Markets shrug off inflation concerns and geopolitics ahead of BOE, jobless claims
Investors seem to ignore rising signs of inflation, supply chain issues, and geopolitical tensions around Brexit and China’s relations with the West. The BOE may announce tapering down its bond buys and US jobless claims are eyed ahead of Friday’s Nonfarm Payrolls. Cryptocurrencies are consolidating their gains.
The US dollar and stock markets are holding up despite growing worries of inflation. The 5-year/5-year breakeven, one gauge of future price rises, is at its highest since 2008. Nevertheless, the Federal Reserve continues stating that price rises are transitory and that the economy still has a “long way to go.” The latest comments came from Eric Rosengren and Lauretta Mester on Wednesday. John Williams is set to speak on Thursday.
ISM’s Services Sector Purchasing Managers’ Index missed estimates with 60.7 points for April, indicating a slowdown due to supply chain issues. ADP’s private-sector labor statistics also came short of expectations, adding to lower forecasts for Friday’s Nonfarm Payrolls. Weekly jobless claims are set to remain around 553,000 reported last week.
The Bank of England is predicted to leave its interest rate unchanged on “Super Thursday” and substantially raise its growth forecasts. Speculation is mounting about the BOE’s bond-buying scheme, with some predicting that Governor Andrew Bailey and his colleagues will announce they are tapering down on bond buys.
Brexit: Britain is sending gunships to Jersey, as a precaution ahead of a planned protest by French fishermen. The two countries are at loggerheads about using the waters around the island, which is close to the French mainland.
Brits go to the polls in local and regional elections, with Scotland’s parliamentarian vote standing out. A majority for pro-independence parties could raise tensions between Edinburgh and London. GBP/USD is clinging to 1.39 amid these three events.
A couple of misses on US data releases on Wednesday caused the USD to pare back some of its earlier strength. On Thursday, investors seem to ignore rising signs of inflation as the US dollar and stock markets are holding up despite growing worries of higher prices. Jane Foley, Senior FX Strategist at Rabobank, expects the inflation debate to drag EUR/USD down to 1.19 over the next month.
“With the market consensus pointing to a 995K rise for the April Nonfarm Payroll number and with several forecasters expecting a number well above 1,000K, the USD may continue to find a good level of support in the near-term.”
“Beyond the end of this week, the USD is likely to continue to respond to the debate about whether or not the Fed’s view that inflation will be transitory is correct. Given the market’s sensitivity to the issue, we see risk that the inflation debate will take EUR/USD back to 1.19 on a one-month view.”
“It will take time for the inflation debate to resolve. Meanwhile, it is likely that central banks will deliberately decide to stay behind the curve in order to allow more scope for interest rates to ‘normalise’ eventually. In the meantime, we would expect the inflation debate to lead to temporary bouts of support for the USD.”
The USD/CHF pair failed to extend the previous day’s gain in the early European session. The pair lost momentum after making an intraday high at 0.9145.
At the time of writing, USD/CHF is trading at 0.9135, up 0.08% on the day.
On the hourly chart, the pair has been looking to extend gains beyond the descending trend line from Wednesday’s high of 0.9164. However, the formation of Doji candles near the downward slope line indicates that upside momentum is receding. If prices sustain below the intraday lows near the 0.9130 area, then it would intensify the selling pressure.
The Moving Average Convergence Divergence (MACD) indicator is placed at the midline with bearish crossover. Moving down, prices would test the 0.9120 and 0.9110 horizontal support zone. Next bears would keep their eyes on 0.9080 (April 30).
On the flip side, if prices break above the downward sloping line, then they will navigate toward the 0.9150 and the 0.9170 horizontal resistance. Finally, market participants would then look out for highs of 0.9215(April 19).
USD/JPY still targets the 110.00 region in the short-term horizon, noted FX Strategists at UOB Group.
24-hour view: “Yesterday, we expected USD to ‘trade sideways between 109.10 and 109.60’. USD subsequently traded within a narrower range than expected (109.13/109.47). Momentum indicators are still mostly neutral and USD could continue to trade sideways for today, likely between 109.10 and 109.50.”
Next 1-3 weeks: “Our narrative from Tuesday (04 May, spot at 109.10) still stands. We continue to hold the view that there is scope for the current USD strength to extend to 109.95. That said, the prospect for such a move is not high for now. On the downside, a break of 108.55 (no change in ‘strong support’ level) would indicate that the positive phase that started late last week has ended.”
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