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Dollar may struggle as yields soften

May 17,2021 06:51:08

Overnight Headlines

*USD quiet as focus remains on Fed

*US equities closed strongly with all sectors higher on Friday

*Mixed risk tone, Vix lower, gold higher and another Elon-induced Bitcoin selloff

US equities rollercoaster week finished on a better note as mounting inflation jitters battled with signs of economic recovery. The Dow clawed back some of its 1,200-point losses from the start of the week while the S&P500 recorded its biggest one day percentage jump in over a month on Friday. Growth and cyclicals were the best performing areas with energy and tech the leaders. US futures are mixed with Asian markets showing gains.

USD got hit by risk on Friday, softening by 0.5% but ended the week modestly higher. GBP had its second straight weekly advance to lead the majors month-to-date with CAD second in the rankings as Brent fought back to record a 0.6% gain for the week.

Market Thoughts – Light calendar, FOMC and UK data points

The main focus this week will be centred on the minutes of the Fed’s last policy  meeting for any clues as to when officials might start to talk about tapering. So far, members have stuck to the same script and, in the market’s eyes, been doggedly dovish consistently arguing the spike in inflation is transitory. We get a range of Fed speakers during the week and with US bond yields pulling back from last week’s highs at 1.70% for the 10-year, the dollar may struggle this week with price pressures now fully in the market.

The UK sees a load of data released this week with Tuesday’s unemployment forecast to drop again to 4.8%. Restriction easing is pointing to labour market strength ahead of the ending of the furlough scheme in September. Base effects will affect the CPI data on Wednesday with energy prices pushing prices higher over the next few months while retail sales released at the end of the week should rise with the reopening of shops in April, along with the timely PMIs.

Chart of the Day – Positive data to help GBP

With the UK data dump this week, cable should find some support especially after the strong US inflation data failed to push the pair below the psychological 1.40 level. The spread of the Indian Covid variant is a mild concern but the vaccines are doing the job they were meant to do and the roadmap to normalisation is proceeding to plan with today’s next phase continuing. Data is expected to be encouraging with the May PMIs on Friday showing that the economic outlook is improving.

Cable enjoyed its second weekly gain last week and maintains a solid uptrend now we have held 1.40, which should act as strong support after the recent breakout. Resistance above lies at 1.41 and then around the 1.4160 zone at last week’s highs. A strong move through here will target the year-to-date peak at 1.4241.

Jamie DuttaAnalyst / Trader

"With extensive experience as a full time trader and financial market commentator, I have worked as a trader in top tier investment banks and trading houses, including Morgan Stanley and GAIN Capital trading Forex, Index derivatives. and Bonds. I combine technical analysis with a deep fundamental knowledge to identify trade set-ups. My real life experience allows me to break down the complexities of financial jargon and trading. This means everyone can better understand the compelling forces of greed and fear which are realised every day in countless ways across markets."

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