1 is at 1925 and my T2 level is at 1934. If this rally attempt fails it’s likely that gold retraces back to the 1897 – 1898 region.
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 Federal Reserve||Several FOMC members support 0.5% rate hike in May. The Fed is prepared to taper by $60B of treasuries and $35B of mortgage back securities per month.|
|Stimulus||The Fed is looking to scale down its bond-buying program (QE) but has signalled that it be careful with tightening due to the war in Europe.|
|Yields||The US 10-year treasury yield has risen to 2.187% as investors sell the bonds and adjust to the expected rate hikes.|
|Employment||The March non-farm payrolls increased by 431K while the analyst consensus had predicted 492K new jobs. The unemployment rate dropped to 3.6% and average hourly earnings were in line with expectations (0.4% vs. 0.4% expected).|
|Inflation||The annual headline inflation reading for January came in at 7.5% (7% prior). This was the highest CPI print in 40 years. The core CPI (all items less food and energy) was confirmed at 6.0% (5.5% previous).|
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The Next Main Risk Events
- USD – Unemployment Claims
- CHF – SNB Chairman Jordan Speaks
- EUR – CPI Flash Estimate y/y
- CAD – GDP m/m
- USD- Core PCE Price Index m/m
- USD – Revised UoM Consumer Sentiment
- USD – ISM Manufacturing PMI
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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