Daily Market Outlook, May 05, 2021

Daily Market Outlook, May 05, 2021

The most notable overnight developments came in the form of comments by Treasury Secretary Janet Yellen which contributed to the initial bid as highlighted in today’s Asia Open: Yellen stated when discussing fiscal efforts that “it could cause some very modest increases in interest rates to get that reallocation. But these investments are what our economy needs to be competitive and be productive. I think that our economy will grow faster because of them…It may be that interest rates will have to rise a little bit to make sure our economy doesn’t overheat.”

Note that Yellen’s remarks were more aimed at highlighting optionality rather than advocating for a hawkish shift in policy guidance. The comments are not necessarily at odds with recent points made by Fed officials. Powell has on multiple occasions acknowledged that the Fed would have the means of countering any unwanted inflation that “materially moves above 2% and persists above that range.” Yellen affirmed after the NY close, and clarified via a Wall Street Journal event that she is neither “predicting nor recommending higher interest rates.” This appears to have calmed the market explaining the aforementioned rebound in risky FX.

Asian equity markets are mixed this morning although China, Japan and South Korea are all still closed for holidays. Singapore announced stricter anti-Covid-19 measures in response to a recent rise in cases including some instances of the India variant. Japan’s PM is reportedly still undecided on whether to end the state of emergency in three areas.

The Australian April services PMI was revised higher to 58.8 from 58.6 signalling improving economic conditions. In contrast, however, India’s services index dropped to a three-month low in April reflecting the impact of the latest rise in Covid-19 cases. In New Zealand, unemployment fell by more than expected in Q1 as the economy reopened.

Today’s data calendar is dominated by April updates for services. They are generally expected to provide further support to the view that the sector is strengthening as Covid-19 cases fall and restrictions are being eased. In the Eurozone, the PMI measure will be an update to the first reading from two weeks ago, although the data for Italy and Spain are new. That first estimate saw the Eurozone measure move above the 50 level that signals expansion for the first time since last August. Admittedly Monday’s second reading for April manufacturing was revised down modestly from the initial outturn. However, there seems no significant reason why the services measure will follow and expect it to hold above 50. In the UK, the April update will be released Thursday as it is delayed by a day due to the Bank Holiday.

In the US, the April ISM survey for services is a first reading. The March print was a multi-decade high signalling strong growth in the sector as Covid-19 concerns fade. The already released services PMI for April points to another rise. One note of caution is that the ISM manufacturing index was down from March but nevertheless we look for another rise in the services reading. Also of interest in the US will be the ADP private sector employment estimate for April, which as usual will be watched for clues ahead of Friday’s official payrolls data. The ADP reading for March was the strongest for six months although it still underestimated the official report. Another strong gain is expected for April given growing signs of an improving labour market.

A number of Fed speakers are scheduled for today. Amongst them Chicago Fed President Evans is normally one of the most ‘dovish’ while in contrast, Cleveland Fed President Mester has typically taken a harder line. However, for now both seem likely to repeat the message from last week’s policy meeting that the Fed sees no urgency to change policy

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby)

EUR/USD: 1.2025-30 (560M), 1.2040 (367M), 1.2050-55 (1BLN), 1.2120 (650M)

USD/CHF: 0.9175 (200M). EUR/GBP: 0.8635-50 (300M)

AUD/USD: 0.7700 (481M), 0.7750 (1BLN), 0.7775 (488M)

0.7800 (452M), 0.7850-70 (1BLN)

USD/CAD: 1.2300 (1.1BLN)

USD/JPY: 108.85-109.00 (607M), 110.00 (293M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.2120 bullish above

EURUSD From a technical and trading perspective, the close sub 1.2080 warns of deeper corrective cycle to test support at 1.1990/60 failure here opens 1.1850

Flow reports suggest topside congestion through to the 1.2160 level from the highs and then while there maybe some weak stops just beyond stronger offers are likely through the level to the 1.2200 area with weak stops again appearing but very limited and the 1.2250 again seeing the stronger offers through to the 1.2300 level with the market then having the ability to test this year’s highs, downside bids light through to the 1.2000 area and then weak stops on a move through the 1.1920 level opening the market to the 1.1850 area where stronger congestion appears

GBPUSD Bias: Bullish above 1.39 bearish below

GBPUSD From a technical and trading perspective, as 1.3960 contains upside attempts look for a test of range support towards 1.37.

Flow reports suggest topside offers through to the 1.3940 area where offers are likely to be a little stronger with further offers likely to be into the 1.4000 area with stops likely through the 1.4020 area and opening a stronger move higher, downside bids strong into the 1.3800 with congestion likely to continue through the level and while there may be some stops that congestion is likely to continue through to the 1.3750 level, light bids through the level but increasing again into the 1.3700 level with congestion then continuing through the level.

USDJPY Bias: Bullish above 108 targeting 112

USDJPY From a technical and trading perspective, as 107.50 acts as support there is potential for a test of the pivotal 108.50, through here will open another look at 110.

Flow reports suggest downside bids into the 107.80 however, a break through the level is likely to see weak stops and breakout stops appearing and the market free to quickly test 107.50 and an old trendline then nothing until closer to the 107.00 area where stronger bids start to appear but the downside opening to Feb levels, topside offers through to the 110.00 level with light congestion through the figure level and weak stops possibly limited and stronger offers likely increasing on a move higher towards the 111.00.

AUDUSD Bias: Bearish below .7700 bullish above

AUDUSD From a technical and trading perspective, the closing breach of .7730 has relieved downside pressure opening a move to test offers towards .7820

Flow reports suggest topside offers continue through the 0.7800 area with a break through the 0.7820 area likely to see weak stops and a test towards the sentimental 0.7850 area however, while there maybe some offers in the area the market looks to be fairly open through to the 79 cents level and ultimately ranges from the end of Feb, downside bids light through the 0.7700 level with weak stops likely on a move through the 0.7680 before stronger bids around the 0.7650 area and continuing through to the 0.7600 likely increasing in size, any further moves are likely to see strong support into the 0.7550 to calm the situation

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