Waiting for U.S. inflation data, gold may choose the direction

[Market Review].

The market is waiting for U.S. inflation data. The U.S. benchmark stock index hit another record high on Monday as investors await the second-quarter earnings period, which kicks off this week, to determine whether corporate earnings can support current market valuations. U.S. Treasury yields are near flat, with the benchmark 10-year Treasury yield near 1.36%; dollar movement is likely to be influenced by Fed Chairman Jerome Powell’s testimony statement to Congress this week and inflation and manufacturing data. As the market is highly sensitive to any talk of early tapering of bond purchases, the U.S. CPI data released today will be closely watched, followed by Fed Chairman Powell’s testimony before Congress on Wednesday and Thursday.

Gold closed slightly lower. Because concerns that a coronavirus variant could jeopardize the economic recovery have spurred investor demand for safe-haven assets. Gold prices had previously advanced for three consecutive weeks. Meanwhile, agency surveys showed that economists also raised their expectations for U.S. GDP in the second half of the year and inflation expectations rose, raising concerns that the Federal Reserve may taper its stimulus sooner than expected, which could weigh on gold prices. In addition, because the dollar and stock market strength, weakened the demand for gold as an alternative asset; investors cautiously look forward to the U.S. inflation data, which may affect the Fed’s timetable for tapering its bond purchase program. Gold closed slightly lower overnight.

ECB may reassess forward guidance. ECB President Lagarde expects changes to the ECB’s policy guidance in July. She said the forward guidance will be re-evaluated in order to meet commitments given the durability of policy.

The UK could still lift the embargo next week. Despite a surge in new crown cases in the U.K. to the highest level in months, Prime Minister Johnson may confirm plans to lift almost all remaining outbreak restrictions in the U.K. from July 19. This could increase the risk to the U.K. economy.

The spread of the epidemic has renewed oil market concerns. Oil prices are under pressure to the downside because of fears that the spread of the variant virus is undermining the global economic recovery. But tight crude oil supplies are keeping the decline in check. The global economic recovery has pushed fuel demand to near pre-epidemic levels. But with the rapid spread of the Delta virus, traders are now refocusing on the raging outbreak and global concerns about the spread of new variants of the virus, which will be detrimental to oil prices.

[Risk Warning].

Dual factors may pressure the dollar to weaken

ABN AMRO believes that today’s U.S. inflation data and Powell’s testimony before Congress could dampen market bets on interest rate hikes and push the dollar weaker. The bank’s analysts said the U.S. CPI data will tell the market whether inflation did peak in May, and ABN AMRO economists expect headline CPI to slow to 4.8 percent in June from 5 percent, which could set a ceiling on current expectations for the Fed’s interest rate. Analysts added that curbing bets on rate hikes may also be Powell’s goal when he delivers his semi-annual report testimony to Congress.

Euro upside action improves resistance at 1.1895

Technical analysis by UOB suggests that EURUSD is expected to trade between 1.1790-1.1895 in the coming weeks. The pair’s upside momentum has improved moderately and is expected to rise slightly to 1.1895, but the chances of a sustained rise above that level are not high and is not expected to threaten the next resistance at 1.193; on the downside, support is at 1.1845 and then 1.1825.

Australian dollar eyes support at 0.7450

Australia’s economic recovery is facing a growing threat as Sydney faces a worsening outbreak of New Crown. In Sydney, the daily confirmed cases of New Crown pneumonia have climbed to the highest level since March 2020. Authorities have been struggling to contain the spread of the highly contagious delta virus. Yesterday, the Australian dollar weakened against the U.S. dollar, although the hawkish stance of the Australian Federal Reserve still posed some support to the Australian dollar. UOB believes that the pair’s downside momentum has weakened and the market can focus on the 0.7450 support level later.

[Key Forecast].

16:00 IEA may maintain optimistic expectations for crude oil demand

Last month, the IEA’s monthly report expects global crude oil demand to reach pre-epidemic levels next year, with global oil demand to increase by 5.4 million barrels per day in 2021 and a further 3.1 million barrels per day in 2022. On the production side, the IEA noted that OPEC+’s total oil supply will increase by 800,000 barrels per day in 2021 if OPEC+ sticks to its current policy. there is room for OPEC+ to increase production by 1.4 million barrels per day in 2022.

This month, the IEA’s monthly report may raise crude oil demand expectations and forecast an increase in OPEC’s oil production in June. But the IEA may be concerned that crude oil supply is at risk.

Last week, OPEC+ production increase agreement talks collapsed, but oil-producing countries should not let the international oil price huge shock due to their own interests, in order to avoid market panic, OPEC+ is expected to restart talks again in the short term, and the parties are more likely to reach a compromise. However, the contradictions between Saudi Arabia and the UAE in other areas may intensify, and it is still worth paying close attention to whether the two sides can properly handle their differences and whether the confrontation will extend to OPEC+.

20:30 US June CPI may be strong

Last month’s May unadjusted CPI annual rate, recorded at 5%, and CPI monthly rate recorded at 0.6%. Some agencies commented that the U.S. CPI data for May increased by more than expected, and as the economy strengthens, the risk of continued higher inflation is expected to become more solid. The monthly quarterly CPI rate recorded 0.8%, the largest increase since 2009, and the annual rate recorded 5%, the largest increase since August 2008, although the annual rate was affected by the base effect. Price pressures are expected to continue to increase across the economy as businesses balance surging demand with material shortages and labor shortages. Shipping bottlenecks, rising input costs and higher wages will all pose challenges for companies protecting margins.

Currently, the market expects the U.S. June un-quarterly CPI at an annual rate of 4.9%, which may be positive for the dollar if the published value is larger than expected; conversely, it will be negative for the dollar.

At the same time, the quarterly CPI monthly rate will also be released, and the market is expected to be 0.5%. If both sets of data are said to be strong, the dollar index may strengthen.

Wednesday 04:30 API crude oil inventories may continue to decrease

Last week’s API report showed that US crude oil inventories decreased by 7.983 million barrels. The EIA crude oil inventories released later decreased by 6.866 million barrels. U.S. Midwest crude oil inventories fell, recording the largest since September 2019. Oklahoma Cushing crude stocks recorded their lowest level since March 2020. U.S. Gulf of Mexico crude oil stocks fell to their lowest level since March 2020. This means that the U.S. has not significantly increased crude oil production.

By the end of the week, the market expects that US API crude oil inventories may decrease by 4.333 million barrels in the week to July 9. If the published value is larger than expected, oil prices may come under pressure; conversely, oil prices may rise.

It is also important to keep an eye on the U.S. oil drilling count. If the drilling count continues to rise, crude oil production may gradually increase in the following weeks.

Wednesday 10:00 New Zealand Fed may stay put

Tomorrow morning, the New Zealand Federal Reserve will announce its interest rate resolution. The Fed has kept interest rates at record lows, but with New Zealand quickly emerging from an epidemic-induced economic downturn, the central bank hinted at a rate hike as early as next September, one of the first global advanced economies to say it wants to exit stimulus.

New Zealand’s gross domestic product grew 1.6 percent in the first quarter, well above expectations, and the country’s economy is recovering and monetary policy may tighten sooner than previously expected. The New Zealand Federal Reserve previously said that economic activity is returning to levels seen before the new crown outbreak.

However, fragile links remain, and the recovery will require continued monetary and fiscal support. The New Zealand Fed also said it is adding debt service limits to its policy toolkit to support the sustainability of house prices.

Some analysts expect that the New Zealand Fed is estimated to stay put on this resolution, possibly announcing an end to its plans for large-scale asset purchases at its August meeting. And it may release a clear signal to raise interest rates. Last week several investment banks brought forward the New Zealand Fed’s rate hike expectations to November this year. If the New Zealand Fed sends such a signal to the market, the New Zealand dollar may gain support.