official Daily Market Notes by Tickmill.co.uk

[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]

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.

[broforex51]

 

AUDNZD today as we see here, the trend is bearish but for now there is sideways. So it is good if you open sell position when the price breaks middle area at 1.06293 with potential target up to 50 pips below
 

[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]

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]

Only strong US inflation in May can save USD

The dollar holds its ground on Tuesday counting on a strong positive surprise in the US May inflation report. The release is due on Thursday. Yellen's comments that high interest rates will be a plus for the economy went unnoticed by investors, since the rhetoric of the US Treasury head has no immediate consequences.

The ZEW report on the business climate in Germany for June fell short of expectations, but assessment of the current conditions beat forecasts. The mixed report deprived EURUSD of the opportunity to re-break the 1.22 level, as there is no over-optimism in the German economy and there are not so many reasons for the ECB to rush to tighten policy.

It is also worth paying attention to the NFIB report on small business in the United States. If it confirms that the reason for the weak May Non-Farm Payrolls was a lack of labor supply (as was the case in April), expectations for inflation in the United States in May will also have to be revised towards higher growth, since it is obvious that employers have to raise wages and these costs will translate into an increase in final prices. Recall that according to the Non-Farm Payrolls report, monthly wage growth was 0.5% (0.2% forecast), which indicates increased risks of accelerated US inflation in May.

Nevertheless, the Fed continues to believe and tries to convince market participants that the increased inflation rate will not last long, as it is caused by temporary drivers and technical factors such as the low base effect. Last year, in April and May, inflation reached a local minimum, after which it turned into growth. Compared to those months, inflation in April and May of this year can easily show high growth rates.

US trade statistics may also be in focus. The consensus on the data is reduction of the US trade deficit to $70 billion. However, the news that the US trade deficit has reached its peak is unlikely to help the dollar. In addition, the Fed is entering a blackout period - the Central Bank officials are silent for a whole week in front of the Fed meeting, so the dollar can only be supported by a strong inflation report. 

On Thursday, the ECB will meet and, in this light, mixed data on sentiment in Germany indicate that it doesn’t make sense for the bank to rush to slow down asset purchases. The ECB will likely prefer to focus on supporting a weak euro, and will also point to the risks of new virus strains and slow vaccinations as key risks which justify low rates and QE.

EURUSD pulls back today after the 1.22 test on Monday amid lack of optimism in economic data. If the uptick in US inflation in May does not meet expectations, the baseline scenario for EURUSD is continued rise in the second half of the week to the June high (1.225):

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]

Taper or not to taper early? US May inflation report should help the Fed to make up its mind

Oil prices rose on Tuesday continuing to develop modest upside momentum on Wednesday. WTI has broken the $70 per barrel mark for the first time since October 2018. The API data indicated a 2.11 million barrels cut in US oil inventories on the reporting week, raising the chances of a positive EIA report on inventories, which is slated for release today. Optimism about demand continues to drive price increases, which is partly justified by the fact that the pandemic is receding. The daily increase in the number of new cases of Covid-19 continues to decline while some health officials, like the head of the Ministry of Health of Norway, make extremely optimistic claims that the pandemic is nearly over.

OPEC acts as a counter-argument for the current oil rally, or rather, the cartel's excess production capacity of 6 million b/d. It is clear that these capacities will be gradually put into operation and if this is done in a weak market or coincides with the deterioration of the demand background (as was the case in March) prices may repeat the correction. Now OPEC production caps are factored in prices, however signals of improvement in demand continue to come. Prices will come under serious pressure closer to the next OPEC meeting.

Another important indicator of the market movement towards the reduction of excess oil reserves was the narrowing of the Brent-WTI spread. Now the WTI discount is only $ 2.3 per barrel, this is the lowest since November 2020 and indicates a faster expansion in the United States.

A short-term oil forecast from the EIA published yesterday showed that forecasts for the recovery of shale production in the United States for 2021 and 2022 have not changed much. This also supported prices, as it was the recovery in US production that prevented OPEC from effectively exercising control over the market.

The mix of the fresh upside leg in oil, declining chances an early QE tapering by the Fed and a flight of inflation to the Russian Federation in May sharply boosted appeal of carry trade, since the chances that the Central Bank of Russia will sharply raise the rate (for example, by 50 bp), thus expanding the differential rates, have gone up. The CBR meeting will take place on Friday and USDRUB is likely to continue to decline rapidly on positive expectations:

The major currency pairs remain in narrow ranges today in anticipation of the key US inflation report for May for this week, as well as the meeting of the European Central Bank. China released inflation data that pointed to an unpleasant trend of contraction in production margins (CPI falls, PPI rises), forcing the authorities to announce price controls. The key takeaway from the data is that inflationary pressures in the world continue to build up, so tomorrow we may well see an unexpected very strong rise in US inflation. However, due to the fact that last May inflation was very low (near zero), YoY gains should be attributed to a good extent to the low base effect, so the market's tolerance to higher inflation rate may be high. A surprise for the market is likely to be core CPI values above 3.7% or above 5% of broad CPI. If the data fails to meet expectations, we can expect a resumption of the downtrend in the dollar, since prolonged pause of the Fed in QE tightening, will lead to rotation into high-yielding currencies away from the USD, since other major Central Banks have clearly more hawkish policy stance. 

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]

EIA data was a surprise for the market, casting doubts on US demand strength

Oil prices came under pressure on Wednesday, WTI struggled to stay above the $70 mark. The catalyst for the decline was bearish EIA report on commercial oil and refined products inventories in the United States. The report is now having a bigger impact on the market than usual, as it presents one of the major uncertainties on supply side. OPEC pumps oil in accordance with established quotas, and therefore supply from the cartel is more or less predictable.
The EIA report was a bit ambiguous as it contained both positive and negative information for the market. Stocks of crude oil decreased by 5.24 million barrels in the reporting week, confirming the API inventories data (which also indicated a reduction in reserves), nevertheless, refined products - gasoline, distillates and propane reserves jumped 20.71 million barrels which was a kind of a shock for the market:

The growth of finished products may indicate that the demand for them has decreased (i.e., fuel consumption in the United States has decreased) or supply has increased, or there was a combination of these factors.
In search of an answer to the question of what caused the increase in inventories, it is worth paying attention to the capacity utilization of refineries. The report showed that it rose 2.6% to 91.3%, the highest since January last year:

 

Taking into account the change in the activity of refineries, the change in demand for finished oil products turned out to be negative and amounted to -1.43 mln bpd. However, it should be borne in mind that we are approaching the travel season in the United States, which is a seasonal factor of increase in fuel demand.
On the supply side, the bulk of the negative news for the market comes from Iran. The country has ambitious supply growth targets, from 2.4 million bpd to 3.3 million bpd in the first six months to 4 million bpd. over the next six months, provided that the United States lifts the sanctions.
Iran's supply is expected to rise, however any news indicating progress in the nuclear deal could trigger a correction in the market, which, however, should short-lived as the demand side situation improves.
Later today, OPEC is to publish a monthly bulletin that will report on the cartel's production in May, as well as provide updated forecasts by the end of the year. On Friday, the IEA will release a report, which will also provide its views on the market. Both reports could cause increased price volatility, especially if the outlook changes for the worse, as the market remains fragile after recent gains.

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 meeting impact will likely to be short-lived and here is why

Greenback holds position on Monday after the short-squeeze last Friday. Gold resumed its plunge while nominal yield on long-dated US debt (Treasuries) remained subdued – in overall this suggests that expectations of inflation overheating somewhat retreated. This could happen for two reasons - either markets feel that US growth rate cools down or they expect some updates on the Fed credit tightening. Considering that the FOMC meeting is around the corner, the reason is most likely the second.

The reaction in USD, gold and Treasuries suggest that asset prices factored in a possible change in the policy at the meeting on June 16. Interest rate and bond-buying pace are expected to remain at current levels; however, the Fed may start to talk about when it intends to scale back massive bond purchases. Even this slight policy tweak should have an impact, given that other central banks have taken the first step towards exiting the anti-crisis policy. Therefore, if there is a comment, a la "we start to discuss the timeframe of QE tapering", it is unlikely that this will cause a long-lasting surprise in the market.

But the Fed is hardly ready for anything more. There is actually no need for that. The comfortable US economic situation (aka “Goldilocks economy”) and looming summer calm in the markets are two key reasons for the Fed to be cautious and extend the wait-and-see stance. In addition, rising demand for long-term Treasuries since the beginning of June suggests that the Fed has managed to convince market participants that high inflation in April-May is temporary. So, there is no market pressure on the Fed to tell something about QE tapering. If the Fed rushes now with hints about reduction of asset purchases, it can sow doubts that inflation is completely under control. This is certainly not in the best interest of the Fed officials.

As a result, the emerging trend of this summer – search for yield amid subdued volatility - is likely to remain intact. Already on Friday, we saw strengthening of 10-year Russian bonds by 11 bp after Bank of Russia hiked key rate by 50 bp. The yields on «second-rate» Eurozone bonds - Italy and Greece - also declined, their spread to 10-year German Bunds dropped below 100 bp., indicating that investors are willing to take risk in exchange of returns. This week, investors to EM will likely pay attention to Brazilian Central Bank, which is supposed to raise interest rate by 75 bp. In general, there are clear signals that demand for risk is on the rise.

As one of the main funding currencies, greenback has inverse relationship with demand for risk, therefore, it’s likely that recent USD strengthening can be attributed purely to the FOMC even risk. The index may reverse in the area of 90.80-91.00 in the second half of the week:

 

Meetings of the Norwegian Central Bank and the Bank of Switzerland will also be held this week. The Central Bank of Norway gave a signal that it will tighten credit conditions, and the SNB, on the contrary, that it will not rush in this matter. Therefore, EURNOK and EURCHF may tend to move in different directions this week - the first is down and the second is up.

For EURUSD, the situation largely reflects the alignment of the dollar index: a potential downward movement on the FOMC will probably not go beyond 1.2075 from where a rebound can be expected:

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]

Medium-term uptrend in EUR, GBP under threat after Fed surprise

The Fed left its policy unchanged yesterday, but the updated forecasts and dot plot showed that the Central Bank does not believe in its own story about temporary high inflation. The reaction of the markets was acute and should not surprise, given the fact that in the past few months, the Fed’s policymakers worked hard to convince investors that high inflation will not last long, and therefore will not impact rate hike outlook. It turned out that this is far from the case.

Compared to the previous dot plot, there have been significant changes: 13 out of 18 officials expect a rate hike of at least 25 bp. in 2023. There were only 7 of them in March. As for 2022, 7 out of 18 officials expect at least one rate hike; in March, the hawk camp was less numerous - only 4 policymakers.

The forecast for GDP growth in 2021 was revised upward by 0.5% - from 6.5% to 7%. Inflation, according to the forecasts of the Central Bank, will rise to 3% by the end of the year and then begin to cool down. Notably, the growth forecast for 2022 remained unchanged, and for 2023 it was raised from 2.2% to 2.4%, probably reflecting optimism about the infrastructure initiatives of the Biden administration.

The sharp increase in the degree of optimism in the Fed forecasts brings forward the start of quantitative tightening (QT), which was clearly demonstrated by the bearish reaction in the Treasury market. The yield to maturity of longer-dated bonds, which are more sensitive to changes in interest rates or inflation, soared from 1.49% to 1.59% on Wednesday. Clearly, there was a massive sell-off of longer-maturity bonds which boosted demand for cash. The USD index soared from the level of 90.50 and continues to rally today fueled largely by the Euro weakness, as it now turns out that the ECB is noticeably lagging behind other Central Banks in developed countries in tightening credit conditions.

Formally, the details of the QE tapering will likely appear at the conference in Jackson Hole in August or at the meeting in September.

The risk of an early tightening of credit conditions in the US makes the dollar less attractive for carry trades, so investor focus is likely to shift to EUR and JPY, further weakening these currencies against the USD.

Technically, an interesting situation arose in the EURUSD and GBPUSD pairs, where yesterday's fall sent prices to the lower border of the medium-term uptrend:

 

Breakout and consolidation below 1.1930 for EURUSD and 1.3890 for GBPUSD for several sessions may mean that the medium-term uptrend in the pairs is broken and, at best, we will see consolidation of EURUSD below 1.20 and GBPUSD below 1.40 with occasional sales in this summer. 

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]

Next week could be tough for low-yielding EUR, GBP and here is why

May UK Retail sales came slightly worse than projections, following strong gains in April. However, like the United States, UK consumers boosted consumption of services that became available after economy reopening by cutting spending for retail goods. The data had little impact on the pound as FX markets appears to be pricing in implications of the June Fed meeting.

“Instead of a thousand words” in the official communique or Jeremy Powell's speech to signal the move to a tightening cycle, the Fed revised its GDP and inflation forecasts sharply higher:

The dot plot also showed that overwhelming majority of central bank policy architects see the interest rate at a higher level than it is now in 2023. This data was enough to predict a transition to the QE tapering at the end of summer.

On Friday, the dollar stalls near 92 points resistance level, enjoying its highest level since mid-April. The USD gains are broad. Trade weighted exchange rate of the US currency is up 1.5% this week, commodity currencies from the G10 sank 2.5% on average against USD. The factor of China's intervention in the commodity market (price control) joined the Fed's policy, which hit the currencies of countries expressing high sensitivity to price swings in commodities.

Nevertheless, the rally of US currency finds much less support from the Treasury market on Friday. The movements in yields during and after the Fed meeting are strange. Yields on bonds on the horizon of 5-30 years after the initial reaction to the Fed, during which they rose sharply, erased gains completely on Friday:

 

It’s also possible that the downside reaction in long-term bond yields could be market perception that the Fed signaled about policy tightening too early and now risks to slow down expansion because of that. In other words, markets could be pricing in a policy error from the Fed. 

Further prospects for the upward USD move will depend on the trajectory of yields. If their rally resumes, it will be much easier to see US currency gains as well.

The Fed move on Wednesday was good news for the ECB, as it definitely helped to curb appreciation of the euro. Trade-weighted exchange rate of the euro fell by 0.5% to the lowest level since July 2020. The ECB chief economist added fuel to the fire saying that even in September, the ECB may not have enough data to move towards tightening. Divergence of ECB and Fed policies unexpectedly changes its sign and now the markets expect the US Central Bank to move to tighten credit conditions earlier.

In the short term, the EURUSD growth attempt is likely to encounter resistance in the 1.1950-1.1980 area. Next week, the target for the pair will probably be the level of 1.1835 and then 1.17 closer to mid-summer.

The next week may also be vulnerable period for the GBPUSD. Despite the fact that the pound copes better with the onslaught of USD compared to the euro, thanks to the hawkish position of the Bank of England, the risk of worsening trade or political spat with the EU could increase pressure on the currency. The target for the pair is 1.38-1.3810 in the next trading week.

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, EUR, CAD weekly outlook: more hawkish Fed hints in cards 

Fed spokesman James Bullard dotted the i's, saying on Friday that Powell initiated discussion about reducing monetary stimulus (aka QE tapering). It is very strange that Powell himself did not report this at the press conference on last Wednesday, nevertheless the markets responded to the news accordingly. The US currency index climbed to 92.40 points, the highest level since April 12, Treasuries yields with maturities of 5 years or more tumbled to new local lows, pricing in lower risks of economic overheating. Several Fed officials are due to hold a speech this week, so bullish surprises may not be over for USD.

Back in April, Powell said that it was not the time to discuss slowdown in the pace of QE. Even earlier he was even more dovish stating his famous “we are not even thinking about think about raising rates”. The Fed position, as we see, is altering very quickly and it is clear that officials may be underestimating the pace of recovery from the pandemic.

An earlier roll-off of QE may indicate that the neutral interest rate (at which the tightening cycle will end) may be lower, which may have also boosted demand for long-term bonds. Implied date of the first-rate hike by 25 bp has been also brought forward to November 2022.

Clearly there is a room for development of the story with hawkish Fed which should improve USD position against currencies which offer low interest rates. The ECB and the Bank of Japan are noticeably lagging behind in hawkish rhetoric what increases the risk of more downside pressure in EURUSD and further gains in USDJPY. As for EURUSD, the target after downside breakout of the upward medium-term trend is horizontal level of 1.17, which will roughly correspond to the March high in USD index at 93.40:

 

Last week there was a strong decline, so the initial downside momentum has probably fizzled out and EURUSD is expected to rebound to 1.1920/40.
There is, of course, still a chance that Powell will correct his colleague during his testimonial before the US Congress on Tuesday, but if he confirms that the debate on tightening credit conditions has begun, the dollar could rise even higher.

China's intervention in commodity markets and tightening by the Fed also helped form a peak in commodity prices. Bloomberg Commodity index peaked out in early June and then fell to the level of early May and is unlikely to soon return to growth. This circumstance jeopardizes the further rally in commodity currencies - AUD, NZD, CAD. For example, in USDCAD, the price has broken through the downtrend line that formed in the middle of last year - definitely a negative signal for CAD growth prospects:

 

The calendar of events and economic reports on the EU is not particularly interesting, but it is worth paying attention to the speech of the head of the ECB Lagarde in the European Parliament. It is likely that she will gladly take the opportunity to highlight the difference in policy stances of the ECB and the Fed, so that it could further weaken the euro, realizing one of the ECB's key goals - to stimulate export sector.

The most important reports of the week will be the European PMI, which will be released on Wednesday, the decision of the Bank of England on Thursday (which by the way has every chance to support the pound), as well as the US inflation report (Core PCE) for May. The weekly report on US unemployment benefits may have a material impact on market sentiment, given the great importance of the upcoming June NFP.

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.