Daily Trading Insights & Tips

[tickmill-analytics]

Continuing US bond rout may offer some support to USD next week

Incoming economic data of developed economies in the second half of the week, dynamics of commodity prices (record price of steel futures) added fuel to the flight from long-dated bonds:

US GDP growth beat forecast in the first quarter of 2021, averaging to 6.4%, while quarterly inflation measured through GDP growth accelerated to 4.1% against expectations of 2.5%. Despite weak output in Germany and threat of technical recession in the first quarter, price growth there also accelerated above expectations in April.

US unemployment claims that came on Thursday were slightly weaker than the forecast - both initial and continuing claims gained more than expected, nevertheless, the markets are bracing for a very strong increase in the April NFP of 925K. The report is due for release on next Friday. If job growth meets expectations or even beats forecast, rumors that the Fed will move to tapering earlier than previously expected should increase, as according to the Fed, substantial progress in employment is the key goal of ultra-easy credit policy. Inflation expectations are also set to accelerate in this case, fueling more upside in yields which in case of rapid movements may offer support for USD.

It is clear that US debt market became more concerned about the threat of inflation this week. However, in the current environment, inflation is a synonym of expansion, which means demand for risk is likely to stay here as the dominant market theme. At the very least, it is difficult to expect that there will be a reason for a collapse and even a correction. The Fed added fuel to the fire on Wednesday, once again declaring that "it is not time to even discuss the changes in QE purchases". Cheap credit policy, coupled with economic pickup will likely continue to push prices up and the risk that inflation will accelerate haunts bonds. The Fed stubbornly denies that inflation will be here for a long time and is trying to convince market participants of this. As you can see, it doesn't work out very well.

The dollar sank after the Fed meeting, but is trying to recover for the second day in a row. Yesterday, consolidation above the upper border of the descending channel failed, but on Friday the chances of this are much higher:

 

Next week we may see a slight strengthening of the dollar towards 91.00-91.20 amid bond pressure ahead of a possible NFP surprise. The bar to surprise is very high and if the report fails to meet expectations, USD will likely start to drift lower from those levels. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

USD set to stay range-bound given moderate US data updates

The buying wave in USD emerged last Friday appears to be losing punch as US currency retreats against major peers. However, resumption of sales may take longer than bears could expect. To bet on further USD slide, markets may need data updates that would shift risk-seeking flows to assets outside the US. However, this week, key reports will be related to the US economy and weak US currency should be expected in case of a downside surprise in Friday Payrolls. 

In general, post-pandemic recovery in the United States is going well. Last week, this was indicated by data on consumer spending and U. Michigan consumer sentiment report, which came a tad stronger than forecasted. Long-term market rates in the US generally sway near opening Monday and US currency has not been offered support from this side. 

At the same time, markets learned last week that the European economy is getting out of the recession faster than forecasted. Key macroeconomic variables more than met expectations - GDP for the first quarter, inflation and unemployment in April, which sets the stage for appreciation of the Euro as EU recovery momentum catches up with the US.

We have entered a new month, so it is also worth to consider seasonality factor. May usually turns out to be favorable for the dollar, this is probably due to the fact that corrections in risk assets often occur in May. Keep in mind the well-known saying “Sell in May and go away”, which this year may remind many investors of itself.

The upper border of USD index strengthening this week will most likely reside at 91.55 points. This is a two-week high. For EURUSD it is approximately 1.1990 and 1.3780 for GBPUSD. These levels may not hold in case of a correction in US equities, which would open the door for rally in the index towards 92.00. However, this is difficult to expect morally, given that the consensus on Payroll’s growth in April is almost 1 million jobs. There are also many anecdotal evidences indicating that the service sector in the United States simply lags behind the consumer boom, failing to hire required number of workers.

Investors also listen to Powell, but continue to do their own thing. Weekly inflows to funds investing in inflation-protected bonds continue to remain at historically high levels:

 

In our case, elevated inflationary expectations reflect the investors’ opinion that there is strong demand in the economy, which, of course, is barely a macroeconomic basis under which a correction should be expected.

Commodity markets are on the rise, as can be seen from highest in years reading of the Bloomberg Commodity Price Index, which basically forces investors to expect continued rise in cost-push inflation in the coming months:

The largest threat for further USD dump is a fresh sell-off in Treasuries. However, we have to see material gain in Payrolls above forecast to see another leg of inflation concerns. In addition, bond pressure could emerge after the release of ADP and PMI in the US non-manufacturing sector on Wednesday. The focus will traditionally be on the employment component. Moderate data should take away support from USD as any sign of cooling in the US momentum is what bond bulls exactly want for. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

[tickmill-analytics]

Developed economies compete in the pace of recovery. Which one will win?

Developed economies keep competing in the pace of recovery. UK data showed on Tuesday that manufacturing activity rose to its highest in more than 26 years:

 

Interestingly, the Markit report mentioned the same challenge also faced by US and EU producers: supply chain bottlenecks, resources and inventory shortages. This results in the rise of intermediate prices and response to this is the same everywhere - push the increase further in the price chain, i.e. hike end prices. However, the temporary consumer boom against the background of lifting of the pandemic restrictions makes it easy to do this, so cost-push inflation does not yet run into demand constraints, causing steady upward inflation trend.

The data on activity of manufacturers in the US and German economies were somewhat disappointing, but still it was quite strong. Looking under the hood, primary drivers of growth of the broad index were extremely high readings of new orders and prices components, while components of inventories and customer inventories made negative contribution:

 

Nonetheless, central banks have been slow to sound the alarm and tighten credit conditions in response to the threat of inflation pickup. But there is still some progress in this matter. Yesterday the head of the New York Fed Williams spoke, who admitted that the Fed could raise interest rate on excess reserves for banks or reverse repo rate. Both measures are intended to remove excess liquidity from the banking sector, although they are quite technical in nature. However, in the past, they preceded the start of normalization of credit conditions, so the dollar bulls took this hint with great optimism. 

On Tuesday, we saw increased demand for greenback thanks to Williams comments, USD index climbed to 91.40 which is highest level since the start of the week. Today, the report on activity in the US service sector from ISM is due which should help to prepare better to the NFP surprise as well as give an idea of what is happening with services sector inflation in the US. Strong reading, especially driven by prices and hiring components will likely to push USD index higher with potential test of 91.55 resistance level, however further upside is under question and will require more reflation optimism, i.e., strong NFP surprise.  

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

US data may drive EURUSD lower, providing good buying opportunity

Another leg of USD rally took place yesterday amid sell-off in US equities. The bout of risk aversion was fueled by the comment of the US Treasury Secretary Janet Yellen that a rate hike may be needed to prevent economy from overheating. The caused market turbulence in various asset classes, including stocks and USD, revealed lack of trust of investors to the Fed comments, showing that the Fed pledge to keep rates low and the stance on inflation (“we see inflation as temporary factor”) are taken with a grain of salt. Yellen later clarified that her comment was not a recommendation or a forecast for an interest rate hike, which is not surprising, because just a week ago we saw very cautious Fed rhetoric regarding rate hikes. Fed Speaker Charles Evans' speech today is likely to address market rumors sparked by the Yellen remark.

The last three upside swings in USD were distinguished with length of the waves getting progressively shorter, while meeting resistance at the two-week high of 91.40:

 

Such a price action, together with the stabilization of ATR and RSI near their averages, often precedes a breakout move. Taking into account the pressure of buyers its vector will likely be positive. The breakdown catalyst is expected to be the Non-Farm Payrolls report on Friday.

Two other reports to look out for are the ADP US Job Growth Data and the ISM Service Sector Index. They will play an important role in shaping expectations for the NFP. The ADP is expected to point to an increase in jobs of 850,000 in April, while the ISM index is expected to rise from 63.7 to 64.3 points. Particular attention should be paid to the hiring component of the ISM index, as its predictive power in relation to the NFP report is quite significant. The two strong reports also once again could cast doubt on the Fed's ability to maintain current degree of monetary easing, which, in particular, may result in faster growth in long-dated bond yields. As I wrote on Monday, news and data flow this week favors tactical strengthening of USD as the reports on the US economy take central place in the economic calendar this week and risks are shifted towards positive surprises in the data.

For EURUSD, the breakdown of lower border of the trend channel disabled it  for some time, but there was no particular rush to sell near the critical 1.20 level as seen from little pressure in RSI:

In this regard, the level can equally act as a foothold for growth after completion of the correction. The 1.1950 test on the release of US statistics looks like a logical scenario, but let’s not forget what drove the recent strengthening of EURUSD - progress in vaccinations, European fiscal stimulus and economic data. Next week, the news background is expected to be more favorable for the growth of the European currency.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

US data disappoints, laying the groundwork for weaker NFP expectations

Brent price failed to break above the $70 level on Wednesday, as buyers' appetite is still constrained by some demand risks. Concerns about demand in India as well as expectations that OPEC will soon begin to lift output restrictions weigh on prices. Recovery of Iranian supply also makes growth more cautious. Although it now seems that the market will be able to absorb new supply, there are risks that the outlook for demand will become less optimistic, which will lead to a more fragile balance in the market.
Saudi Arabia has announced its June OSP prices and, given OPEC's concerns about demand and upcoming production increases, prices for Asia have been cut an additional 10 cents. The Saudis have also lowered prices for other regions, for example for Europe the over-benchmark premium has been reduced in all grades. However, US prices have been raised. The multidirectional movement of price discounts for different regions suggests that OPEC evaluates the prospects for a recovery in demand in different ways, and also takes into account different levels of risks.
The EIA report showed that oil stockpiles in the United States fell by 7.99 million barrels in the reporting week, which significantly exceeded the forecast of -2 million barrels. This strong decline was driven by several factors, in particular increased capacity utilization rates of refineries. Now it is at its highest level since March last year. Oil exports increased by 1.58 mln bpd to 4.12 mln bpd. Only four times in history US oil exports topped 4 million bpd what looks like an indication of a really strong near-term oil demand picture, especially for US supply. 
Technically, the corrective rally in oil after breakout of the key trend line took place in a narrowing channel, which indicates a keen buying pressure. The price approached the March high however potential breakout of the main resistance line is likely to be short-lived (false breakout), since risks in the news background are shifted towards neutral and negative events (growth in Iranian output, US shale oil recovery, planned increase in production OPEC, etc.). Most of the positive on the demand side has already been priced in by the market in one way or another:

 

Yesterday data on ADP and ISM in the US were not as strong as expected which became a major disappointment. The growth of jobs according to ADP was 742K (forecast 800K), the ISM index did not live up to expectations:

 
With this data in mind, optimism about Friday's NFP declined. This eased pressure on long-term yields and the dollar. The yield on 10-year US Treasuries retreated as less strong labor market growth would mean less acceleration in inflation – the biggest threat of real bond returns currently:

It is clear that the risk of a weaker NFP report has risen, so the markets could start to brace for a negative surprise on Friday. If the report does turn out to be so, the bearish trend in the dollar is likely to resume, as more inconsistencies will appear in the story with higher inflation in the US.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Real rates story unfolds not in favor of USD

A number of central banks held monetary policy meetings this week. They clearly showed a tendency to speak or take decisions related to the tightening of monetary policy. Brazil, following the Russian Federation, raised its key rate from 2.75% to 3.5%. Overall, emerging market economies are shifting from talk to action and lift interest rates in response to rising inflationary pressures. The G10 countries have progressed much less in this sense, but those of them that at least talk about raising rates or reducing QE have successfully drawn attention of foreign investors. Among them are Canada and Norway, which were relatively open about their plans to curtail credit stimulus, which sent their currencies higher against USD.

Yet in the US, we have a radically new Fed approach to stimulating growth and employment. It implies low rates even though there is clear progress in inflation. If other central banks are not going to play this melody, and apparently, they are less inclined to do that, their real interest rates will likely rise faster compared with the real rates in the US. Of course, this dynamic will gradually put pressure on the dollar, as investors will follow the Central Banks that tighten policy, thus pushing higher real returns on local assets.

That is why this week we saw emotional market reaction to the awkward remark of the US Treasury Secretary Janet Yellen, that economy overheating may require interest rate hikes to tame it. To avoid confusion with the Fed guidance, she was quick to clarify that she does not predict and does not recommend a rate hike.  Yesterday, Fed representative Robert Kaplan said that it is equally important not to be late with policy tightening, as asset market bubbles and excessive risk-taking fueled by low interest rate environment increases vulnerability to actual Fed tightening. 

Focus today on April NFP report. The market expects job growth by 1 million. A positive surprise could in theory mean that the Fed is moving faster towards the employment target, and therefore may begin to phase out monetary stimulus earlier. Therefore, a positive surprise in the data is likely to trigger a new sell-off in long bonds and hit the dollar, as from the discussion above, the situation with real rates in the US will change to the worse for the dollar. In addition, in other large economies, data continues to improve, which changes the forecast for local real rates in a positive direction. This includes data on PMI in China, as well as European statistics released this week. A strong NFP report is likely to allow the dollar index to touch the 90.50 level:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Weak April NFP: What does it mean for Dollar and US stocks?

April Non-Farm Payrolls report was a huge blow to expectations of an early Fed policy tightening. Despite generally strong economic background in April, jobs count printed three times less than the forecast of ~1M. Of the more than 50 surveyed economists by Bloomberg, only two of them forecasted jobs growth below 800K. Unemployment rate surprisingly trended higher as well. The Fed's status quo with regard to low rates and QE has gotten a solid excuse, which together with strong commodity inflation outlook ensures further focus of the debt market on inflation risks. What this means for stocks and greenback is discussed below.

The 10-year Treasury yields, after initial downward spike on fears of slower growth in the US, trimmed decline quickly and closed near the opening on Friday:

What could it mean? Bond investors might not perceive weak job growth as an alarming symptom for the economy: such nuances as a shortage of labor supply due to generous government benefits, significant seasonal adjustments suggested to focus on the trend in US jobs growth, rather than on a single month’s print. 

The report removed one of the key hurdles to USD downtrend - the risk of early tightening of the Fed's monetary policy. Risk assets got the welcomed mix of moderate growth prospects and stronger guarantees of cheap liquidity that’s why we saw confident rally on Friday. SPX rallied to new ATH, closing close to a record high, while index futures pulled back only marginally on Monday.

Iron ore futures, one of the benchmarks for commodity inflation, jumped 8% on Monday, which is likely to slowly but surely fuel worries in bonds:

 

Also on Friday, we saw a new record in inflation expectations in the US following the release of the report:

Given the dynamics of commodity prices, this trend is likely to continue, that is, more downward pressure is coming for real rates in the US. This will also add pressure on USD and spur search for the yield, both in alternative asset classes (stocks) and bonds outside the United States, where the prospects for tightening Central Bank policy are better and inflation risks are less severe than in the US. In terms of the FX implications for the major currency pairs, EURUSD and GBPUSD, we are likely to see continued gains this week with targets at 1.2250-1.23 and 1.42-1.4250 respectively.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Weak April NFP: What does it mean for Dollar and US stocks?

April Non-Farm Payrolls report was a huge blow to expectations of an early Fed policy tightening. Despite generally strong economic background in April, jobs count printed three times less than the forecast of ~1M. Of the more than 50 surveyed economists by Bloomberg, only two of them forecasted jobs growth below 800K. Unemployment rate surprisingly trended higher as well. The Fed's status quo with regard to low rates and QE has gotten a solid excuse, which together with strong commodity inflation outlook ensures further focus of the debt market on inflation risks. What this means for stocks and greenback is discussed below.

The 10-year Treasury yields, after initial downward spike on fears of slower growth in the US, trimmed decline quickly and closed near the opening on Friday:

What could it mean? Bond investors might not perceive weak job growth as an alarming symptom for the economy: such nuances as a shortage of labor supply due to generous government benefits, significant seasonal adjustments suggested to focus on the trend in US jobs growth, rather than on a single month’s print. 

The report removed one of the key hurdles to USD downtrend - the risk of early tightening of the Fed's monetary policy. Risk assets got the welcomed mix of moderate growth prospects and stronger guarantees of cheap liquidity that’s why we saw confident rally on Friday. SPX rallied to new ATH, closing close to a record high, while index futures pulled back only marginally on Monday.

Iron ore futures, one of the benchmarks for commodity inflation, jumped 8% on Monday, which is likely to slowly but surely fuel worries in bonds:

 

Also on Friday, we saw a new record in inflation expectations in the US following the release of the report:

Given the dynamics of commodity prices, this trend is likely to continue, that is, more downward pressure is coming for real rates in the US. This will also add pressure on USD and spur search for the yield, both in alternative asset classes (stocks) and bonds outside the United States, where the prospects for tightening Central Bank policy are better and inflation risks are less severe than in the US. In terms of the FX implications for the major currency pairs, EURUSD and GBPUSD, we are likely to see continued gains this week with targets at 1.2250-1.23 and 1.42-1.4250 respectively.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

High inflation concerns could be the reason for more stock market pain

US tech sector saw onslaught of selling orders on Monday, pulling down the universe of risk assets. Nasdaq market cap erased 2.5%, which was the deepest pullback in several months. The rest of equity indices saw less severe declines, however, gloomy sentiment stretched on Tuesday – US equity futures extended decline, strong weakness is also felt in European markets.

Correction in risk assets once again helped greenback to dodge a sell-off. The dollar index bounced off 90 level, however the rebound has fizzled out near 90.35 mark.

Long-term interest rates in the US renewed rally, rising to their weekly high (1.62%).

It’s hard to pin down exact causes of the pullback, however consensus in the media is that anxiety about inflation outlook gained critical mass, provoking sell-off. In fact, in addition to the official data indicating revival of US inflation to the level not seen in a decade, there are some alternative gauges suggesting that inflation rate in the near future may indeed cause economic discomfort. Here is, for example, a comparison of inflation rates and mentions of the word "inflation" in earnings calls of US companies:

 
The number of mentions soared 800% and considering the correlation of this indicator with inflation rate, the United States can indeed expect a period of relatively high rates of price growth in the near future as firms will likely pass increased costs to consumers. 

Inflation has also started to appear more frequently in Google searches:

The number of searches of “inflation” is at all-time high signaling that consumers could become more concerned about inflation outlook. This indirectly indicates that consumer inflation expectations are set to increase further, making it even harder for the Fed to call inflation a transitory phenomenon. 

If inflation is really a concern for the markets, Wednesday CPI report may become a new catalyst for equities decline if price growth accelerates considerably above forecasts. So, it could make sense to wait and see April inflation print before trying to buy the dip in equities or enter USD shorts.
 
Key events for the rest of the week:

-    Speeches by representatives of the Fed, in particular, FOMC member Lael Brainard on Tuesday.

-    OPEC's monthly report, which will include crucial production and demand forecasts for Q3.

-    The US CPI report on Wednesday, which could heighten market concerns about high inflation in the near future.

-    Bank of England Governor Bailey is scheduled to speak Wednesday at which the UK's QE reduction will be likely discussed. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

The risk of commodity markets correction creates buying opportunity in USDCAD

On Wednesday we see first signs of easing bearish grip on equities after the two-day violent selling. European markets are trading in positive area, US equity futures show some signs of distress ahead of the April US CPI release.

The foreign exchange market looks calm today, the slump in US equities offered temporary reprieve to USD. However, greenback fundamentals continue evolve towards more bearish pressure on the currency. One of the key reasons to sell is deteriorating real interest rate outlook in the US. The Fed’s policy tightening hopes were shattered after dismal April NFP release, while the fears of high inflation in the US, even temporary one, continue to mount. The sources of inflationary pressures are rising wages and the strong uptrend in raw materials. Recall that MoM US wage growth in April surged to 0.7% (0% expected), which is a really strong print, likely pointing to some labor shortage issues, while the Bloomberg commodity price index began to grow in early April at worrying pace:

 

Most likely, a correction in commodity markets will soon follow, which will primarily catch on significantly strengthened commodity currencies, such as AUD and CAD. Therefore, it is reasonable to expect their growth peaking in the near future. Particularly interesting in terms of the prospects for a rebound is the USDCAD pair, which is now at its lowest level since September 2017, which also coincides with the psychologically important area of 1.20:

 

US inflation is expected to accelerate to 3.6% y/y in April, but given stock markets reaction to inflation fears this week, some upside surprise, like 4% print can be already priced in. Inflation growth above forecasts is likely to keep the pressure on USD, given Fed’s Vice Chair Clarida speech today confirms the commitment to keep rates low despite inflation threat. Nevertheless, the dynamics in the stock market and geopolitics (exacerbating conflict in the Gaza Strip) should be the primary drivers of USD till the end of the week.

The move in USD in the Wednesday morning has barely affected low-yielding currencies, including the euro. Despite a significant improvement in the EU’s virus situation and progress in vaccinations, which creates a strong support in EUR, short-term dynamics will depend on USD moves. The same can be said for GBPUSD, where the recent rally requires both a profit-taking pullback and more data on the British economy. The signal from the Bank of England that policy tightening may start earlier than planned has been priced in by the GBPUSD during the recent strengthening to 1.42. Nevertheless, both the pound and the euro retain prospects for further strengthening against USD, in particular after there are signs that equity markets correction is done and risk-on dominates again. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Commodity market rally hits pause putting commdollars under pressure

Risk assets and oil remain under pressure on Monday while gold and other safe heavens are marginally higher. Among numerous market developments we would note stabilization of commodity prices after the rapid growth in April - early March:

 

The Bloomberg commodity index posted a local top on May 12 and then started to retreat. At the same time, we saw a pullback in a number of market bets associated with expectations of accelerated consumer inflation. First, the yield on long-dated US Treasury bonds started to ease last week:

 

As it can be seen on the chart, the yield jumped last week on US CPI report release, however it couldn’t sustain gains - having climbed to 1.70%, the yield steadily declined in the second half of the week. Material pro-inflationary surprise in US retail sales on Friday was apparently discounted by the Treasury market as the yield continued to slide on Friday.

Second, commodity currencies, which uptrend were fueled by the rise in commodity prices, embarked on a downtrend: at the time of writing, AUDUSD is down 0.41%, NZDUSD is 0.66%, USDCAD is up 0.23%. At the same time, their weakness could not be attributed to the broad strengthening of the dollar, as the US currency declined against the EUR and GBP.

The commodity market could be under pressure due to the increase in the incidence of Covid-19 in the Asian region last week and related new restrictions. In addition, PPI and the component of input prices in manufacturing PMIs in the US, Europe, and some Asian economies rose strongly in April. For example, in deflationary Japan, wholesale prices rose at their fastest pace in six and a half years, data showed on Monday. High prices for production factors could become an inhibiting factor for activity in the sector, as a result, the demand for raw materials could find a local high. Also, worth noting is the weak data on the Chinese economy, released on Monday. Growth in retail sales has lagged well behind forecasts, dampening risk appetite.

Earlier I wrote that overheated by historical standards commodity market is poised to cool down, which can hit primarily commodity currencies. Taking into account synchronized developments in commodity and Treasury market, commodity dollars, correction could be already under way, which creates selling opportunities. Particularly vulnerable in this regard are CAD, AUD and NZD, which advanced by an average of 9% against the USD since the start of “commodity supercycle” in November 2020. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Oil’s retest of key resistance levels leaves USD vulnerable to attack

The rally in Asian equity markets, positive news flow regarding the virus as well as oil move towards key levels, sparking momentum in the rest of commodity complex, put USD under great pressure on Tuesday. The FOMC Minutes release today may secure the breakout below 90 points in the DXY as the Fed will most likely reiterate its uber-dovish stance that they remain committed to easing. In Europe, the progress in easing of social restrictions lifted bullish sentiment in the Euro. 

The next target in USD index is the area of 89.72-89.50, where a medium-term low was formed in the end of February:

 

In terms of momentum, the move was clearly excessive as seen from the RSI dropping to extreme levels (<20 points). This fact increases chances for a technical pullback from the support area towards 90 level before we could resumption of the medium-term downside.

Brent crude oil benchmark pierced through $70/bbl resistance for the first time since mid-March amid signs of declining global inventories as reopening of economies fuels a boom in demand, including demand for basic commodities like oil. An important signal that sets the stage for bullish oil move is a welcomed decrease in daily cases growth in India which is one of the largest oil consumers in the world. The virus situation in Asia is improving despite a spate of negative headlines hitting the wires in the second half of the past week, as governments managed to avoid worst-case scenario - continued increase in positivity rates and harsher social distancing measures.

Last week, the IEA reported that the oil glut accumulated during the pandemic had been cleared thanks to fast recovery in demand. The news fueled rumors that the market can face deficit in supplies in which lifted prices of near-term contracts compared to longer ones. Futures spreads in the oil market widened signaling that backwardation state intensified. 

On the technical front, oil keeps developing a bullish picture. This week we saw a retest of the previous resistance level at $70 while the uptrend remained intact. If quotes manage to close above $70 per barrel, the next target is the level of 71.22 which is the intersection of the upper bound of current uptrend and the prices peak in 2021:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Economic surprises drive EUR, GBP gains

Asian markets retreated while European equities and US stock index futures failed to sustain recent rebound, turning red on Wednesday. Dollar index rebounded after a dip to the February low of 89.70 amid renewed bearish pressure in risk assets.
Oil has once again failed the task of gaining a foothold above the key resistance ($70 for Brent) and went down. In addition, a negative news background arrived in time - progress on the Iran deal and an unexpected increase in commercial oil reserves in the United States.
The UK inflation data showed that the economy could not escape the fate of other countries - production prices rose strongly amid signs of raw materials shortages and supply bottlenecks. The demand for inventories is rising at the fastest pace in years due to the overreaction of firms to consumer demand boom. Firms are trying to replenish inventories with some excess anticipating more shortage, which basically creates a self-reinforcing loop. Building pressures in producer prices are expected to eventually find way to consumer prices, so pressure on central banks stemming from economic data will likely remain on the rise.
Inflation of retail goods in Britain beat forecast, which is expected to prompt the Bank of England to be among the first to use more aggressive rhetoric. Despite USD bouncing off February lows and adding pressure on the Pound, the British currency appears to be targeting highs of 2021, and then of April 2018 thanks to strong fundamental component (April employment + inflation) and the fact that the uptrend on the daily timeframe still has a large margin of movement - the price is below the median line of the bullish channel:

The European currency continues to stay strong in the pair with USD against the background of the weakening of the latter. The news flow related to easing of restrictions in European countries subdues risks for economic growth which pressures risk premium in EU equities and bonds. Since information of this kind on the US economy were priced in 1-2 months earlier, the equilibrium in expectations should have been restored when the Old World moved to the final phase of lifting lockdowns.
From a technical point of view, the picture for EURUSD is similar to GPBUSD - the peaks of 2021 and 2018 have yet to be overcome:
 

The Fed is to release the minutes of the April meeting today. The Central Bank has more or less definitely expressed its stance, but the markets do not really believe that the Fed will tolerate growing inflation risks. The content of the Minutes is expected to focus on the pledge to keep rates low, which could potentially have a moderately downside impact on the US currency. However, the risk of resumption of decline in the US markets is increasing, which may again provide unexpected support for the USD.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

[tickmill-analytics]

Economic surprises drive EUR, GBP gains

Asian markets retreated while European equities and US stock index futures failed to sustain recent rebound, turning red on Wednesday. Dollar index rebounded after a dip to the February low of 89.70 amid renewed bearish pressure in risk assets.
Oil has once again failed the task of gaining a foothold above the key resistance ($70 for Brent) and went down. In addition, a negative news background arrived in time - progress on the Iran deal and an unexpected increase in commercial oil reserves in the United States.
The UK inflation data showed that the economy could not escape the fate of other countries - production prices rose strongly amid signs of raw materials shortages and supply bottlenecks. The demand for inventories is rising at the fastest pace in years due to the overreaction of firms to consumer demand boom. Firms are trying to replenish inventories with some excess anticipating more shortage, which basically creates a self-reinforcing loop. Building pressures in producer prices are expected to eventually find way to consumer prices, so pressure on central banks stemming from economic data will likely remain on the rise.
Inflation of retail goods in Britain beat forecast, which is expected to prompt the Bank of England to be among the first to use more aggressive rhetoric. Despite USD bouncing off February lows and adding pressure on the Pound, the British currency appears to be targeting highs of 2021, and then of April 2018 thanks to strong fundamental component (April employment + inflation) and the fact that the uptrend on the daily timeframe still has a large margin of movement - the price is below the median line of the bullish channel:

The European currency continues to stay strong in the pair with USD against the background of the weakening of the latter. The news flow related to easing of restrictions in European countries subdues risks for economic growth which pressures risk premium in EU equities and bonds. Since information of this kind on the US economy were priced in 1-2 months earlier, the equilibrium in expectations should have been restored when the Old World moved to the final phase of lifting lockdowns.
From a technical point of view, the picture for EURUSD is similar to GPBUSD - the peaks of 2021 and 2018 have yet to be overcome:
 

The Fed is to release the minutes of the April meeting today. The Central Bank has more or less definitely expressed its stance, but the markets do not really believe that the Fed will tolerate growing inflation risks. The content of the Minutes is expected to focus on the pledge to keep rates low, which could potentially have a moderately downside impact on the US currency. However, the risk of resumption of decline in the US markets is increasing, which may again provide unexpected support for the USD.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

[tickmill-analytics]

The risk of early Fed QE withdrawal fails to soothe USD bears

There was a slight increase in bearish pressure on US currency on Monday as support from two key factors – rising long-term US yields and sell-off in risk assets (i.e., stock market, flagged. Equity markets posted weak upward bias, while long-term yields continue their decline that commenced last week.

The attention of market participants and the bulk of volatility has been concentrated on the commodity and cryptocurrency market in the past few weeks. Both markets saw strong ups and downs of different intensity on claims, that Chinese authorities aimed to suppress excessive speculation. The media are exaggerating a four-year-old ban on the use and mining of cryptocurrencies, for some reason presenting it as fresh restrictions. As for commodity markets, an article appeared on a website close to the PBOC that the Central Bank would allow the yuan to strengthen in response to rising commodity prices, which was subsequently removed. In general, all the latest corrections in the asset markets are in some way tied to China.

If China succeeds in cooling down commodity markets, this should have implications for the path of consumer inflation, since production costs (including commodity prices) are its one of the key sources. In this case, criticism of the Fed due to inaction in response to rising inflation should diminish, which will further pressure USD.

Despite high volatility in the commodities and cryptocurrency markets, FX and equity markets appear to be much less nervous. If central banks are currently concerned about speculation in traditional markets, it is only in their financial stability reports, which invariably contain a chapter on excessive speculation. So, nothing unusual here.

Low volatility is known to promote rotation from US assets to high-yielding ones, which is a process with a negative connotation for the American currency. Last week, the risk of early withdrawal of stimulus by the Fed suddenly increased against the background of the publication of the April Fed Minutes, in which "a number" of policymakers expressed their readiness to start discussing the reduction of QE. Contrary to expectations, this brought minimal relief to the dollar. Hence this week, the bearish trend in the USD can be expected to resume. I would consider the target for the dollar index in the area of the last support at 89.65:
 

ECB President Lagarde with her comments slowed down the rally of European bond yields last Friday, which offered additional support to EURUSD. The EU economic calendar is rather dull this week, the IFO report on German sentiment may increase volatility in the euro, but not for long. The key report this week is likely to be Core PCE in the US, which is slated for release on Friday.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Is it time to long oil? Declining US yields call for patience

Oil prices stood offered on Tuesday after rising 3% on Monday, nevertheless swaying close to weekly highs as concerns that Iranian oil supply could quickly return to the market eased. This helped to shift market focus back to demand outlook.
Brent jumped 3% on Monday while WTI gained 4% on reports that an outcome in the talks on Iranian nuclear deal remains highly uncertain. Oil market is sensitive to the reports regarding progress in the talks because the deal between US and Iran will almost certainly mean that oil selling restrictions will be lifted. This is potentially additional 2M b/d supply which won’t be easy for the oil market to absorb. At the same time, data on manufacturing PMI, as well as in the service sector in the economies-major oil consumers indicated continued growth in demand for fuel, which gives hope for a stronger third quarter compared to the second.

US production data indicate that US oil production is lagging behind the consumer boom, which may indicate a weakening of competition between US shale producers and OPEC.

Indirect talks between the US and Iran are due to resume in Vienna this week. Iran previously extended an agreement with the UN's nuclear agency for outside monitoring of its nuclear program, signaling the United States that it is ready to revive negotiations.

The key signal for continued growth in oil prices may be a decrease in the incidence of Covid-19 in India, which will give hope that the country will move to recovery and lift restrictions earlier. The incidence in the third-largest oil consumption country in the world has receded from peaks, but is still high compared to the global rates. On Monday, the daily growth was 222Kcases, which is less than the absolute maximum of 400K, but still hinders economic recovery, including oil imports:

The weakness in oil on Tuesday coincided with slump in 10-year US bond yields. This may indicate that there are some questions to the risk of accelerating inflation in the world so fast oil price recovery is unlikely. Technically, oil is in a diverging downside channel, with a sloping lower bound indicating that selling pressure prevails:

Long can be considered after the price consolidates above resistance line, i.e. in the area of $66.50 - $ 67.00 in WTI.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Fed participates to the growing chorus of hawkish Central Banks

Fed officials are beginning to gradually acknowledge that they are getting closer to the point where they begin to discuss a reduction in massive monetary support for the economy.

"We are talking about talking about tapering" said the head of the Federal Reserve Bank of San Francisco Daly, indicating that the policymakers are in the earliest phase of discussing an exit from the anti-crisis monetary policy as possible, so a reduction in QE should not be expected soon.

Fed Vice President Richard Clarida made a similar announcement on Tuesday. He said that at one of the upcoming meetings, officials may begin to discuss a reduction in the pace of asset purchases. Ultimately, however, the fate of this debate will depend on incoming economic data.

A month ago, Fed Chief Powell said it is premature to even think about when this kind of discussion would begin. This week saw the first noticeable shift in the rhetoric of the Fed officials which had some implications for debt, equity and FX markets. Let’s discuss them.

In sovereign debt markets, we are witnessing decline in long-term yields not only in the United States, but also on German and British debt. In addition to the pullback in commodity prices, which alleviates the lion's share of fears about inflation, large central banks such as the Bank of England, Canada, New Zealand, and now also to some extent the Fed are signaling that smooth transition to normal monetary policy looms on the horizon which should also curb inflation growth to some extent. That’s why long-term bonds saw inflows as investors demanded less inflation premium in the yield: 

Against the background of growing rhetoric of policymakers around the world about policy normalization, which becomes more and more synchronous, it will become increasingly difficult for risk assets to rally to new highs. There are not enough reasons for a full-blown correction yet, however bets on further rally are likely to be much more cautious, as liquidation of one of the key drivers that fuels risk-taking looms on the horizon.

The lack of reaction of USD index in response to the comments of the Fed representatives suggests that the shift in rhetoric was more or less expected. Since other Central Banks are not lagging behind, and even ahead of the Fed on the path towards policy normalization, downside pressure on the dollar from this point of view remains the same. Technically, the retest of the 4-month low on the dollar index (89.65) was unsuccessful, price failed to move below the level. Bulls took the lead and today the price is developing an upward momentum. In the near-term, a correction to 90.20 is likely, given the difficulties of the US stock market in continuation of the rally:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Dollar rebound will likely to be short-lived. Here is why

The dollar index has crept above 90 level after the failed bearish retest of support at 89.65 which we discussed yesterday. However, it will be tough to extend the move as the Fed is probably months ahead of the start of QE tapering, while other Central Banks are much more specific about the timeframe of policy tightening. A prime example was the Bank of New Zealand, which announced that it intends to start hiking interest rates at the end of next year. NZDUSD jumped 1% due to RBNZ surprise, but there is still room to grow given support from commodity markets and breakout of the crucial mid-term downtrend line:

 

The annual symposium in Jackson Hole, which is widely expected to be the place and time when the Fed will outline concrete steps towards reduction of assets purchases, will take place in August. What it means that there are at least two months of little support for USD from the Fed which suggests that broad USD pressure should remain in place and any upticks should be short-lived.

The economic calendar is not particularly eventful today, so EURUSD is expected to remain in a range, hovering around 1.22 level. The release of US unemployment claims and some weakness in equities today will probably let USD to rise a little bit more with a possible test of 1.2150 on the pair. The comments of the ECB officials that the rise in inflation is temporary should be interpreted as a subtle hint that there is no immediate need to start discussion about reduction of QE, which somewhat reduces bidding on EURUSD.

The Pound’s rally is on pause due to the lack of data releases. Reports that Scotland wants to hold an independence referendum after pandemic do not pose an immediate risk, as it is unlikely that this will happen in the current parliamentary term. GBPUSD may move to 1.4080, however, given strong fundamentals of Britain, the pair is likely to be readily bought out from this level.

In the Asian part of the foreign exchange market, there is some also growing consensus about direction of the USD. The three main Asian currencies - the yuan, won and the Taiwan dollar - joined the pressure on the dollar about 10 days ago, which, of course, also does not add confidence about the prospects for the US currency:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

USD tactical retreat is probably over. What to expect on this week?

No sooner had the US economy felt the effect of the two rounds of powerful fiscal spending, it is already being prepared for a new dose of steroids. However, this time, government support could last for a decade. On Thursday President Biden presented a federal budget plan for the next ten years. As part of the budget proposal, the state plans to boost spending to $6 trillion in 2022 and gradually bring it to $8.2 trillion in 2031. The budget deficit will grow by about $ 1.3 trillion/year while debt-to-GDP ratio will balloon to 117%. And this is taking into account proposed tax hikes by the Democrats. If Biden can enlist the support of Congress on this issue, US public debt will rise at the fastest level since the Second World War.

Equity markets cheered the news of a new long-term economic stimulus. Industrial metal prices also rebounded, as the US government plans to spend a significant portion of stimulus on renovating the economy. The news caused some anxiety in the US debt market as seen from 10-Year Treasury note yield rising rose from 1.58% to 1.61%, as market participants interpreted the news as a risk of increased long-term government borrowing.

Many details of the plan are still unknown and will be made public later, and there is little information about how Congress will react to the proposal, which, by the way, is controlled by Biden's party colleagues. And although this fact has a positive effect on the chances of approval, it remains unclear whether the Republicans can block the proposal, as well as how the final figures will differ from the original ones.

 The foreign exchange market’s reaction to the news from the White House was quite tepid. The dollar index keeps consolidating near the upper border of the two-month channel, signaling about the risk of a breakout:

 

Breakout and consolidation higher, albeit unlikely today, could lay the foundation for continued growth next week. The upward movement could be triggered by the April Core PCE release today. Otherwise, the tactical upward correction of the dollar is likely to come to an end, and next week we will see the resumption of the medium-term downward trend, which is caused primarily by the divergence of the Fed's policy and the policies of other Central Banks.

As for the euro, the ECB seems to have succeeded in convincing market participants that no QE cut is planned in the near future. We see this from the sharp decline in yield on 10-year German bonds - from a peak of -0.07% to -0.17% in a very short span of time after comments from several ECB officials. Therefore, this support factor has weakened in the euro, and we see not very confident upside dynamics of EURUSD. Nonetheless, interest in the euro is high from equity investors, as evidenced by the influx of foreign investors into value equity ETFs in the Eurozone. Over the past few weeks, this inflow has been the highest in several years.

Technically, EURUSD may try to break through the lower border of the channel, however, the horizontal support at 1.2160-1.2170 is likely to withstand, preserving integrity of the channel:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Dollar outlook for the week: more sales ahead of the NFP

On Monday, the dollar index struggles to maintain support at 90 points. The attempt to go up on the inflation report failed miserably on Friday:

 

Annual inflation in the US in April was the highest in several decades - +3.1%. At the peak of the previous expansion, in 2006, it was 2.9%. Despite the fact that market forecasts underestimated inflation (2.9% consensus), the debt market received the news rather coolly. The yield of the 10-year Treasuries barely flickered on the report. It would seem that the risk of accelerated inflation rates in the US increased after the report, because of which investors should have demanded an increased yield on long-term Treasuries, but contrary to expectations, the yield fell from 1.61% to 1.59% at the close.

Strong inflation readings in April-May can be explained by the low base effect - in the same month last year the US lockdown was in full swing, which dragged inflation down. Compared to that month, things are looking very good now. The second potential explanation is that investors in the Treasury market believed the Fed's words that inflation was caused by temporary drivers and would soon begin to slow down. Therefore, there is no reason to dump long-term bonds.

However, if we see another increase in inflation rate in May, there will be some kind of trend, so anxiety, most likely, cannot be avoided. Therefore, bear in mind that the markets will most likely start to worry about increased inflation in the coming months.

Important statistics were also released for Asia. China released a manufacturing activity index for May, while South Korea reported factory output. Key findings - costs are growing (cost of raw materials + labor), and the growth of export orders is slowly slowing down. For example, the index of the cost of raw materials rose to 72.8 points (50 is neutral) - this is the maximum since 2010. At the same time, the index of new orders fell to 48.3 points, that is, it became worse than in April. Together, these dynamics tell us that if pickup of commodity prices continue, it will likely be much slower. Rather, stabilization in the market awaits us.

It should also be noted that small firms in China have probably passed the peak of growth rates - their margins are squeezed by rising commodity prices and difficulties in transferring this inflation to the consumer. The index of activity of small firms in China fell from 50.8 immediately to 48.8 points.

The May Non-Farm Payrolls report is also due this week. Weak job growth in April exacerbated the negative trend in the dollar, as the chances of a Fed rate hike diminished. All May because of this, the dollar was under pressure:

 

It is highly probable that the foreign exchange market will unravel the consequences of the May report throughout June. The thing is that in April the labor supply lagged behind the demand for labor, so few new jobs were created. Preliminary data for May (jobless claims, hiring indices in PMI reports) shows little change. Therefore, the report may again fall short of expectations. The Fed will have more time to delay with low rates, since their goal is jobs. The dollar could suffer again.

On the technical side, we are using the setup from last Friday. USD index failed to settle above the upper border of the channel on Friday, so the control, I believe, rests with the sellers. Closer to the NFP release, the pressure on the dollar is likely to mount, and we will see a retest of support at 89.65.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Oil breakout sets the stage for the rally towards $75 mark

Trading on FX was calm and uninteresting on Monday as UK and US markets were closed due to holidays. On Tuesday, we saw a weak attempt by the greenback to recover after the currency tumbled against majors yesterday. In the economic calendar, reports on the US economy stand out, the closest of which is the ISM index in the US manufacturing. Markets will look for confirmation that supply bottlenecks continue and costs are on the rise, particularly labor costs. The latter effect could hamper job creation, so it could negatively affect expectations ahead of Non-Farm Payrolls release on Friday.

However, if the data can influence the Fed's policy, it will likely do it in the way that it increases chances that there will be no premature tightening of credit conditions. For the dollar, this will have a negative effect, as other central banks are pursuing quite a hawkish policy, increasing interest in local assets. This leads to rebalancing of investment portfolios, causing USD outflows. 

The economic recovery is increasingly difficult to deny, so OPEC is thinking about a new increase in production quotas. The agency updated forecasts to even more bullish however there is still some uncertainty about production hike which markets used to stage breakout in prices. In addition, the rally was facilitated by the data that OPEC did not fully "use" the May increase in production while return of Iran to the market turned out to be more modest than expected.

From the technical point of view, the sharp upward movement of oil on Tuesday looked like a breakout from the range, in which the quotes were held about a month:

 

In order for the rally to gain traction, it is desirable to see a consolidation above $69.70 - $70 per barrel for Brent and, of course, lack of aggressive plans of OPEC to close output gap (i.e., increase production fast). A correction after the breakout will probably follow the decision of OPEC and the communique, however, given the latest demand forecasts, the market should be able to absorb this increase in supply. If OPEC decides not to rush to increase production, in July we can easily see a rally to $75 per barrel in Brent.

Before the ECB meeting, it is important to know what is happening with inflation in the European economy and today's CPI report came in handy. Inflation in May turned out to be slightly better than forecasted, which supported the European currency, as there are expectations that the ECB may start cutting QE earlier, but for this there should be a signal in the data. Unemployment also dropped to a new low after the pandemic - 8%. The meeting of the European regulator will take place on June 10 and the foreign exchange market is now inclined price in positive data updates by gaining more exposure to the euro.

Technically, EURUSD breakdown ended unsuccessfully last Friday, and the new week was marked by continuation of the rally:

  

A short-term correction to the area of 1.22100 to the lower border of the ascending channel is possible before the movement towards the target 1.23 will resume.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

May NFP could fuel USD rally all next week

The odds of the Fed departing from the policy of cheap money earlier than previously expected rose sharply on Thursday after release of the ADP report. The private research agency made highly upbeat assessment of labor market growth in May, estimating job growth at 978K which was significantly above the consensus (~600K). The dollar and long-dated US government bonds were apparently surprised by the labor market rebound:

 

After the April NFP report, which was a big miss as jobs growth was three times lower than consensus, there was a great deal of uncertainty about the direction of the US economy. The market basically split into two camps - some believed that the sharp slowdown in job growth in April was a turning point in the post-pandemic recovery trend, others that it was an outlier, and therefore more data is needed to verify the onset of slowdown. The Fed, by the way, belonged to the second camp. In a sense, the May report should have judged this dispute. Given that the ADP figure correlates with NFP estimate, there was no need to wait for NFP to know whom to believe - the strong positive surprise in the ADP data convinced that the US economic recovery is in full swing and the April data was likely a quirk.

As a result, the real interest rate and market inflation expectations in the US resumed growth again after the data. The yield on 10-year Treasury notes rose from 1.59% to 1.62% and the dollar index soared to 90.50. Since the Fed seeks to ensure maximum employment in the economy (in accordance with the new policy concept) by keeping rates low, strong job growth is quickly moving it closer to this goal, therefore, market interpretation of the report could be a rising risk of an early policy tightening. In the context of the current stimulus setting, this may mean that the Fed will start talking about QE tapering already at its meeting on June 16, which is close at hand.

Technically, the dollar index broke the bearish trend it had been in since April after several attempts to break the support at 89.65 failed. If the NFP report beats estimates coming significantly above the 600K consensus today (for example, 900-950K growth), one should expect USD to extend its rally towards 91 points on the index:

The reading of 700-800K is probably priced in based on the ADP data. If the NFP reading disappoints posting growth of 600K or lower (an unlikely scenario), the dollar can be expected to fall as fast as yesterday's growth.

In EURUSD there is a risk of going down to 1.2050 on a strong NFP. Next week, attention will be focused on the ECB meeting, which may provide support to the euro, given that data on the European economy also give reason to expect a tightening of ECB policy.

As for the GBPUSD, the revision of the composite PMI towards strengthening did not help the pound to resist the dollar onslaught. A positive NFP surprise today will allow testing 1.4050 today, however the Bank of England maintains a more hawkish policy than the ECB or in the future the Fed, so the weakening of GBPUSD is likely to be less strong than EURUSD.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

May NFP could fuel USD rally all next week

The odds of the Fed departing from the policy of cheap money earlier than previously expected rose sharply on Thursday after release of the ADP report. The private research agency made highly upbeat assessment of labor market growth in May, estimating job growth at 978K which was significantly above the consensus (~600K). The dollar and long-dated US government bonds were apparently surprised by the labor market rebound:

 

After the April NFP report, which was a big miss as jobs growth was three times lower than consensus, there was a great deal of uncertainty about the direction of the US economy. The market basically split into two camps - some believed that the sharp slowdown in job growth in April was a turning point in the post-pandemic recovery trend, others that it was an outlier, and therefore more data is needed to verify the onset of slowdown. The Fed, by the way, belonged to the second camp. In a sense, the May report should have judged this dispute. Given that the ADP figure correlates with NFP estimate, there was no need to wait for NFP to know whom to believe - the strong positive surprise in the ADP data convinced that the US economic recovery is in full swing and the April data was likely a quirk.

As a result, the real interest rate and market inflation expectations in the US resumed growth again after the data. The yield on 10-year Treasury notes rose from 1.59% to 1.62% and the dollar index soared to 90.50. Since the Fed seeks to ensure maximum employment in the economy (in accordance with the new policy concept) by keeping rates low, strong job growth is quickly moving it closer to this goal, therefore, market interpretation of the report could be a rising risk of an early policy tightening. In the context of the current stimulus setting, this may mean that the Fed will start talking about QE tapering already at its meeting on June 16, which is close at hand.

Technically, the dollar index broke the bearish trend it had been in since April after several attempts to break the support at 89.65 failed. If the NFP report beats estimates coming significantly above the 600K consensus today (for example, 900-950K growth), one should expect USD to extend its rally towards 91 points on the index:

The reading of 700-800K is probably priced in based on the ADP data. If the NFP reading disappoints posting growth of 600K or lower (an unlikely scenario), the dollar can be expected to fall as fast as yesterday's growth.

In EURUSD there is a risk of going down to 1.2050 on a strong NFP. Next week, attention will be focused on the ECB meeting, which may provide support to the euro, given that data on the European economy also give reason to expect a tightening of ECB policy.

As for the GBPUSD, the revision of the composite PMI towards strengthening did not help the pound to resist the dollar onslaught. A positive NFP surprise today will allow testing 1.4050 today, however the Bank of England maintains a more hawkish policy than the ECB or in the future the Fed, so the weakening of GBPUSD is likely to be less strong than EURUSD.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

US inflation report may cause a major move in USD. Here is why.

Last week, the struggle between USD bulls and bears was unusually evident: the dollar index jumped from 90 to 90.50 points following release of the ADP labor market report, however bullish bets were dialed back completely as the NFP report came out: 

 

This unusual for FX move was caused by really contrasting assessments of labor market situation in the ADP and the NFP. The former reported that the US economy gained more than 900K jobs in May, while the latter failed to meet even modest forecast of 600K.  The progress in employment, as USD volatility showed last week, is a direct indicator of the chances of early tightening by the Fed, which in turn generates demand for dollar fixed-income assets and ultimately the dollar.

This week, US inflation report will determine the fate of the bearish USD trend. The data is due on Thursday. The rise in US consumer prices can easily beat forecasts, but it is unlikely to cause a big surprise: inflation hit the bottom in April-May last year (0 - 0.1%), so it will be easy to attribute acceleration to the low base effect:

 
By the way, inflation overshoot last month (forecast 3.6%, actual reading 4.2%) was quickly absorbed by the market, which can be seen from the USD reaction:

 

Having jumped up, the dollar returned to the downward track in a few days. This gives a rough understanding of what the market's reaction might be if the data show strong inflation in May.
The real surprise will be if May inflation drops below forecast. There will be a good opportunity to short the dollar, as the Fed will have a serious reason to think about whether it is too early to move on to policy tightening. We already saw last Friday that anything that signals about deceleration of recovery boosts chances for the Fed “lower-for-longer” stance, crushing USD. May inflation report, in its possible impact, is most likely no exception.

By the way, also on Thursday the ECB holds a policy meeting and the central bank chief Christine Lagarde speaks. More certainty on tapering of the current main asset purchase program, PEPP, should be a clear-cut signal for EURUSD rally. However, there should be little urge to move with tapering as long-term German bond yields retreated from highs of this year, signaling about subdued inflation concerns. That’s why the ECB may prefer to focus on talking down Euro to support local exports. 
Technically, EURUSD's brisk rebound from 1.211 up last Friday showed that EURUSD weakened on expectations that the NFP would confirm the ADP data, which surprisingly did not happen. If we don't see anything extraordinary about US inflation on Thursday, EURUSD will tend to keep moving up.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

US inflation report may cause a major move in USD. Here is why.

Last week, the struggle between USD bulls and bears was unusually evident: the dollar index jumped from 90 to 90.50 points following release of the ADP labor market report, however bullish bets were dialed back completely as the NFP report came out: 

 

This unusual for FX move was caused by really contrasting assessments of labor market situation in the ADP and the NFP. The former reported that the US economy gained more than 900K jobs in May, while the latter failed to meet even modest forecast of 600K.  The progress in employment, as USD volatility showed last week, is a direct indicator of the chances of early tightening by the Fed, which in turn generates demand for dollar fixed-income assets and ultimately the dollar.

This week, US inflation report will determine the fate of the bearish USD trend. The data is due on Thursday. The rise in US consumer prices can easily beat forecasts, but it is unlikely to cause a big surprise: inflation hit the bottom in April-May last year (0 - 0.1%), so it will be easy to attribute acceleration to the low base effect:

 
By the way, inflation overshoot last month (forecast 3.6%, actual reading 4.2%) was quickly absorbed by the market, which can be seen from the USD reaction:

 

Having jumped up, the dollar returned to the downward track in a few days. This gives a rough understanding of what the market's reaction might be if the data show strong inflation in May.
The real surprise will be if May inflation drops below forecast. There will be a good opportunity to short the dollar, as the Fed will have a serious reason to think about whether it is too early to move on to policy tightening. We already saw last Friday that anything that signals about deceleration of recovery boosts chances for the Fed “lower-for-longer” stance, crushing USD. May inflation report, in its possible impact, is most likely no exception.

By the way, also on Thursday the ECB holds a policy meeting and the central bank chief Christine Lagarde speaks. More certainty on tapering of the current main asset purchase program, PEPP, should be a clear-cut signal for EURUSD rally. However, there should be little urge to move with tapering as long-term German bond yields retreated from highs of this year, signaling about subdued inflation concerns. That’s why the ECB may prefer to focus on talking down Euro to support local exports. 
Technically, EURUSD's brisk rebound from 1.211 up last Friday showed that EURUSD weakened on expectations that the NFP would confirm the ADP data, which surprisingly did not happen. If we don't see anything extraordinary about US inflation on Thursday, EURUSD will tend to keep moving up.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.