Investors Get Nervous Ahead of the US Inflation Data

Equities turned south during the US trading yesterday and today in Asia. It seems that investors may have started getting nervous ahead of tomorrow’s US inflation data as a further surge may raise questions over the Fed’s plan to keep its policy extra loose for long.

Equities Pull Back as Participants Become More Worried on Inflation

The US dollar traded mixed against the other G10 currencies on Monday and during the Asian session Tuesday. It gained against NOK, SEK, AUD, NZD, and EUR in that order, while it lost ground versus GBP, CAD, and CHF. The greenback was found virtually unchanged against JPY.

Although the performance in the FX sphere paints a blurry picture with regards to the broader market sentiment, the weakening of the risk-linked Aussie and Kiwi suggests that there may have been a setback in investors’ morale. Indeed, turning our gaze to the equity world, we see that although EU shares finished their sessions unchanged or slightly higher, the US ones tumbled, with Nasdaq losing the most. The subdued appetite rolled over into the Asian session today as well.

With no clear trigger behind the switch in market participants’ mood, we believe that they may have started getting nervous ahead of tomorrow’s US inflation data. Expectations are for the headline rate to have surged, but for the core one to have increased as well, which means that the rally in headline inflation may not be due to transitory effects after all. With that in mind investors may have already started speculating that the Fed should start considering withdrawing monetary policy support sooner than previously assumed.

If indeed both inflation rates shoot higher tomorrow, equities and other risk-linked assets may continue correcting lower, but we wouldn’t see this as a game changer, rather than just a corrective phase. With Friday’s employment report disappointing, we believe that Fed officials may not be in a rush to alter their policy any time soon. We have several of them speaking this week, and if they maintain the view that policy normalization is not on the discussion table yet, equities and other risk-linked assets may rebound, while the US dollar and other safe havens, like the Japanese yen, may come under renewed selling interest.

DAX — Technical Outlook

After yesterday’s failure to reach the current all-time, at around 15511, which was tested in mid-April, DAX drifted lower. We can see that the cash index continues to slide this morning, which doesn’t paint a very positive picture, at least in the near term. However, let’s not forget that, overall, the German index is still balancing above a medium-term upside support line taken from the low of January 31st. Even if the price moves a bit lower, as long as it stays above that upside line, we will continue aiming higher overall.

As mentioned above, a further price-drop might bring the German index closer to the aforementioned upside line, which if remains intact, could attract new buyers again. DAX may then travel back to the 15270 hurdle, marked by the high of May 4th and the low of May 10th, where a temporary hold-up might occur. That said, if the buyers are still in control, they could force the price to rise to the all-time high, at 15511.

On the other hand, if the aforementioned upside line breaks and the price falls below the 14829 hurdle, marked by the current lowest point of May, that would confirm a forthcoming lower low, this way increasing the chances for DAX to slide further south. The index may slide to the 14707 obstacle, a break of which might set the stage for a move to the 14420 level, marked by the low of March 25th.

AUD/USD — Technical Outlook

Yesterday, AUD/USD formed a new high for May, reaching the area near the 0.7890 level. However, shortly after that, the rate drifted lower, making its way closer to the short-term tentative upside support line taken from the low of May 4th. As long as the pair remains somewhere above that upside line, we will class the current move lower as a temporary correction, before another possible leg of buying.

A further decline could bring the pair to the next potential support area, at 0.7818, which at the end of April, acted as a good resistance hurdle. If AUD/USD stays above that hurdle, or somewhere above the aforementioned upside line, the bulls may take advantage of the lower rate and push it north again. If so, the pair could travel to the 0.7861 obstacle, a break of which might clear the path towards yesterday’s high, near the 0.7890 level.

Alternatively, if the rate breaks the previously-mentioned upside line and falls below the 0.7760 zone, marked by the low of May 7th, that could attract more sellers into the game, as such a move may change the direction of the short-term trend. AUD/USD could drift to the 0.7738 hurdle, or to the 0.7700 zone, marked by the low of May 6th, where the pair could stall for a bit. That said, if the bears are still behind the steering wheel, they may easily send the rate to the current lowest point of May, at 0.7675.

As for Today’s Events

During the European session, we have Germany’s ZEW survey for May. The current conditions index is expected to have increased to -42.6 from -48.8, while the economic sentiment one is forecast to have risen fractionally to 71.0 from 70.7. Following the improvement in the PMIs around the Eurozone in the last months, this will confirm that the bloc’s growth engine continues to recover from the damages of the coronavirus pandemic. At the latest ECB gathering, officials kept their policy unchanged and did not discuss plans for their bond purchases, but given that at the next meeting we will also get new staff macroeconomic projections, we may also get hints with regards to the Bank’s future plans. With the recovery underway, officials may provide clues as to whether and when they intend to reduce the pace of their QE program.

Later in the day, the US JOLTs job openings for March are coming out and the forecast points to a small acceleration, to 7.500mn from 7.367mn in February.

As for the speakers, we have several on today’s agenda and those are: BoE Governor Andrew Bailey, New York Fed President John Williams, Atlanta Fed President Raphael Bostic, Philadelphia Fed President Patrick Harker, and San Francisco Fed President Mary Daly.

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