Daily Market Outlook, May 19, 2021
Main US equity indices closed lower for a second day, with the soft risk tone following through into the Asian trading session. The Nikkei fell by 1.3%, erasing some of the previous day’s rise. Markets remain volatile, predominantly on concerns about inflation, but also on new variants and a resurgence in Covid cases in some parts of the world. On the one hand, there is progress on vaccinations and the economic recovery remains on track.
UK April CPI inflation, released this morning, jumped up to 1.5%y/y in line with market expectations from 0.7%y/y in March. As expected, the increase was driven primarily by higher energy prices, although core inflation (excluding food and energy) also rose to 1.3%y/y from 1.1%y/y. It still leaves headline inflation below the 2% target and the increase was therefore not as a big as in the US. Nevertheless, further rises are expected in the coming months, which will probably push it above target in the second half of the year. At the House of Lords yesterday, BoE Governor Bailey reaffirmed the view that the factors pushing inflation above target this year are likely to be temporary.
Ahead this morning, the final reading of Eurozone April CPI is expected to be unrevised at 1.6%y/y, which was up from 1.3%y/y in March and 0.3%y/y at the end of last year. As elsewhere, headline inflation has risen significantly this year mainly because of energy prices. Core CPI inflation is more subdued at 0.8%y/y. The ECB’s March forecasts point to headline inflation moving up to 2% by the end of the year, but the recent rise in the oil price could bring that forward to Q3. In any event, inflation is expected to fall back quickly in early 2022. The ECB, meanwhile, is expected to publish its Financial Stability Review.
The main focus today will be on this evening’s minutes of the 27/28 April FOMC meeting, and comments from St Louis Fed President Bullard and Atlanta Fed President Bostic in separate events this afternoon. The policy message in the minutes is likely to continue to be dovish, and that will probably be reflected in the more up-to-date views from policymakers indicating that the spike in inflation is likely to be temporary. That may provide some reassurance to markets that remain concerned that central bank rhetoric will change as the recovery gathers momentum.
G10 FX Options Expiries for 10AM New York Cut
(Hedging effect can often draw spot toward strikes pre expiry if nearby)
EUR/USD: 1.2150 (1.7BLN), 1.2170-75 (530M), 1.2200 (500M)
GBP/USD: 1.4100 (228M)
AUD/USD: 0.7735 (546M), 0.7875-80 (401M)
USD/CAD: 1.2055 (336M)
USD/JPY: 108.75 (227M), 108.90-109.00 (850M), 109.50 (905M)
Technical & Trade Views
EURUSD Bias: Bearish below 1.2120 bullish above
EURUSD From a technical and trading perspective, the close through 1.2120 is constructive but bulls must defend 1.21 to set up a test of 1.2270/80.
Another EUR 5-billion nearby between Wednesday and Friday. DTCC data shows 2.3-billion Euro's between 1.2150-75 Wednesday 1.7-billion between 1.2160-75 Thursday, 1-billion 1.2160-70 Friday. FX option prices retain a small EUR/USD bullish bias for now
Flow reports suggest topside offers strong through the 1.2275 level and increasing on a push above the 1.2300 level all the way to the 1.2350 before weak stops are joined by buyers on the move through the highs of the last couple of years, downside bids light through the 1.2200 area and weak stops likely on a dip through the level and opening a quick move through the 1.2150 area and towards 1.2100 where stronger bids are likely.
GBPUSD Bias: Bullish above 1.40 bearish below
GBPUSD From a technical and trading perspective, as 1.3960 now acts as support, bulls will target a retest of 1.4230’s. Only a close back below 1.40 would concern the bullish thesis.
Flow reports suggest topside offer through the 1.4200 level with weak stops likely to open a test through to the 1.4250 before stronger offers start to appear through to the 1.4300 level and a long term trend line likely to have attracted option barriers, a break here does however likely see stronger stops appearing and the market opening to a larger move towards the 1.47-1.48 area. Downside bids light into the 1.4100 with weak stops on a move through the level to test quickly through weak sentimental 1.4050 and stronger bids then appearing for any test of the 1.4000 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 light through the 109.00 level with weak stops below the 108.80 and opening the market to a new test of the 108.00 level, stronger 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 111.0
AUDUSD Bias: Bearish below .7790 bullish above
AUDUSD From a technical and trading perspective, as .7790 now acts as support bulls will target a retest of prior cycle highs above .80 cents. The breach of .7790 refocuses attention on the downside as .7820 contains upside attempts, look for a test of .7680.
Flow reports suggest downside bids light through the 0.7750 area and stronger bids likely continue through to the 0.7700 area before weak stops appear below the 0.7680 and a stronger 0.7650 area then holds the downside, topside offers into the 0.7800 area with weak stops through the 0.7820 before opening for a new run higher and strong offers likely through the 0.7840-60 area to build for the 79 cent level.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 65% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 75% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Futures and Options: Trading futures and options on margin carries a high degree of risk and may result in losses exceeding your initial investment. These products are not suitable for all investors. Ensure you fully understand the risks and take appropriate care to manage your risk.
Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!