The Fed thinking of thinking tapering combined together with the ECB saying it is too early to start tapering their bond-buying programme creates a contrast in the future expectations and weakness in EURUSD. If there is a possibility that the Fed will start to scale down the asset purchases while the ECB keeps on buying bonds the probability of EUR weakening against the USD increases. We have lately focused on the signs of USD starting to gain some strength. Let’s take a look at the markets again to see what is taking place on this front. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

USD has strengthened against the JPY and NZD since the US session open yesterday. USDJPY has rallied 0.34% since providing to traders acting on our analysis a low-risk opportunity on the long side. We have some return to mean activity now in NZDUSD.  The pair is losing momentum near the 109.05 resistance after the pair rallied strongly on Wednesday. Sterling and CHF have shown some strength with the cable rallying to levels near the 1.4234 resistance and USDCHF failing to maintain levels above a resistance level at 0.9002. The pound was supported by speculation that the BOE hike the rates earlier than expected. Over the last five days, we still have NZD strongly up while JPY is the weakest in the group. Japan’s extension of state of emergency in multiple areas including Tokyo could slow the economic recovery. These concerns were attributed to the weakness in JPY. 

Lack of momentum in iron ore prices has kept AUDUSD trading sideways for several weeks now. The iron ore futures have been in retreat since May 12th. Since then the AUDUSD pair has been trading sideways (between 0.7688 – 0.7813) without any conviction in the rally attempts.  Gold traded sideways (futures down -0.14%) while silver gained some (futures +0.23%). Oil rallied (+0.97%) on good US data and speculation that the Iran nuclear deal would only allow the Iranian oil supply to enter the global markets after some delay. The big US equity indices traded sideways or with moderate gains: S&P 500 (+0.12%), DJIA (+0.41%), Nasdaq Composite (-0.01%). The 1.06% gain in the small and medium cap index Russell 2000 was a positive surprise and has encouraged the futures to trade higher after the US cash session. 

Weekly unemployment claims were confirmed lower than expected (406K vs. 427K expected) and quite a bit lower than the previous number of 444K. The trend in claims is positive with this being the 7th consecutive week with a decrease in the number of claims. The number of claims has decreased from 941K in January to less than half which signals that the vaccinations are taking an effect and that the businesses are hiring. The numbers are still high in absolute terms but the trend is definitely encouraging. Today traders will focus on the PCE release to gain insights into the inflation trends. 

We said yesterday that USDJPY had honoured the 108.50 support and had rallied creating a higher reactionary low. This is bullish price action and should not be ignored. Those that did, lost a good opportunity to increase their account. USDJPY has rallied almost 80 pips or 0.76% since the time of our report yesterday. USDJPY is now breaking above the 109.78 resistance and should it be able to hold above this level the next target lies at 110.30 where the channel top is at the time of writing this. That’s about 0.35% or 40 pips from the current market price. If the pair falls back below the 109.78 resistance the next confluence area can be found at 109.10 – 109.23 (the 50% Fibonacci retracement level and both the 20 and 50-period SMAs). This is where we’d expect buyers to get interested in this market again. A break below the rising trendline would negate the bullishness we are seeing at the moment.

We focused on NZDJPY in yesterday’s Bullish and Bearish Markets video. Here’s a quick update on this market. Our view was bullish on this market as it was breaking above the 79.21 resistance and we gave the channel high as the first likely target. This was reached and the pair has since retraced a bit from yesterday’s highs. The market is still bullish and the key zones are 79.21 – 79.42 (former resistances) and 78.43 – 78.80 (the 23.6% Fibonacci retracement level and the 20-day SMA). The latter zone is fairly close to the rising trendline support. A failure to bounce back higher from these zones and sideways price action below the 79.21 – 79.42 zone would be negative and could lead to the breaking of the rising trendline support.

We said yesterday (here) that EURUSD was trading a support area but should it l fail to encourage the bulls to buy, the next key zone is at 1.2124 – 1.2146 (the 23.6% Fibonacci retracement level, the 20-day SMA and the price channel low). This is exactly what happened. There were rally attempts but those were thwarted by the red team. Now the green team is losing ground and EURUSD shows signs of weakness. USD has been strengthened by the admission by the Fed (in the FOMC Minutes) that they are willing to think about thinking tapering. Now the ECB Executive Board’s Director, Panetta said that it is too early to start tapering the bond-buying programme. This contrast creates weakness in EURUSD. If 1.2158 support is violated we look for further downside in this pair. A sustained rally above 1.2216 would help the bulls to potentially push the price to 1.2267 resistance.

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 FEDThe 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.
StimulusThe 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.
YieldsAfter 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.
PayrollsThe 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).
InflationAs 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 

  • 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
  • Biden’s new infrastructure proposal reduced to $1.7 trillion from $2.2 trillion
  • Iron ore futures down almost 10%, AUD impacted
  • Iran oil exports to “maximum capacity” within months?
  • Australian April retail sales 1.1% (+0.5% expected)
  • Japanese April headline CPI -0.4% (-0.5% expected)
  • Fed’s Kaplan calls for discussions about taper in bond buying 
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The Next Main Risk Events

  • USD – Core PCE Price Index
  • USD – Chicago PMI

For more information and details see the TIOmarkets economic calendar here.

Trade Safe!

Janne Muta
Chief Market Analyst

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