Market appetite improved yesterday and today in Asia, perhaps due to a report that US President Joe Biden will seek USD 6trln in federal spending for the 2022 fiscal year. today, market participants are likely to lock their gaze on the release of the core PCE index, the Fed’s favorite inflation metric, for the month of April. A surge may raise questions as to whether the acceleration in headline inflation is due to transitory factors and may add to speculation that the Fed may have to start normalizing its policy earlier.
Investors Appear Somewhat Optimistic Ahead Of The PCE Data
The US dollar traded mixed against the other G10 currencies on Thursday and during the Asian morning Friday. It gained against JPY and NZD, while it underperformed versus GBP, SEK, CAD, and NOK. The greenback was found virtually unchanged against EUR, AUD, and CHF.
Although the performance in the FX world does not paint a clear picture with regards to the broader market sentiment, the weakening of the yen suggests that investors may have traded in a risk-on fashion yesterday and today in Asia. Indeed, turning our gaze to the equity world, we see that major EU and US indices traded mostly higher, with appetite staying relatively supported during the Asian session today as well.
Although up until yesterday, investors appeared careful in adding to their risk exposure ahead of today’s PCE data, a New York Times report that US President Joe Biden will seek USD 6trln in federal spending for the 2022 fiscal year, may have boosted their sentiment. Market chatter suggested that the more-than-anticipated fall in initial jobless claims may have also helped, but we think that anything pointing to an improving labor market, combined with the recent surge in inflation and remarks by a few Fed officials over QE tapering, may have the opposite effect, as it could increase the chances for the Fed to start normalizing its policy sooner than previously anticipated.
As we already noted, today, market participants are likely to lock their gaze on the release of the core PCE index, the Fed’s favorite inflation metric, for the month of April. The forecast suggests that the yoy rate has surged to 2.9% from 1.8%, something that could raise more questions as to whether the acceleration in headline inflation is mainly due to transitory factors. It would also be interesting to hear what Fed policymakers have to say in the aftermath of the release. If most of them stick to their guns that the surge in inflation is likely to prove to be temporary and that it’s not the time to consider normalization yet, equities and other risk-linked assets are likely to continue trending north. However, the opposite may be true if more Fed policymakers start referring to a potential reduction of their QE purchases. For now, we prefer to step to the sidelines and wait for the picture to become clearer.
Back to the FX world, the British pound was the main gainer among the G10s, coming under buying pressure after BoE MPC member Gertjan Vlieghe said that a rate hike could come earlier if the economy rebounds more quickly than expected. His comments come after the latest better-than-expected GDP data, and combined with the fast vaccination rollout pace in the UK, they may keep the pound relatively supported, especially against the US dollar, which could come under renewed selling interest if most Fed policymakers stick to their dovish stance.
DJIA Technical Outlook
The Dow Jones Industrial Average cash index traded higher yesterday and today in Asia, breaking above the key resistance of 34500. Overall, the index continues to trade well above the upside support line drawn from the low of Jan. 31, while yesterday’s advance has confirmed a forthcoming higher high on both the 4-hour and daily charts. In our view, those technical signs keep the near-term outlook relatively positive.
We believe that the break above 34500 may encourage market participants to push the action towards Dow’s record peak of 35092, hit on May 10. They may decide to take a break after testing that zone, thereby allowing the price to correct slightly lower. However, if they regain control from above 34500, the subsequent rally may push the index above its current record and thereby take it into uncharted territory.
In order to start examining the case for a larger correction lower, we would like to see a dip below yesterday’s low of 34200. This may trigger declines towards the 33930 territory, marked by the inside swing high of May 19, the break of which could see scope for extensions towards the low of the same day, at 33475.
GBP/USD Technical Outlook
GBP/USD has been trading in a sideways range since May 17, between the 1.4100 and 1.4220 barriers. Overall though, the pair continues to trade above the upside support line drawn from the low of Apr. 12, as well as above all three of our moving averages on the 4-hour chart. In our view, this paints a cautiously positive picture.
In order to start examining the resumption of the prevailing uptrend, we would like to see a clear break above the aforementioned range’s upper end, at 1.4220. This would confirm a forthcoming higher high and may pave the way towards the 1.4315 barrier, marked by the high of Apr. 18, 2018, the break of which could extend the gains towards the peak of the day before, at around 1.4375. That said, before the next leg north, we cannot rule out another pullback, towards the lower end of the short-term range.
In order to start examining a bearish reversal though, we would like to see a dip below 1.4005. The rate may already be below the pre-mentioned upside line and may encourage the bears to push the action towards the 1.3930 zone, where another break could trigger extensions towards the 1.3840 barrier, or the 1.3800 zone, marked by the lows of May 4 and 3 respectively.
As For The Rest Of Today's Events
Alongside the US core PCE index, we also get the personal income and spending data for April. Personal income is expected to have declined 14.8% mom after surging 21.1% in March, while spending is forecast to have slowed to +0.5% mom from +4.2%.