Caution returns as inflation fears mount

Stocks in Asia were shaky on Tuesday morning following the lack of cues from Wall Street overnight due to the Memorial Day holiday in the US.

Nevertheless, there is a sense of caution in the air after red-hot inflation readings from Germany sparked concerns over how aggressive the ECB should be in taming the inflation beast. Surging oil prices have rubbed salt into the wounds, compounding inflation fears after the European Union agreed to cut oil imports from Russia. In the currency space, the dollar rose slightly but is still heading towards its first monthly decline in five months, while gold prices remain trapped within a range. With inflation fears chipping away at risk appetite, European futures are pointing to a negative open this morning.

A cautious outlook is likely to remain the name of the game for the rest of the week as investors juggle inflation concerns, recession fears, and ongoing geopolitical risks. Sentiment could also be influenced by key economic reports from major economies, including the US jobs report on Friday.

German inflation nears 50-year high

Last week, ECB President Lagarde heightened expectations around the bank raising interest rates in July and September. Those expectations have been boosted by the latest inflation figures from Germany, which revealed consumer prices rose 7.9% in May from 7.4% in April, its fastest pace since the beginning of 1974. Given how geopolitical risks and upward pressure on energy, commodity, and food prices may feed the inflation beast, this will pressure the ECB to act.

This morning sees the release of the latest Eurozone inflation data with expectations of another record high. Looking at the technical picture, EURUSD could challenge 1.0850 if 1.0700 proves to be reliable support.

Will the US jobs report offer the dollar a lifeline?

The dollar is set for a monthly decline despite rallying to levels not seen in 20 years two weeks ago.

Buying sentiment towards the greenback took a hit last week as the less hawkish-than-feared Fed minutes kept bulls at bay. However, king dollar could have an opportunity to fight back if the monthly US payrolls report on Friday exceeds expectations. Markets are expecting the US economy to have created 329k jobs in May with the unemployment rate dropping to 3.5% and average hourly wages seen rising 0.4%.

Regarding the technical picture, the Dollar Index (DXY) certainly needs some love. Prices are under pressure on the daily charts with 101.00 acting as the next key level of interest. If bulls are able to fight back and keep above this level, then a move towards 103.00 could be on the cards.

Commodity spotlight – Oil

Oil bulls are certainly in high spirits after the EU agreed to cut oil imports from Russia. This development comes at a time when demand is expected to rise amid the US and European summer driving season.

The global commodity is likely to extend gains thanks to the improving demand outlook and signs of tight supply amid ongoing geopolitical risks. Although fundamentals are favouring bulls, there are some themes that could create some obstacles down the road. If China is forced to renew Covid-19 restrictions, this could weigh on the demand outlook, especially if they continue to impact growth on the world’s largest energy consumer.

Looking at the technical picture, Brent seems to be pushing higher on the daily charts. If the upside momentum holds, prices could test $123.70 and $130.00 respectively. Sustained weakness below $120 could encourage a decline back towards $114.40 and $100.00.