What we are looking at today:
- USD strength remains on pause ahead of inflation: US dollar strength has been on pause in recent sessions (especially versus EUR). Market participants appear to be waiting for a catalyst, with the US CPI data due today.
- Indices attempt to recover yet again: Indices are ticking higher this morning, but after another late decline which meant a failed recovery yesterday, the rallies lack conviction and sustainability.
- Data trading: US CPI is key today. A decline is expected on both core and headline levels. Traders should be prepared for volatility across bond yields and the US dollar.
With several reasons for market participants to be worried, broad sentiment remains bearish for majors. Fears over inflation and negative growth, FOMC aggressive tightening, the Ukraine war and supply chain disruptions from China’s zero-COVID strategy are all playing into fear levels for traders. The net result has been for risk aversion to flood markets, with indices lower and the USD outperforming. However, there has been a sense of consolidation hitting the USD in recent sessions, as traders look ahead to today’s US inflation data. Will this be confirmation of peak inflation? It is interesting to see bond yields starting to slip and USD is underperforming this morning.
Subsequently, US CPI inflation looms large on the economic calendar today. Signs have been growing that inflation may now be peaking and the CPI is expected to reflect this today. Both headline and core CPI are expected to drop almost half a percent on a 12-month basis. The reaction of US yields and USD to this decline will be a crucial driving factor for major markets in the US session.
Market sentiment is trying to look positive: The USD is slipping across the board today and equity markets are rebounding. These moves have not tended to last long recently.
Treasury yields are lower again: With both 2-year and 10-year Treasury yields showing signs of topping (near term at least) in recent days, yields are slightly lower again today.
Chinese inflation higher than expected: Headline CPI jumped to 2.1% in April from 1.5% in the previous month. This was above the 1.8% increase forecast. The PPI fell to 8.0% from 8.3%, although this was above the expected decline to 7.7%.
German inflation in line: Inflation in the Euro zone's largest economy increased slightly in April, to 7.4% from 7.3%. This was in line with consensus forecasts.
The flow of Russian gas will be watched: There are reports of Russia diverting gas to the separatist regions. Also, the prospect of a force majeure on Russian gas into Europe could be driven by the Ukrainian side. European countries remain dependent on Russian gas.
Cryptocurrency rebounds after huge sell-off: An enormous sell-off (Bitcoin has lost -25% in 6 days), there is a rebound of sorts today. Bitcoin has bounced from briefly dipping below $30,000.
Fed hawks are comfortable with 50bps moves: A couple of notable hawks on the FOMC (Mester and Bostic) said that they were supportive of the current pace of 50bps hikes in the next few meetings. However, Mester does not rule out 75bps if inflation remains elevated.
Several ECB speakers today: There are 8 ECB speakers throughout the day today, so this may increase volatility on EUR positions.
- US CPI (at 1330BST). Year on year headline CPI is expected to drop back to 8.1% in April (from 8.5% in March), with core CPI expected to fall to 6.0% (from 6.5%)
Major markets outlook
Broad outlook: Market sentiment is again trying to recover after disappointment yesterday.
Forex: USD slipping back ahead of US CPI.
- EUR/USD has continued to consolidate over the past two weeks in a range between 1.0470/1.0640. Given how selling pressure has continued to re-engage over the past year, there is still a sell into strength bias in the market. For now, though support is holding. Initial resistance is around 1.0600 with 1.0635/40 now key.
- GBP/USD has consolidated in its downside in recent sessions since the break of 1.2410. The consolidation over the past few days still shows little sign of serious recovery yet, so the outlook of selling into strength remains viable. However, there is a positive divergence threatening still, which may enable a near-term recovery. Initial resistance is around 1.2410/1.2475 which is a basis of overhead supply throughout the past week. A move below 1.2260 opens 1.2075.
- AUD/USD outlook has become increasingly bearish since the breach of support around 0.6965/0.7000. Another early rebound today is threatening a near-term rally. However, there is considerable overhead supply now between 0.6965/0.7030 to restrict recoveries.
Commodities: Precious metals and oil are trying to recover this morning following key breakdowns yesterday.
- Gold continued lower to break below $1850 yesterday. This has opened a test of the next support $1820/$1825, which is also around where the primary uptrend of the past three years comes in. However, momentum remains correctively configured with $t/$o suggesting that near-term rallies are a chance to sell. Resistance initially comes in at $1850/$1865, however, $1890/$1920 is more considerable on a medium-term basis.
- Silver broke below $21.40 yesterday to leave silver trading at its lowest since July 2020. The market has rebounded this morning, but there is considerable resistance of overhead supply now between $21.40/$22.00. The RSI is oversold but remains bearishly configured to suggest that rallies are a chance to sell.
- Brent Crude oil has fallen back to re-assert the six-week trading range between $99/$116 A bull failure yesterday has left a more negative bias within the range now, and how the market reacts to this morning’s rebound will be a gauge of whether a fallback to test the key support band between $98/$99 will be seen. There is a mid-range pivot band around $105/$107.
Indices: Another intraday bull failure on Wall Street leaves a negative bias.
- S&P 500 futures continue to falter in near-term rally scenarios. Having broken below 4000 to hit the lowest since April 2021, there is now a key resistance band between 4100/4140. Momentum remains bearishly configured and rallies remain a chance to sell.
- DAX has been in a downtrend channel for the past 7 weeks. Yesterday’s rebound may be leading to the latest rally but is still within the trend lower. The daily RSI remains stuck under 50 and any recovery here will be seen as an opportunity. Initial resistance is at 13,790/13,900. The initial support is at 13,270.
- FTSE 100 has recovered in recent sessions towards a test of the initial resistance between 7299/7315. However, a move above 7395 is needed to suggest a sustainable rally is forming. Initial support is at 7208 which could be a higher low above 7157.