Growing worries about inflation have gripped markets recently and left investors on edge.

Wall Street slipped on Monday, dragged down by declines among technology shares as concerns over rising prices soured risk sentiment. Although Asian stocks opened firmer this morning and US futures are positive, caution ahead of Wednesday’s FOMC meeting minutes could limit gains across equity markets.

Federal Reserve policymakers have repeatedly played down the inflation risk as transitory. However, the volatile movements witnessed across financial markets recently suggests that investors think otherwise. If inflation proves to be longer lasting, this could force the Federal Reserve into action sooner rather than later. Such a development would be bad news for equity markets, especially expensive growth stocks sensitive to higher interest rates.

Dollar Index dips below 90

The dollar stumbled into Tuesday’s trading session under renewed pressure thanks to dovish comments from the Fed’s Clarida who indicated that it is too soon to talk about tapering, citing the weaker than expected April labour market report. Dallas Fed President Robert Kaplan, a known “hawk” on the FOMC, also spoke on Monday and said he believed price pressures would moderate in 2022. The Greenback has weakened against every single G10 currency this month with the Dollar Index (DXY) approaching levels not seen since late February. If the DXY secures a solid daily close below the 90.00 psychological support, this signals further downside with 89.70 acting as the first level of interest.

Eurozone GDP in focus

The euro slightly weakened against every single G10 currency excluding the dollar and Japanese yen on Tuesday morning ahead of the second estimate of the Eurozone GDP numbers. According to the flash estimates back in April, the European economy shrank 0.6 percent in the period from January to March 2021 and the euro may offer a muted reaction if the second estimate meets expectations. Looking at the technical picture, EURUSD has the potential to push higher if a solid daily close above 1.2170 is secured, a move fuelled by the weaker dollar.

Commodity spotlight – Gold

Gold bulls continue to draw strength from a weaker greenback and inflation fears. The precious metal has gained 5.7 per cent this month and could extend gains as inflation concerns continue to grow. Where the metal closes this week may be influenced by the FOMC meeting minutes, but a solid break above $1870 could open the doors towards $1900.

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