US equities rebounded from their mid-week lows, erasing a large part of their losses. Investors bought in the dip triggered by high inflation data on Wednesday.
Financial markets bounced back from their Wednesday lows as risk-off transformed into a risk-on movement once again. The Dow Jones index recovered almost a thousand points, and so did the other US market indices.
The week started in a risk-off mode, with all equity indices in the developed world losing ground. They followed the US equity markets lead, which dropped on fears of higher inflation.
Higher inflation did come. Last Wednesday, the April inflation data came in higher than economists’ expectations.
The equity markets tanked, the dollar rallied, but that lasted only a few hours. Since the cash market opened on Thursday, the equity markets moved in one direction and one direction only – higher.
As such, everything else followed suit immediately – the EUR/USD bounced from the 1.2050 area weekly lows, the AUD/USD bounced from below 0.77, and so on.
Gold had an interesting week. It hovered around the $1,840 area before the inflation release in the United States and then declined, despite the hot data. It followed the US dollar’s path in a typical risk-off move. Once the equity markets recovered yesterday, so did the price of gold, approaching the $1,830 level.
Crude oil tanked yesterday by more than 3%, reaching $63.70 before the close of the North American session. With no particular reason for the move, it may be just a late reaction to the US crude oil inventories from the previous day.
Thursday’s price action was highly influenced by the fact that banks in France, Germany and Switzerland were closed for a bank holiday. Thus, liquidity during the European session was much thinner than otherwise would be the case.
Today, however, things look interesting. To start with, the ECB Policy Meeting Accounts are to be released today. While no surprises are expected, they may reveal some interesting facts regarding Governing Council discussions about the “significant” increase in asset purchases.
Also, the euro is trading with a bid tone, as seen on the EUR/USD and the EUR/JPY pairs, which found a bid throughout the week. Rumours have it that the ECB discussed whether it is appropriate to signal the tapering of its PEPP program at its next meeting in June. Any details from today’s accounts may trigger a sharp movement in the euro pairs.
Later in the North American session, the Retail Sales data for the month of April will be of particular interest. The market expects an increase of 1% when compared to the previous month, and there is room for a positive surprise.
Finally, this is the last trading day of the week, so the flows are stronger than any other day. The weekly fix time will dictate the positioning for the upcoming week.
Markets to Watch
FTSE 100, EUR/USD, EUR/GBP – markets in focus today.
The Preliminary GDP was released this week and showed that the UK economy contracted in the first quarter of the year. However, the contraction was less than the market had feared, and therefore the FTSE 100 found support right at the lower edge of a rising channel. The focus for the end of the trading week shifts towards a move to test the upper edge.
The EUR/USD only consolidated levels after the US CPI inflation data on Wednesday. Despite testing the 1.2050 area, the support held, and the pair has traded with a bid tone ever since. As we enter the last trading day of the week, the pair reversed higher from a bullish triangle, and a move back to 1.2150 should not be discounted.
The British pound was one of the strongest currencies this week. Against the euro, it gained more than one hundred pips. But now, the EUR/GBP is staging a reversal, forming a small inverse head and shoulders pattern at the 0.86 area.
Winners and Losers
The US dollar still gained this week so far, despite a pullback in the last 24 hours against its G10 peers. Crude oil suffered.