While it is true that everyone has his or her own unique inflation, it seems that even the analysts aren’t in agreement about the issue. The amount of inflation in the US actually depends on how it is measured by various analysts. While several measures point to quite sharp price increases in the US inflation Reuters quotes a bank analyst saying that there is no inflation problem in the US. The recent activity in the US Treasury yields suggests the markets agree with this view. Should it remain the dominant view of the US economy it would mean further USD weakness. Lower inflation expectations keep the yields capped (investors buy bonds) which in turn could mean the bids for the greenback stay soft. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
With the US and UK traders taking a day off yesterday the markets traded in a subdued manner. USD weakness was however the theme with EUR, GBP and JPY gaining against the greenback. AUDUSD rallied during the Asian session on the back of the news that the Chinese authorities are cutting back on emission controls. As iron ore prices rallied higher AUDUSD followed but since then the traders have reacted negatively as the RBA keeping the rates unchanged and said they will keep the rates low until 2024 as the central bank seeks full employment in the economy. The RBA also cautioned that there still is the possibility of significant outbreaks of the virus.
Oil prices have rallied 1.9% since yesterday’s low with the USOIL now approaching the 67.83 high that was put in place early March. The rally has been attributed to the optimism related to the approaching summer driving season of the United States. The demand outlook for this period has warranted the rally. The increased demand should lead to lower oil inventory reports now that the driving season has started.
Traders focus today on the OPEC-JMMC Meetings, Canadian GDP release, US ISM Manufacturing PMI and speeches by the BOE Governor Bailey and the FOMC Member Brainard. For more information and details see the TIOmarkets economic calendar here. This week’s highlight will be the US employment release on Friday. Analyst consensus is expecting to see 670K new jobs and the unemployment rate to decrease by 0.2% to 5.9%.
In yesterday’s analysis (here), we highlighted the bearish daily candle in the USDJPY chart and the fact that this had led to further softness in the bids. Our key price area is at 109.05 – 109.25 has been this far missed by 7 pips. Price action over the last two days suggests the red team is in the driving seat today. However, the medium-term trend is higher and we expect the buyers to step in above the 50% retracement level (coincides with the channel low) at 108.80. A decisive break below this level would turn the technical picture medium-term bearish. The nearest key resistance level is at 110.20 (yesterday’s high).
EURUSD dropped below our key support in Friday’s trading but the concerted buying in dollar rivals after the US PCE numbers were published caused the EURUSD to snap back higher. In yesterday’s trading, the pair decisively violated the 1.2205 resistance that is now likely to act as a support level. The next significant resistance level is at 1.2266 while the 1.2132 – 1.2160 range is a highly important support zone for the bulls. Should this zone be violated before EURUSD has established a new reactionary high above last week’s high we’d have a lower reactionary high combined with a broken support level. This would quite likely reverse the recent uptrend and take the pair significantly lower.
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
- 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 Rate Statement & Cash Rate
- EUR – German Final Manufacturing PMI
- USOIL – OPEC-JMMC Meetings
- CAD – GDP
- USD – ISM Manufacturing PMI
- GBP – BOE Gov Bailey Speaks
- USD – FOMC Member Brainard’s Speech
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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