Friday’s activity in the US Treasury markets suggests the inflation might still be transitory just as the Fed has been stating. Even though the Fed’s favourite inflation gauge exceeded analyst consensus expectation the 10-year yield dropped on Friday. As a result, USD lost ground against the JPY, GBP and EUR. Gold and silver also rallied after the PCE release and closed 1% and 1.7% higher from the lows. The US equity indices didn’t move much ahead of the long weekend (Memorial Day) and closed slightly higher with DJIA (+0.19%) leading the others. S&P500 (+0.08), Nasdaq 100 (+0.09%) managed to close only slightly higher while the Russell 2000 (-0.18%) underperformed. Over the last week the best performing sectors were discretionary (+2.55%), communication services (+2.51%), real estate (+2.17%) and industrial (+2.02%). By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

Over the last five days, the currencies with the biggest volatility against the USD are the NZD and the JPY. While the NZD is up by 0.50% against the USD the JPY has retreated almost 1%. Since the beginning of the US session on Friday, the JPY has bounced back some after the release of the Core PCE price index. The actual number was 0.7% (0.6% expected and 0.4% prior). The 10-yr Treasury yield closed lower by three basis points to 1.58% which indicates that the Treasury investors believe the Fed in that the inflation is likely to be transitory. The weakness in the yields pressured the USD and the big rivals managed to gain some ground. BTCUSD, ETHUSD and LTCUSD fall after bitcoin failed to overcome the supply at 40850. 

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The UoM Index of Consumer Sentiment for May was confirmed slightly higher (82.9) from the preliminary reading of 82.8. At the same time, the Chicago PMI increased to 75.2 from 72.1 in April. Chinese Manufacturing PMI came in roughly in line with expectations (51.0 vs. 51.3 expected) but the reading was still positive showing expansion in Chinese manufacturing activity. No meaningful reaction in USDCNY. 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%. The US and UK equity markets will be closed today.

In the previous report we pointed out how the USDJPY was breaking above the 109.78 resistance and the next target would be at 110.30 where the channel top was at the time of writing. The target was missed by 10 pips as USD weakness kicked in soon after the PCE report was released. This resulted in a bearish daily candle and further weakness in today’s trading. At the time of writing this, USDJPY has rallied back to the 109.78 level (now a resistance). The next key price area is at 109.05 – 109.25 where several technical factors coincide (the 38.2% Fibonacci retracement level, the 20-day SMA and the 50-day SMA). On the upside, the nearest key resistance area is from 110.20 to 110.40.

The XAUUSD managed to stay above the 1890 support and the rising channel low on Friday. The decline preceding the PCE report release was quickly turned into a rally by the bulls. The nearest key support area is at 1875.50 – 1884 while the next significant resistance level can be found at 1960. With the US Treasury yields weak this market remains bullish until the yields start rising.

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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 

  • 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
  • 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

  • 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.

Trade Safe!

Janne Muta
Chief Market Analyst

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DISCLAIMER TIOmarkets offers exclusively consultancy-free service. The views expressed in this blog are our opinions only and made available purely for educational and marketing purposes and do NOT constitute advice or investment recommendation (and should not be considered as such) and do not in any way constitute an invitation to acquire any financial instrument or product. TIOmarkets and its affiliates and consultants are not liable for any damages that may be caused by individual comments or statements by TIOmarkets analysis and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his/her investment decisions. The analyzes and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with any legal requirements for financial analyzes and must, therefore, be viewed by the reader as marketing information. TIOmarkets prohibits duplication or publication without explicit approval. FX and CFDs are leveraged products. They are not suitable for every investor, as they carry a high risk of losing your capital. Please ensure you fully understand the risks involved. All the prices in this report are CFD prices based on price charts provided by TIOmarkets unless otherwise stated. 

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