[Market Review
US Dollar Index Steady Ahead of Fed Rate Resolution
After a violent pull-up on Friday, the US dollar index held sideways around 90.5.
U.S. inflation expectations rose to an 8-year high. Meanwhile, the Fed admitted $583.9 billion in fixed-rate reverse repos, renewing a record high. All these data strengthen the tapering of bond purchase expectations. However, before the Fed’s interest rate resolution this week, investors maintain a cautious attitude, the dollar trend did not appear dramatic fluctuations.
As for Biden’s stimulus plan, the latest news said that Democratic U.S. Senator Manchin said that senators from both parties will hold a series of meetings this week and will develop infrastructure proposals by the weekend. We can keep an eye on that.
Gold fell before it rose. Next, let’s focus on gold. Earlier yesterday, gold continued its pullback. Gold prices fell below the three major hurdles of 1870, 1860 and 1850 before the U.S. session, touching a new one-month low of $1844, but suddenly pulled up and recovered most of the losses early in the U.S. session, with gold prices back above $1860. U.S. inflation is expected to strengthen the discussion of tapering bond purchases, as well as bitcoin back to the 40,000 mark, put pressure on the gold price. However, gold was somewhat supported by the European Central Bank’s adherence to stimulus.
Silver oscillated broadly. Silver played a similar down-then-up scenario. Silver prices had previously fallen to near $27.45 before returning to $28. However, by this morning, silver prices turned down again.
The euro is narrowly oscillating. In non-US currencies, the EURUSD traded in the 1.2090-1.2130 range during the day. ECB President Lagarde said it was too early to discuss ending the emergency anti-epidemic bond purchase program. ECB management member Villeroy pointed out that the ECB stimulus policy should be at least as long as the Federal Reserve. It is reported that the EU is now starting to offer 10-year euro bonds to finance the recovery plan.
The British pound is not very volatile. Like the euro, the pound also maintained a sideways oscillation, the pound against the dollar during the day mainly traded in the range of 1.4070-1.4120. The pound is currently facing two major risks. One is the delayed unsealing of the United Kingdom, but the pound is largely unaffected by this. The second is the British-European trade dispute, the United Kingdom and the European Union failed to agree on a solution to the trade problems of Northern Ireland after the United Kingdom’s exit from the European Union. According to the Guardian, in an effort to break the Northern Ireland Brexit impasse, the UK’s chief Brexit negotiator and the vice president of the European Commission are expected to meet this week. We can keep an eye on the development of the event.
U.S. oil hovers near $70. Finally, a look at the oil market. Earlier, optimistic expectations for summer travel saw U.S. oil break strongly above the $70 mark. However, the delayed unblocking in the UK and the expected increase in U.S. crude oil production caused oil prices to give back some of their gains. The market reacted negatively to a U.S. EIA forecast that shale oil production, which accounts for more than two-thirds of total U.S. production, is expected to increase by about 38,000 barrels per day in July.
[Risk Warning].
U.S. bond yields will rise if bond purchase tapering is expected to increase
Danske Bank said the latest Fed interest rate resolution may be less important and the Fed is expected to continue bond purchases at the current pace until substantial further progress is made, but Fed Chairman Jerome Powell will acknowledge at a press conference that discussions on tapering bond purchases are close.
The bank still expects the Fed to signal a rate hike in 2023, while the likelihood of a rate hike is currently zero. The tightening of liquidity in the U.S. will eventually strengthen the dollar, but the exact timing remains highly uncertain. There is a risk that U.S. Treasury yields will rise this week, but we may need to see an actual statement of tapering of bond purchases before there is a new sharp rise in U.S. Treasury yields. The 10-year U.S. Treasury yield is expected to be around 2% by year-end.
The dollar bear market is far from over, still weighed down by two major factors
Market analysts say the dollar’s failure to fall further looks like a harbinger of impending strength, but don’t mistake the 15-month-long decline for an end. Any short term rally will be quickly sold off as fundamentals and overall market sentiment still firmly point to dollar weakness.
The recent consolidation is more due to a lack of new catalysts than a change in the long-term outlook. The decline in volatility is not just a problem for the dollar. Most of the rally in most major currencies spurred by the reopening after the outbreak has been mostly absorbed. Negative U.S. real interest rates and a ballooning current account deficit will continue to weigh on the dollar as long as there are no major changes in Fed policy.
Pound’s downside momentum remains intact Focus on support at 1.4080
UOB Singapore noted that the pound fell to 1.4095 against the dollar on Friday, and despite the relatively large drop, the downside momentum is still not over. Support at 1.4080 may be tested next, followed by 1.4050, with the next support level at 1.4005. As long as the pound does not rise through strong resistance at 1.4185 in the next few days, the likelihood of a close below 1.4080 will increase. The current first and second resistance levels are 1.4140 and 1.4160, respectively.
[Key Outlook].
20:15 Bailey may release a hawkish signal
First of all, let’s pay attention to the upcoming speech of Bank of England Governor Bailey. Late last month, he said that the imbalance in the economic recovery is expected to ease as more service markets reopen, and that higher inflation is only temporary and will fall again after exceeding the 2% target. The Bank of England is quite satisfied with the appropriate policy currently set, and economic growth and inflation trends do not support the idea of more stimulus measures.
He also said that the current policy guidance on easing quantitative easing is “too directive”. It seems that his speech laid the groundwork for tightening monetary policy. Shortly after, Bank of England member Frigidaire said that if the transition of the mandatory paid leave program is smoother, then some earlier rate hikes would be appropriate, and that the first rate hike in 2022 may be followed by further modest tightening.
Therefore need to be alert to Bailey will release a hawkish signal. On balance, Bailey may say that the economy is steadily recovering and that higher inflation is only temporary, suggesting that the Bank of England may gradually tighten monetary policy. Also need to pay attention to his expression in terms of interest rate hikes, if his speech strengthens the Bank of England may raise interest rates early expectations, the pound is expected to strengthen.
20:30 U.S. retail sales data fears weak performance
Next, let’s look at the U.S. will release the monthly retail sales rate for May. The monthly U.S. retail sales rate has been volatile in recent months, soaring to 9.7% in March and falling to 0% in April. Some agencies commented that total U.S. retail sales reached a record $619.9 billion in April, supporting economists’ expectations for strong household spending for the rest of the year. As concerns about the epidemic dissipate, consumers may begin to shift more toward spending on services such as entertainment and travel, and increased savings supported by fiscal stimulus should support retail demand.
Currently, the market is expecting a monthly U.S. retail sales rate of -0.8% in May, and if the figure meets or exceeds expectations, the dollar index is expected to gain support. Conversely, if it is lower than expected, the dollar index may suffer a blow.
Currently, market expectations for this data are low, but recent U.S. data releases have been good, so you need to be wary that retail sales release data is better than expected, which in turn will support the dollar index.
Wednesday 04:30 API crude oil inventories may decrease
Finally, let’s focus on API crude oil inventories. Last week, API reported that US crude oil inventories decreased by 2.108 million barrels. The subsequent release of EIA crude oil inventories decreased by 5.241 million barrels. The financial blog Zero Hedge commented that crude oil inventories fell more than expected, but product inventories rose sharply and overall crude oil inventories are now below the 5-year average. The four-week rolling average of gasoline demand showed the first decline in four weeks. This seems to indicate that U.S. crude oil demand has fallen back.
By the end of the week, the market expects that U.S. API crude oil inventories could decrease by 3 million barrels for the week ending June 11. If the release is larger than expected, oil prices may come under pressure; conversely, oil prices may rise.
In addition, it is also necessary to pay attention to the news from Iran, where negotiations between Iran and multiple countries are progressing slowly and there is uncertainty about crude oil output.
On the demand side, the International Energy Agency said that oil demand rebounded strongly in the second half of 2021, with energy demand expected to increase by 4.6% in 2021 and potentially return to pre-2019 levels in the coming year. Peak U.S. summer gasoline demand has begun and U.S. driving activity has strengthened significantly. Demand for jet fuel is also picking up as the weather turns warmer, vaccinations advance and blockade measures ease. Taken together, there is the potential for further tightening in the oil market, which would support oil prices.
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