The US dollar continues to weaken. The US and UK are closed for the holiday. Amid light holiday trading, investors weighed the impact of rising inflation and the Fed’s dovish stance on U.S. assets, and the dollar index came under slight pressure and has now fallen below the 90 mark.
PCE data released on Friday rose 3.1% from a year earlier, the largest year-over-year gain since July 1992. PCE is the Federal Reserve’s favored inflation indicator.
In addition to the PCE, the Fed also focuses on the Common Inflation Expectations Index CIE. the CIE has continued to pick up since the third quarter of last year, recording 2.01% in April this year, a new high for 2015. The soaring CIE underscores the warming of market expectations. Despite this, the CIE has still not reached the average value of 2.06% since 1999. As a result, some analysts say there is room for the Fed’s tolerance of inflation expectations.
Earlier, Fed official Balkin said that the employment and population ratio is being closely watched and is unlikely to vote in favor of a policy change at least until that data returns to pre-epidemic levels. The U.S. employment-to-population ratio was 61.1% before the epidemic. And as of April this year, the indicator rose only slightly to 57.9% from 57.4% at the end of last year. For more information on the U.S. employment situation, we can keep an eye on Friday’s non-farm payrolls report.
Gold had a bright May performance. Next, let’s focus on gold. Gold prices rose slightly during the day and are currently trading above $1,900. Gold accumulated a 7.79% gain in May, its biggest monthly gain since July last year, amid a declining dollar performance.
Silver rose above $28. In silver, the price oscillated below $28 for most of the day, but finally managed to close above that mark, closing up 0.33%. Silver accumulated an 8.26% gain in May, its biggest monthly gain since last December.
The euro rallied back above 1.22. In non-U.S. currencies, the euro rose more than 20 points intraday against the yen and is now running above 1.22. The euro was boosted by a weaker dollar and a German inflation rate that exceeded expectations.
Germany released CPI data for May on Monday, which reached a year-on-year increase of 2.4%, a new high since October 2018, influenced by local easing of epidemic control measures. Earlier, the Bundesbank had said that inflation was likely to rise to a level of 4% this year, a situation not seen since the creation of the euro.
At one point, the British pound rose above the 1.4250 mark. Let’s look at the pound again. Like the euro, the pound climbed shakily during the day, breaking through the 1.4250 handle at one point, before pulling back slightly.
U.S. oil returned to $67. Finally, let’s look at the oil market. U.S. oil has shaken higher during the day and is now back at $67. There is optimism that fuel demand will grow in the next quarter, supporting oil prices. However, a spokesman for the Iranian Foreign Ministry said that significant progress has been made in the U.S.-Iran negotiations. If things go well, Iran could increase oil production, which would overshadow the outlook for oil prices. Next, we can keep an eye on the OPEC meeting.
Gold may strengthen further and is expected to rise to 2000 by the end of the year
Precious metals information website analysts said the latest data from the U.S. Commodity Futures Trading Commission showed that rising inflationary pressures, continue to support gold prices, forcing hedge funds and investors to cover their short positions in gold. Many market analysts and investors expect gold prices to rise to $2,000 by the end of the year.
Analysts at TD Securities warned that the gold market may be at a new crossroads. Inflation concerns may prompt the Federal Reserve to tighten policy sooner than expected. However, if inflation is indeed temporary, then the easing could be extended and eventually gold prices could strengthen further.
The euro fears continued gains Long-term target seen at 1.25
The Spanish Foreign Bank said that the euro is appreciating earlier than expected. Confidence in the eurozone recovery is growing as investors turn to European asset markets. On the other hand, the strength of the dollar in the first quarter of the year seems to be disappearing, with the dollar no longer reacting positively to strong data from the US. Once the new crown crisis is nearing an end and the recovery continues, the key point will be the way the Fed and the ECB reverse their expansionary policies and the timing of the start of the reduction of bond purchases. In the long term, the euro is expected to reach a long-term equilibrium level of around 1.25 against the dollar in 2022.
Japan’s slow economic recovery, the yen has room for further sell-off
Mitsubishi UFJ pointed out that in the context of global reflation, the Japanese economy is slow to recover, so the yen is under downward pressure. Although the dollar as a whole is weakening, the yen has much more room to depreciate than other non-U.S. currencies. Since the start of Japan’s fiscal year, cross-border portfolios have not yet shown significant outflows from the yen, but speculative markets have been quick to prepare for a weaker yen.
In addition, the bank expects cross-border outflows from Japan to continue to increase. There have been three weeks of net foreign bond sales in the past four weeks, compared to total bond purchases of just 1.4 trillion yen this fiscal year. With longer-term U.S. bond yields becoming more stable, the yen is expected to have room for further selling in the coming weeks.
12:30 Australia Fed may maintain a cautious stance
First, to focus on the Australian Fed will announce the interest rate resolution. A survey shows that all industry experts are currently predicting that the Australian Fed will keep the policy rate unchanged at the ultra-low level of 0.1%, and will not launch a negative interest rate policy for the time being, nor is it likely to raise interest rates immediately. At the same time, the Australian Fed’s stance on the policy outlook is not expected to differ much from the previous one, which means that the Australian Fed will not start raising interest rates until at least mid-2023.
In addition, the Australian Fed may remind investors that it will decide whether to further expand the size of its asset acquisition measures at its July meeting. This should have a suggestive impact on the market. Many economists expect that the Australian Fed will not extend the yield target, but may further expand QE.
If the Fed maintains a dovish attitude, then the Australian dollar may come under pressure, so please pay attention.
17:00 Eurozone May CPI is expected to perform brightly
This afternoon, the eurozone will release CPI data. The Eurozone CPI started the year at a steadily higher annual rate, recording 1.6% last month. Driven by higher energy prices, the euro’s headline inflation rate reached 1.6% in April. This pressure is likely to intensify further in May. core inflation fell from 0.9% to 0.7% in April, mainly due to changes in transport service prices. Overall, price pressures remain constrained, with the economy restarting and travel gradually recovering, residential and transportation services may become more important drivers of potential prices in the euro area.
Currently, the market expects the euro zone May CPI annual rate of 1.9%, if the published value is greater than expected, or good for the euro; conversely, will be negative for the euro.
Also announced is the monthly CPI rate, the current market expectation is 0.2%. With the epidemic under control, Europe’s economy will gradually recover and inflation data is expected to move higher.
TBD OPEC+ to confirm production increase plan
Next, come to focus on the OPEC+ ministerial meeting. The organization expects a severe tightening of the global oil market and a significant drop in oil stocks for the rest of the year if no further production increases are made. According to a report by the Joint Technical Committee, OPEC+ producers will still have a lot of spare capacity when they complete their current plans to increase production, and there will be plenty of room to increase production later in the year. Analysts generally expect OPEC+ to confirm plans to increase oil supply: by 840,000 barrels per day in July and resume the process of producing more than 2 million barrels this summer.
For crude oil traders, how fast OPEC+ will increase production will be the focus of attention. Watch for hints from OPEC+ at this week’s meeting on its strategy for the next quarter. Once the current production increase is completed in July, OPEC+ will still have a lot of spare capacity, which theoretically equates to nearly 6 million barrels per day, or about 6% of global supply. Traders have already set their sights on Saudi Arabia and Russia’s stance.
At this point, the market is not expected to make a decision on policy changes beyond July at this meeting, but any hints given by ministers will be closely watched.
Also, keep an eye on the U.S.-Iran negotiations. For its part, Iran said that Iran and six world powers have made significant progress in talks to restart the 2015 nuclear deal, but there are still important issues to be resolved. The director general of the International Atomic Energy Agency said technical discussions with Iran “have not yielded the expected results.” And data from the U.S. Energy Information Administration showed that the U.S. imported 1.033 million barrels of crude oil from Iran in March, despite the sanctions imposed on the country.
Australian GDP to pick up at 09:30 on Wednesday
Finally, pay attention to the GDP data that will be released in Australia. Starting from the second quarter of last year, Australia’s GDP recorded -6.3%, and then gradually recovered, recording -1.1% in the fourth quarter. With the outbreak gradually under control, Australia’s economy is steadily improving. Previously, the Commonwealth Bank of Australia raised its forecast for Australia’s GDP growth from 4.4% to 4.7%.
Currently, the market expects Australia’s first quarter GDP to be at an annual rate of 0.3%. If the published value is larger than expected, it may be positive for the Australian dollar; conversely, it will be negative for the Australian dollar.
Since the May meeting of the Australian Federal Reserve, Australian economic data has generally been in line with expectations, and the lack of unexpected signs of upside. If this data performance is unusually beautiful, it may be able to help the Australian dollar to strengthen.