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tickmill-analytics

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Pressure on USD rises ahead of possible dovish Fed move

The CFTC data showed that net long speculative position on EURUSD rose last week, which suggests the shift in sentiment on the pair is under way after protracted squeeze of long positions. Historically, the euro net long position is within one sigma, i.e., far from extreme levels and there is still room for bulls to ramp up pressure. Speaking of the short term, there was no particular rush of buyers after the test of 1.21 on Monday - the major move is most likely set for Wednesday, when the Fed will clarify the course of US monetary policy. And again, the main question is when to expect unwinding of current pace of QE purchases. Long-dated Treasury yields advanced on Monday, signaling return of inflation concerns as well as worries about possible Fed meeting outcome where the regulator hints that reduction in credit stimulus could begin in the less distant future.

The European currency is also drawing strength from progress on the fiscal front. Positive news on the European recovery fund (large-scale fiscal stimulus) triggered some sell-off in European bonds, due to reassessment of inflation expectations. The yield on 10-year German bonds is again moving towards the local high of this year (-0.217%), while the sell-off appears to be stronger than in long-dated Treasuries:


Screenshot-2021-04-26-at-17-21-28.png



The dollar index is moderately correcting downwards, having touched the lowest level since the beginning of March (90.65). Despite the coronavirus crisis in one of the largest emerging economies (India), expectations for a global recovery persist, as evidenced by the positive dynamics of industrial metals prices. Iron ore and copper have resumed their uptrend since early April, reflecting expectations that demand will continue to rise:


Iron-Ore.png




The theme of recovery this week may be supported by the data on the US economy, in particular GDP, orders for durable goods and claims for unemployment benefits. Output growth in the US economy for the first quarter is expected to be an impressive 6.1%. Given benign environment, better-than-expected data updates should fuel risk appetite. If the Fed gives a signal that it will tolerate overheating of the economy, there will be even less sense to stick to USD positions till the next meeting.

Joe Biden's first speech to Congress will also take place this week, in which he can provide more details on tax reform. For risk assets, the details are likely to be negative, so US indices are likely to decline ahead of the speech.




Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
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tickmill-analytics

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“Frozen” USDCAD and the upcoming Fed meeting: markets overview

FX and sovereign debt markets are bracing for the bout of turbulence ahead of the Fed event today. Despite success in spurring inflation growth, the Fed’s message will likely remain unchanged – substantial observed progress in employment is an essential condition to depart from accommodative policy. Yield differential between the 10 and 2-year Treasuries will likely extend gains on a dovish message - which should support EM currencies as well as Norwegian krone and CAD.
US long-dated yields have rebounded ahead of the Fed, halting decline which lasted about a month:

US-yield.png


The US dollar were also offered support thanks to signs of renewed bond market rout and set to test the upper bound of downward channel in which it currently resides:

USD-ENG.png


Inflation premium in long-dated Treasuries could be fueled by the US consumer sentiment report released on Tuesday. Consumer sentiment index jumped to 121.7, the highest since February 2020. The report reinforced fears that supply in the economy is not keeping pace with rebounding consumer demand, which should result in faster inflation. There are signs on the supply side that justify those fears: for example, quickly rising maritime shipping rates or, for example, updated profit forecast of the largest container operator Maersk. The company has doubled its profit forecast for 2021 due to "exceptionally strong" demand for its logistic services.
Given these findings, if the Fed continues to cling to the transient inflation argument today and leaves QE timeframe unchanged, the US real rate will be under pressure again. This time, however, we have less patchy global growth, so there are plenty of alternatives to US fixed income assets. This should stimulate the search for yield abroad. The effect on the dollar appears to be negative.
However, pressure on USD will likely be uneven. Given positive correlation of yielding currencies with the spread between 10-year and two-year US government bonds, in particular the Canadian dollar, today's message from the Fed may open way for their further rally. By the way, the CAD has been behaving strangely in the couple of last days, fluctuating in a very narrow range after strong sweeping moves earlier:
Screenshot-2021-04-28-at-16-00-35.png


Continuation pattern?

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

tickmill-analytics

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Continuing US bond rout may offer some support to USD next week


Incoming economic data of developed economies in the second half of the week, dynamics of commodity prices (record price of steel futures) added fuel to the flight from long-dated bonds:


Yields-US.png




US GDP growth beat forecast in the first quarter of 2021, averaging to 6.4%, while quarterly inflation measured through GDP growth accelerated to 4.1% against expectations of 2.5%. Despite weak output in Germany and threat of technical recession in the first quarter, price growth there also accelerated above expectations in April.

US unemployment claims that came on Thursday were slightly weaker than the forecast - both initial and continuing claims gained more than expected, nevertheless, the markets are bracing for a very strong increase in the April NFP of 925K. The report is due for release on next Friday. If job growth meets expectations or even beats forecast, rumors that the Fed will move to tapering earlier than previously expected should increase, as according to the Fed, substantial progress in employment is the key goal of ultra-easy credit policy. Inflation expectations are also set to accelerate in this case, fueling more upside in yields which in case of rapid movements may offer support for USD.

It is clear that US debt market became more concerned about the threat of inflation this week. However, in the current environment, inflation is a synonym of expansion, which means demand for risk is likely to stay here as the dominant market theme. At the very least, it is difficult to expect that there will be a reason for a collapse and even a correction. The Fed added fuel to the fire on Wednesday, once again declaring that "it is not time to even discuss the changes in QE purchases". Cheap credit policy, coupled with economic pickup will likely continue to push prices up and the risk that inflation will accelerate haunts bonds. The Fed stubbornly denies that inflation will be here for a long time and is trying to convince market participants of this. As you can see, it doesn't work out very well.

The dollar sank after the Fed meeting, but is trying to recover for the second day in a row. Yesterday, consolidation above the upper border of the descending channel failed, but on Friday the chances of this are much higher:



Screenshot-2021-04-30-at-15-47-27.png



Next week we may see a slight strengthening of the dollar towards 91.00-91.20 amid bond pressure ahead of a possible NFP surprise. The bar to surprise is very high and if the report fails to meet expectations, USD will likely start to drift lower from those levels.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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USD set to stay range-bound given moderate US data updates



The buying wave in USD emerged last Friday appears to be losing punch as US currency retreats against major peers. However, resumption of sales may take longer than bears could expect. To bet on further USD slide, markets may need data updates that would shift risk-seeking flows to assets outside the US. However, this week, key reports will be related to the US economy and weak US currency should be expected in case of a downside surprise in Friday Payrolls.

In general, post-pandemic recovery in the United States is going well. Last week, this was indicated by data on consumer spending and U. Michigan consumer sentiment report, which came a tad stronger than forecasted. Long-term market rates in the US generally sway near opening Monday and US currency has not been offered support from this side.

At the same time, markets learned last week that the European economy is getting out of the recession faster than forecasted. Key macroeconomic variables more than met expectations - GDP for the first quarter, inflation and unemployment in April, which sets the stage for appreciation of the Euro as EU recovery momentum catches up with the US.

We have entered a new month, so it is also worth to consider seasonality factor. May usually turns out to be favorable for the dollar, this is probably due to the fact that corrections in risk assets often occur in May. Keep in mind the well-known saying “Sell in May and go away”, which this year may remind many investors of itself.

The upper border of USD index strengthening this week will most likely reside at 91.55 points. This is a two-week high. For EURUSD it is approximately 1.1990 and 1.3780 for GBPUSD. These levels may not hold in case of a correction in US equities, which would open the door for rally in the index towards 92.00. However, this is difficult to expect morally, given that the consensus on Payroll’s growth in April is almost 1 million jobs. There are also many anecdotal evidences indicating that the service sector in the United States simply lags behind the consumer boom, failing to hire required number of workers.

Investors also listen to Powell, but continue to do their own thing. Weekly inflows to funds investing in inflation-protected bonds continue to remain at historically high levels:


saupload-Weekly-Flows-Inflation-Protected-Bond-Funds.jpg



In our case, elevated inflationary expectations reflect the investors’ opinion that there is strong demand in the economy, which, of course, is barely a macroeconomic basis under which a correction should be expected.

Commodity markets are on the rise, as can be seen from highest in years reading of the Bloomberg Commodity Price Index, which basically forces investors to expect continued rise in cost-push inflation in the coming months:
Screenshot-2021-05-03-at-13-34-26.png





The largest threat for further USD dump is a fresh sell-off in Treasuries. However, we have to see material gain in Payrolls above forecast to see another leg of inflation concerns. In addition, bond pressure could emerge after the release of ADP and PMI in the US non-manufacturing sector on Wednesday. The focus will traditionally be on the employment component. Moderate data should take away support from USD as any sign of cooling in the US momentum is what bond bulls exactly want for.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

tickmill-analytics

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Developed economies compete in the pace of recovery. Which one will win?


Developed economies keep competing in the pace of recovery. UK data showed on Tuesday that manufacturing activity rose to its highest in more than 26 years:


Screenshot-2021-05-04-at-13-37-42.png



Interestingly, the Markit report mentioned the same challenge also faced by US and EU producers: supply chain bottlenecks, resources and inventory shortages. This results in the rise of intermediate prices and response to this is the same everywhere - push the increase further in the price chain, i.e. hike end prices. However, the temporary consumer boom against the background of lifting of the pandemic restrictions makes it easy to do this, so cost-push inflation does not yet run into demand constraints, causing steady upward inflation trend.

The data on activity of manufacturers in the US and German economies were somewhat disappointing, but still it was quite strong. Looking under the hood, primary drivers of growth of the broad index were extremely high readings of new orders and prices components, while components of inventories and customer inventories made negative contribution:


Screenshot-2021-05-04-at-14-42-12.png



Nonetheless, central banks have been slow to sound the alarm and tighten credit conditions in response to the threat of inflation pickup. But there is still some progress in this matter. Yesterday the head of the New York Fed Williams spoke, who admitted that the Fed could raise interest rate on excess reserves for banks or reverse repo rate. Both measures are intended to remove excess liquidity from the banking sector, although they are quite technical in nature. However, in the past, they preceded the start of normalization of credit conditions, so the dollar bulls took this hint with great optimism.

On Tuesday, we saw increased demand for greenback thanks to Williams comments, USD index climbed to 91.40 which is highest level since the start of the week. Today, the report on activity in the US service sector from ISM is due which should help to prepare better to the NFP surprise as well as give an idea of what is happening with services sector inflation in the US. Strong reading, especially driven by prices and hiring components will likely to push USD index higher with potential test of 91.55 resistance level, however further upside is under question and will require more reflation optimism, i.e., strong NFP surprise.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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US data may drive EURUSD lower, providing good buying opportunity


Another leg of USD rally took place yesterday amid sell-off in US equities. The bout of risk aversion was fueled by the comment of the US Treasury Secretary Janet Yellen that a rate hike may be needed to prevent economy from overheating. The caused market turbulence in various asset classes, including stocks and USD, revealed lack of trust of investors to the Fed comments, showing that the Fed pledge to keep rates low and the stance on inflation (“we see inflation as temporary factor”) are taken with a grain of salt. Yellen later clarified that her comment was not a recommendation or a forecast for an interest rate hike, which is not surprising, because just a week ago we saw very cautious Fed rhetoric regarding rate hikes. Fed Speaker Charles Evans' speech today is likely to address market rumors sparked by the Yellen remark.

The last three upside swings in USD were distinguished with length of the waves getting progressively shorter, while meeting resistance at the two-week high of 91.40:

Screenshot-2021-05-05-at-15-15-13.png


Such a price action, together with the stabilization of ATR and RSI near their averages, often precedes a breakout move. Taking into account the pressure of buyers its vector will likely be positive. The breakdown catalyst is expected to be the Non-Farm Payrolls report on Friday.

Two other reports to look out for are the ADP US Job Growth Data and the ISM Service Sector Index. They will play an important role in shaping expectations for the NFP. The ADP is expected to point to an increase in jobs of 850,000 in April, while the ISM index is expected to rise from 63.7 to 64.3 points. Particular attention should be paid to the hiring component of the ISM index, as its predictive power in relation to the NFP report is quite significant. The two strong reports also once again could cast doubt on the Fed's ability to maintain current degree of monetary easing, which, in particular, may result in faster growth in long-dated bond yields. As I wrote on Monday, news and data flow this week favors tactical strengthening of USD as the reports on the US economy take central place in the economic calendar this week and risks are shifted towards positive surprises in the data.

For EURUSD, the breakdown of lower border of the trend channel disabled it for some time, but there was no particular rush to sell near the critical 1.20 level as seen from little pressure in RSI:


Screenshot-2021-05-05-at-17-08-40.png




In this regard, the level can equally act as a foothold for growth after completion of the correction. The 1.1950 test on the release of US statistics looks like a logical scenario, but let’s not forget what drove the recent strengthening of EURUSD - progress in vaccinations, European fiscal stimulus and economic data. Next week, the news background is expected to be more favorable for the growth of the European currency.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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US data disappoints, laying the groundwork for weaker NFP expectations


Brent price failed to break above the $70 level on Wednesday, as buyers' appetite is still constrained by some demand risks. Concerns about demand in India as well as expectations that OPEC will soon begin to lift output restrictions weigh on prices. Recovery of Iranian supply also makes growth more cautious. Although it now seems that the market will be able to absorb new supply, there are risks that the outlook for demand will become less optimistic, which will lead to a more fragile balance in the market.
Saudi Arabia has announced its June OSP prices and, given OPEC's concerns about demand and upcoming production increases, prices for Asia have been cut an additional 10 cents. The Saudis have also lowered prices for other regions, for example for Europe the over-benchmark premium has been reduced in all grades. However, US prices have been raised. The multidirectional movement of price discounts for different regions suggests that OPEC evaluates the prospects for a recovery in demand in different ways, and also takes into account different levels of risks.
The EIA report showed that oil stockpiles in the United States fell by 7.99 million barrels in the reporting week, which significantly exceeded the forecast of -2 million barrels. This strong decline was driven by several factors, in particular increased capacity utilization rates of refineries. Now it is at its highest level since March last year. Oil exports increased by 1.58 mln bpd to 4.12 mln bpd. Only four times in history US oil exports topped 4 million bpd what looks like an indication of a really strong near-term oil demand picture, especially for US supply.
Technically, the corrective rally in oil after breakout of the key trend line took place in a narrowing channel, which indicates a keen buying pressure. The price approached the March high however potential breakout of the main resistance line is likely to be short-lived (false breakout), since risks in the news background are shifted towards neutral and negative events (growth in Iranian output, US shale oil recovery, planned increase in production OPEC, etc.). Most of the positive on the demand side has already been priced in by the market in one way or another:

Screenshot-2021-05-06-at-13-04-38.png


Yesterday data on ADP and ISM in the US were not as strong as expected which became a major disappointment. The growth of jobs according to ADP was 742K (forecast 800K), the ISM index did not live up to expectations:

Screenshot-2021-05-06-at-13-25-12.png


With this data in mind, optimism about Friday's NFP declined. This eased pressure on long-term yields and the dollar. The yield on 10-year US Treasuries retreated as less strong labor market growth would mean less acceleration in inflation – the biggest threat of real bond returns currently:

Screenshot-2021-05-06-at-13-31-08.png


It is clear that the risk of a weaker NFP report has risen, so the markets could start to brace for a negative surprise on Friday. If the report does turn out to be so, the bearish trend in the dollar is likely to resume, as more inconsistencies will appear in the story with higher inflation in the US.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
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