The ECB and the US inflation data were not enough to bring back the volatility to the FX market. The attention now turns to the Fed’s next meeting on Wednesday.
With the two main economic events behind us (the ECB meeting and the US inflation), market participants still have one trading day left to digest the data. The ECB remained in an accommodative mode, despite delivering an upbeat growth outlook for the European economies.
Inflation in the United States exceeded expectations for the second month in a row. A close look at historical data tells us that this is the largest two-month change in core CPI since August 1981.
The S&P500 liked the higher inflation data, as investors sent the index to a new record high. Equity markets around the developed world remain bid, as inflation accelerates and the global economic outlook improves after the pandemic-led recession. European stock market indices followed the lead from their US peers, trading close to their recent highs all week.
The US dollar remains close to its 2021 lows, as the EUR/USD and AUD/USD trade close to their highs of the year, and USD/CAD close to its low. The currency market was quiet this week, and even yesterday’s events out of the United States and Europe were not enough to bring back its traditional volatility.
Commodities, while correcting a bit from the highs in the previous weeks, have performed strongly so far in the trading week. Crude oil led the race higher, followed by gold. If the WTI crude oil price closes the week above $70, it will put further pressure on inflation in the period ahead.
After the last two trading days, with the Bank of Canada and the European Central Bank interest rate decisions on top of the US inflation, traders have a chance to take a breather. Today’s economic calendar is light, and if we do see some accelerated moves, they will likely be late reactions to this week’s events.
Only the Preliminary University of Michigan Consumer Sentiment has the potential to move markets, but at that time in the trading day, investors will likely focus on next week’s Fed interest rate decision and press conference.
Markets to Watch
S&P500, USD/CAD, AUD/USD – markets in focus today.
Yesterday’s inflation data in the United States did not spook the stock market. Fears of high inflation led to an abrupt decline in the stock market indices in May – a decline that was recovered in the days to follow.
But this time it was different. The S&P500 reached an all-time high quickly after the inflation data, despite the fact that the two-month increase in the prices of goods and services in the United States is the largest in more than three decades.
The S&P500 traded with a bid tone the entire week. Therefore, yesterday’s new all-time high should not come as a surprise, given the bid tone shown so far. As for the rest of the trading week, market participants already have the Fed’s meeting next week in mind. Will the S&P500, and, implicitly, the market, put pressure on the Fed?
The USD/CAD pair has evolved in a tight range for more than a month. The massive decline that started with the recovery in the price of oil in April 2020 found strong support at the 1.20 area.
Not even the Bank of Canada’s monetary policy decision could break the range, as shown by the technical picture. A move above 1.2150 should bring more strength toward 1.23, while a break of the critical 1.20 support should trigger more weakness toward the 1.1850 area.
The Aussie pair remains one of the strongest on the FX dashboard. Effectively, it hovers around its 2021 highs, although it has a hard time breaking and holding above 0.78.
This market traded with a bid tone during the pandemic, closely correlated to the US stock market indices. Bears may want to short the AUD/USD pair only on a break below the 0.76 area, ideally followed by a daily close down there. On such a close, the measured move of an eventual head and shoulders pattern suggests that the 0.74 level might come next.
Winners and Losers
Crude oil price – the winner of the week, while the US dollar trades near its 2021 lows.