U.S. Retail Sales recorded a negative monthly rate in May. The dollar index continued to trade around 90.5 during the day. The Federal Reserve admitted $509.5 billion in fixed-rate reverse repos on Tuesday, with the size of reverse repo usage down $74 billion from the previous day, the largest drop since April 1.
In terms of economic data, U.S. retail sales recorded a monthly rate of -1.3% in May, worse than the expected -0.7% and recorded a negative value again after three months, but the previous value was revised up to 0.9%. The monthly core retail sales rate recorded -0.7%, also worse than expected. However, the market did not react well to this. The dollar index briefly rose to 90.68 before falling back to around 90.5 again.
Analysts at forexlive commented that the data may indicate that consumers are shifting their spending more from buying goods to services such as travel and entertainment. More than half of U.S. adults are now fully vaccinated, driving demand for activities such as air travel, hotel stays, dining out and entertainment.
It is important to note that several recent inflation indicators, including the Producer Price Index released on Tuesday, show rising price pressures. However, so far, Fed officials, led by Powell, have said that rising inflationary pressures are temporary and that ultra-loose monetary policy will remain in place for some time. We can wait a bit for this week’s Fed rate resolution to see what new signals will be released.
Gold shocks lower. Next, let’s focus on gold. Gold prices traded in a narrow range above the $1,860 mark for most of the Asian and European sessions, with a significant dip at the beginning of the U.S. session, falling nearly $15 at one point before finally closing down 0.39% at $1,858.47 per ounce.
Silver was slightly under pressure. Similarly, silver also shocked lower during the day, hitting a low of $27.37 per ounce to close at $26.6 per ounce.
The euro traded in a narrow range. In non-US currencies, EURUSD traded mainly around 1.2120 during the day, reaching a high of 1.2147 and a low of 1.21. The EU’s recovery plan continues. The EU’s first bond issue will raise 20 billion euros for the region’s recovery fund.
The British pound dipped slightly. Let’s look at the British pound again. The pound rose and then fell against the dollar, then recovered slightly before finally coming under slight intraday pressure. The UK unemployment rate and jobless claims both showed declines in May, indicating a positive economic recovery in the UK. However, the pound maintained a sideways trend ahead of this week’s Fed interest rate resolution.
U.S. oil broke strongly above $72. Finally, take a look at the oil market. U.S. oil broke strongly to the upside above $72 per barrel, renewing a new high since October 2018. Data released this morning showed that U.S. API crude oil inventories recorded a big drop of 8.537 million barrels. The decline in inventories and an improvement in the epidemic provided support for higher oil prices.
The market is worried about the Fed turning hawk Gold prices are afraid to fall back to 1840
Market analysts say gold prices have risen 13% in the past 10 weeks and appear to be seeing some profit-taking ahead of this week’s Fed rate resolution.
Although there are clear signs that inflation is gradually higher, but the market is clearly concerned that the Fed may be hinted at the meeting will be tapered bond purchases, which largely depends on whether the Fed believes that inflation is still “temporary”. In addition to the CPI data just released in May, the Fed will discuss the opportunity to focus on other areas, and this will not be conducive to the outlook for gold. At present, gold prices once below the $ 1855 support level, the next may fall back to $ 1840.
Brent oil will reach 80 by the end of the year or gradually fall next year
Singapore’s OCBC Bank expects Brent crude oil to peak at $80 a barrel by the end of this year. Global oil supply will move from its current deficit status to a surplus next year and remain in surplus for the rest of next year. Global oil supplies will increase by 2 million barrels per day by the end of 2022, with most of that coming from OPEC+ and Iran. This means that BOP could start to pull back next year and move back toward a long-term average price of $65 per barrel.
Downside risks remain for the euro, which is expected to fall to 1.15 by the end of the year
Bank of America said that until the ECB’s strategic assessment, the euro’s movement against the dollar depends largely on the impact of the dollar side. This means that U.S. inflation is the main influence on Europe and the United States. The current persistently high U.S. inflation and the Fed’s dovish stance keep U.S. real interest rates high and negative, thus supporting Europe and the United States.
However, it is still unknown whether the high U.S. inflation has been continuing. The ECB strategic assessment report will be published after the summer, when the U.S. inflation situation will become clearer, and both are expected to have a great impact on Europe and the United States. The market forecast for Europe and the United States has been lowered to 1.21 from 1.25 at the beginning of the year, but given that there are still downside risks in Europe and the United States, the bank kept its forecast of a decline to 1.15 by the end of the year unchanged.
14:00 UK May CPI or strong performance
First, to focus on the UK will be released CPI data. The monthly rate of UK CPI released in recent months has been steadily higher, with CPI recording 0.6% in April and rising to an annual rate of 1.5%. The Office for National Statistics said that core inflation in the U.K., which excludes energy prices and other volatile items, rose 1.3% in the 12 months to April. The Bank of England said U.K. inflation will exceed its 2% target and will reach 2.5% by the end of 2021 due to higher global oil prices, an emergency cut in VAT on the hospitality sector due in September from the new crown pneumonia epidemic, and a comparison with depressed figures from the new crown pneumonia epidemic in 2020.
Currently, the market expects the UK May CPI monthly rate of 0.3%, if the published value is greater than expected, or positive for the pound; conversely, will be negative for the pound.
At the same time, investors also need to pay attention to the same time the annual CPI rate, the current market is expected to be 1.8%, much higher than the previous value. If this set of data is better than expected, the pound may strengthen.
22:30 EIA crude oil inventories expected to decline
Next, come the EIA crude oil inventories, which were released last week with a decrease of 5.241 million barrels. This morning, API crude oil inventories have been released, down by 8.537 million barrels, a much larger drop than expected. The financial blog Zero Hedge commented that API crude oil inventories fell for the fourth consecutive week, in line with expectations, and at the largest rate since January.
Based on past experience, API inventory data and EIA inventory data have a relatively strong positive correlation, so EIA crude oil inventories may also decline significantly.
Even so, it is still necessary to pay attention to the current market expectations, the U.S. to June 11 week EIA crude oil inventories or reduce 3 million barrels, if the release of data more than expected, oil prices may short term dip; if the inventory data is less than expected, oil prices are expected to strengthen.
Thursday 02:00 Fed may discuss the bond purchase aspect
In the early hours of tomorrow morning, the Federal Reserve will announce its interest rate resolution. Over the past 15 months, by buying trillions of dollars of bonds, the Fed has provided unprecedented help to the federal government and investors. And at this policy meeting, it may begin preliminary discussions about tapering its support. Even so, the Fed may still be months away from actually putting it into practice.
Some officials have said they want to see substantial progress in both full employment and the 2% inflation target, and then begin tapering its $120 billion monthly asset purchases. Currently, that goal remains unmet.
So when exactly will the Fed taper its bond purchases? About three-quarters of economists surveyed by Bloomberg last week expect the Fed to announce that it will begin cutting the size of its purchases between August and the end of the year, and one-third expect to wait until December to start.
Regarding the economic outlook report, Morgan Stanley analysts expect the Fed to further revise short-term inflation expectations. In the “dot plot” report, the Fed’s Board of Governors will vote 9 for and 9 against the rate hike before the end of 2023, forming a tied position. This means there will be more variables in its future policy moves.
The new variables in the Fed’s economic outlook and future policy direction mean that the U.S. economy, employment and inflation data will become more influential on the market thereafter.
The financial blog Zero Hedge pointed out that many analysts have said that this meeting is the “most important” meeting in recent years. Recent data releases show that the U.S. monetary policy is not too big changes. The Fed will bar interest rates at low levels, quantitative easing of $120 billion a month. In addition, as the economy continues to reopen, there will be more stimulus measures.
It is important to be wary of the possibility that this week’s Fed resolution is less hawkish than expected, given the Fed’s stance in previous months, especially the repeated firm communication to the market that inflation is a short-term phenomenon, and that the current gap in the U.S. job market remains huge.
Thursday 02:30 Powell is expected to release a cautiously hawkish signal
Later, Powell will hold a press conference. On the inflation front, despite continued strength in CPI data, employment employment is still well below pre-pandemic levels, and according to the May employment report, there is still a shortage of about 7.6 million jobs. Despite the recent unexpected acceleration in inflation, Powell and other Fed officials see the rise as temporary, due to a temporary bottleneck as the economy reopens and a low year-over-year base from last year.
Because the market is beginning to discuss the Fed’s tapering of bond purchases, Powell may also express his views on this, and given the steady economic recovery, Powell may loosen his grip on bond purchases.
On balance, we believe that Powell is again likely to emphasize that higher inflation is only temporary and that discussions about tapering bond purchases are close. If he releases a cautiously hawkish signal, the dollar index is expected to gain support.