InvestMacro

After blockbuster US inflation numbers and the ECB avoiding taper talk, stock markets hit all-time highs in the US with large cap growth stocks outperforming all other sectors as bond yields touched three-month lows. Declining rates are a boon to interest rate sensitive stocks like tech and investors have been moving out of value and into the growth sector for the whole of this week with the Nasdaq gaining 0.8% yesterday while the Dow edged higher by 0.1%.

Yesterday’s consensus-busting CPI data was boosted by hefty contributions in used car prices and airline ticket prices which analysts are seeing as short-term in nature – “transitory” in the Fed’s words! Bond markets are certainly taking this view as the market has concluded that enough inflation risk is now discounted. This should see more pressure on the dollar which continues to trade around 90 after a few narrow range days this week.

EUR/USD nears 1.22

The ECB left policy measures unchanged but their upbeat tone saw them move the balance of risks to broadly balanced. Growth and inflation forecasts were revised higher but the latter was downplayed with the 2023 projection of 1.4% pointing to a very gradual taper of bond buying. President Lagarde swatted away any taper talk during the press conference and the ECB will remain flexible on the amounts of bond buying and continue with very accommodative monetary conditions through the summer.

EUR/USD was fairly unmoved by the meeting and bulls need to claim 1.22 before they can revisit the may highs.  Strong support below lies at 1.21 with the 50-day SMA just below.

FTSE eyeing new highs

The UK economy missed forecasts for its GDP figures this morning printing 2.3% m/m, up from 2.1% but one tenth below analyst estimates. The FTSE has found support above 7,000 and looks be making new highs for the month this morning. The index is trading above the upward sloping 50-day and 100-day SMA in a bullish trend.  7,100 is a round number target before the May high at 7164.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Investors who have been craving for some volatility this afternoon had their wishes fulfilled following the May inflation report that showed prices rising in the United States at their fastest rate since 2008.

The consumer price index (CPI) jumped to 5% year-on-year, up from 4.2% in April and topping the 4.7% forecast. Core inflation, which strips out volatile items like food and energy rose 3.8% annually, its biggest increase since 1998. This report will most likely fuel concerns over rising inflationary pressures in the United States as the economy bounces back from the pandemic. While the hot inflation data may not be enough to force the Fed to make any policy moves anytime soon, it may prompt the central bank to think twice about their “transitory” mantra while fueling speculation over official taper discussions.

Looking at the reaction across markets, US Treasury yields spiked above 1.53%, US stocks opened higher while the dollar whipsawed.

In other news, US jobless claims fell to 376,000 last week which was above the median economist estimate but the lowest level since 13 March last year. Given how the Federal Reserve has made it clear to markets that employment is a key component in its mandate, the improving jobless claims could add to the growing list of factors that may bring more hawks to the policy discussion table.

Looking at the technical picture, the Dollar Index has found some support above the 90.00 level. A daily close above this point could open the doors towards 90.45. Alternatively, a decline back below 90.00 may inspire a move towards 89.52.

ECB leaves rates and stimulus unchanged

As widely expected, the European Central Bank kept its interest rates and stimulus program unchanged despite rising inflation across the bloc.

In its statement, the central bank said it would continue with its mammoth €1.85 trillion pandemic emergency purchase programme (PEPP) until at least March 2022 or until its judges that the Covid-19 crisis phase is over. The council stated that the pace of the PEPP purchases would be kept unchanged at a “significantly higher pace during the first months of the year”.

When it came to the staff projections and post-meeting press conference, Christine Lagarde sounded optimistic over the economic outlook. The growth forecasts for 2021 and 2022 were raised with GDP seen expanding 4.6% this year and 4.7% in 2022. In regard to inflation, the forecasts were increased to 1.9% in 2021 from 1.5% and 1.5% in 2022 from 1.2%. This means the ECB still sees current inflation as being temporary.

All in all, Lagarde struck an upbeat tone on economic growth and saw broadly balanced risks and stable financial conditions Despite the rosier outlook, the ECB maintained a safe distance from any mention of taper talks. The euro has been choppy but has found a bid above 1.2180 since the end of the press conference.

Commodity spotlight – Gold

Gold was injected with volatility on Thursday after the US inflation data exceeded market expectations. The precious metal appreciated as further signs of inflationary pressures boosted appetite for the commodity which is seen as a hedge against inflation. However, upside gains may be capped if inflation fears send US Treasury yields climbing and boost the dollar.

Lagging indicators remain in favour of the bulls with the MACD trading above the zero level while the 50-day Simple Moving Average has crossed above the 100-day. Gold bugs remain in the driving seat above the $1855 support level with $1916 acting as the first level of interest if $1900 proves to be weak resistance. Beyond $1916, gold has the potential to test $1927 and the year-to-date high a t $1959.

Alternatively, sustained weakness below $1900 could trigger a decline back towards $1870, $1855 and $1842.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Grab the popcorn everyone and fingers on the mouse! Everyone in the market has been eagerly anticipating today’s risk events with the start of the ECB meeting and the US inflation numbers being released at 12.30GMT. Narrow ranges and quiet markets have been the order of the week so let’s hope there is some excitement later today.

Transitory versus sustained?

Headline and core prices are expected to jump to 4.7% and 3.5% respectively in the US CPI numbers with base effects being the primary reason for the surge higher. This should be the peak for US prices with the trend starting to come down in June, although some economists still believe they will remain elevated and above target through the rest of the year. But the Fed is in no rush to respond as it is happy to look through the spike in rising prices, especially as the latest US job figures provide a further excuse for its patient stance.

We’ve seen bond markets move already with yields falling steadily all week with the widely-watched US 10-year Treasury now trading below 1.5%, the first time since March. A bumper headline number to the topside of estimates is surely needed to arrest this fall, but bond markets are known to generally lead markets so it will be fascinating to see who is right later today.

USD/JPY has been tracking sideways this week in a narrow range around 109.50. A bumper CPI print would push the pair higher and challenge last week’s highs at 110.32/33 while support rests at the 50-day SMA at 109.10 near this week’s lows.

ECB meeting and taper talk

ECB officials have recently been talking down any mention of tapering bond buys in the emergency ECB programme but there are some expectations that there may be a small change in guidance. This would come in the statement with a shift from “significantly” to “moderately” higher than at the start of the year and see buying cut to €70bn/month versus the current rate of €80bn/month. If President Lagarde does not repeat this “taper on hold” message or there is a communication error, then the risks are skewed to a higher euro as market expectations are generally currently cautious.

EUR/USD has been treading water this week either side of 1.22. Any bullish talk from Lagarde will see the pair push higher towards end of May highs at 1.2266 with the January peak at 1.2349. Last Friday’s low at 1.2103 is support if the ECB gets out its very patient and vigilant card.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.