28-May-2021

1) XAU/USD At Crossroads, US PCE Inflation Holds The Key
2) AUD/USD Drops To 0.7700 Neighbourhood, Closer To Weekly Lows
3) EUR/USD Remains Depressed Below 1.2200, Focus On US PCE, Budget
4) GBP/USD Stays Pressured Below 1.4200 Amid Higher US Treasury Yields
5) NZD/USD Retreats Further Multi-Month Lows, Slide Below Mid-0.7200s

 

 

1) XAU/USD At Crossroads, US PCE Inflation Holds The Key

Gold price (XAU/USD) finished Thursday almost unchanged around $1896, unable to resist above the $1900 mark. Gold price breached the key $1891 support after the 10-year Treasury yields advanced through 1.60% on the New York Times report that US President Joe Biden is pushing for $6 trillion in spending for the 2022 fiscal year. This came a day before the White House’s budget proposal. The greenback also drew support from upbeat US data. However, hopes for the US stimulus drove the Wall Street rally, which kept the dollar’s gains in check, helping gold stage a modest rebound. Gold prices also recovered amid increased buying support from China and India. Meanwhile, rising inflation expectations continue to boost gold’s appeal as a hedge against inflation.

This Friday, all eyes remain on the critical US Core Personal Consumption Expenditure (PCE) Price Index release, the Fed’s preferred inflation measure, which excludes volatile items such as energy and food prices. Gold’s fate hinges on the outcome of US PCE data, as a faster-than-expected increase in the price pressures could add fuel to the Fed’s tapering expectations, sending the yields and the dollar northwards and vice-versa. The Fed policymakers have recently revived calls for taper talks, dismissing rising inflation concerns. The US Core PCE is seen higher by 2.9% YoY in April vs. +1.8% booked previously. Meanwhile, Biden’s budget and month-end flows will also have a major influence on the gold prices.

Upbeat US PCE inflation report is likely to trigger an extension of the correction from multi-month highs, with strong support seen around $1870 levels. A breach of the latter could expose the $1845 cushion, the confluence of the 21 and 200-daily moving averages (DMA).

The Relative Strength Index (RSI) remains within the overbought territory, keeping the gold price at an imminent risk of decline, which could likely get compounded due to the effect of strong inflation figures.

However, the losses may remain capped by a bull cross confirmed on the daily chart after the 21-DMA pierced through the 200-DMA from below.

If the data fall short of expectations, the price could rebound towards May 26 highs of $1913, above which the January high of $1918 could get tested. The next upside target is seen at $1930, the round number.

 

2) AUD/USD Drops To 0.7700 Neighbourhood, Closer To Weekly Lows

The AUD/USD pair witnessed some selling during the early European session and dropped to four-day lows, around the 0.7715 region in the last hour.

Following a brief consolidation through the early part of the trading action on Friday, the pair met with some fresh supply and extended this week’s rejection slide from the vicinity of the 0.7800 mark. Some follow-through uptick in the US Treasury bond yields provided a goodish lift to the US dollar. This, in turn, was seen as a key factor that exerted downward pressure on the AUD/USD pair.

In fact, the yield on the benchmark 10-year US government bond recorded the steepest rise in over a week on Thursday on reports about the Biden administration’s multi-trillion spending plan. The US President Joe Biden is expected to propose a $6 trillion budget for the fiscal year 2022 on Friday. This, along with mostly upbeat US economic data, raised bets for an earlier Fed lift-off.

The latest development further fueled worries about rising inflationary pressures, which might force the Fed to tighten its monetary policy sooner rather than later. Hence, the focus will remain on Friday’s key release of the core PCE Price Index. This will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the AUD/USD pair.

Meanwhile, the global markets cheered the Biden administration’s multi-trillion spending plan. This was evident from an extension of a strong rally in the global equity markets, which might extend some support to the perceived riskier Aussie. That said, a sustained break below the 0.7700 level would mark a bearish break for the AUD/USD pair and pave the way for additional losses.

 

3) EUR/USD Remains Depressed Below 1.2200, Focus On US PCE, Budget

EUR/USD remains on the back foot below 1.2200 ahead of the European open. The US dollar benefits from firmer Treasury yields on optimism over the spending plan. However, inflation concerns continue to keep investors unnerved. Eurozone sentiment data, US Core PCE awaited.

Euro/dollar has dropped below the 50 Simple Moving Average on the four-hour chart and momentum has turned negative. Bulls may find some solace in the fact that the currency pair still trades above the 100 and 200 SMAs. Nevertheless, bears are gaining ground.

Some support awaits at 1.2155, which provided support last week. It is followed by 1.2105, a cap from earlier in the month, and then by 1.2075.

Some resistance is at the recent high of 1.2210, followed by the former triple top of 1.2245 and finally by the May peak of 1.2266.

How far does $6 trillion go? In the short term, a mere press report about President Joe Biden’s fiscal 2022 budget is pushing the dollar higher. While stock cheer the prospects of more government investment and faster growth, the specter of larger US debt weighs on bonds. Treasury yields are rising and the greenback follows.

The dollar has also received a boost from Thursday’s mostly upbeat economic releases and Friday’s publications could add fuel to the fire. While headline Durable Goods Orders disappointed with a drop, the non-defense ex-air component – aka “core of the core” surprised with a leap of over 2%.

This increase in investment is good news for the economy. Moreover, weekly jobless claims extended their decline, hitting a new pandemic low of 406,000. Gross Domestic Product growth remained unchanged at 6.4% annualized in the second read, a minor miss that was shrugged off by investors.

Friday features the release of Personal Income, Personal Spending, and Core Personal Consumption Expenditure (Core PCE) – the Federal Reserve’s favorite gauge of inflation. Economists expect it to surpass the bank’s objective of 2% but by how much? If the indicator for May beats estimates – like the Consumer Price Index – the greenback could get another boost.

While there are three more days until May officially ends, Friday’s trading will likely see choppy end-of-month trading. Monday is a bank holiday in both the US and the UK, meaning money managers will be scrambling to adjust their portfolios. As the dollar has been on the back foot during the month, an upside correction cannot be ruled out.

All in all, the greenback has room to rise. What about the euro? European Central Bank member Isabel Schnabel said that the increase in European bond yields is natural, hinting at her reluctance to further ECB intervention. Moreover, France revised its first-quarter GDP down from +0.1% to -0.4% – making it the second consecutive quarter of contraction and thus an official recession.

 

4) GBP/USD Stays Pressured Below 1.4200 Amid Higher US Treasury Yields

GBP/USD remains pressured near 1.4200, as the US dollar holds firmer on the session amid higher yields and Biden’s spending plan. Concerns about Indian covid variant offset hawkish BOE-speak. Focus shifts to US data.

From a technical perspective, the pair continued with its struggle to find acceptance above the 1.4200 mark and retreated from the top end of a two-week-old trading range. This, in turn, warrants some caution for bullish traders and makes it prudent to wait for some follow-through buying before positioning for any further appreciating move. Any subsequent move up is likely to confront resistance near the 1.4230-35 region, or YTD tops, above which the pair could aim to reclaim the 1.4300 mark.

The latter coincides with a resistance marked by a short-term ascending trend-channel extending from April monthly swing lows. A sustained move beyond will be seen as a fresh trigger for bullish traders and set the stage for a move to test April 2018 swing highs, around the 1.4375 region.

On the flip side, the 1.4150 horizontal level now seems to protect the immediate downside. Any subsequent fall might continue to attract some dip-buying and remain limited near the 1.4100-1.4090 area. Failure to defend the mentioned support levels might turn the pair vulnerable to accelerate the fall towards mid-1.4000s en-route the key 1.4000 psychological mark, or the ascending trend-channel support.

The GBP/USD pair witnessed a dramatic intraday turnaround on Thursday and rallied over 125 pips from sub-1.4100 levels, or one-and-half-week lows. The sharp intraday positive move followed hawkish remarks from the Bank of England policymaker Gertjan Vlieghe, saying that the central bank was likely to raise rates well into next year. Vlieghe also noted that an increase could come earlier if there is a smooth transition from furlough and the economy rebounds more quickly than expected.

The comes on the back of the optimistic outlook for the UK economy – bolstered by the impressive pace of vaccinations and the gradual easing of lockdown measures. UK Prime Minister Boris Johnson also said there is nothing in the data currently to delay the plan to end restrictions fully on June 21. This was seen as another factor that continued acting as a tailwind for the British pound and provided an additional boost, pushing the pair back above the 1.4200 mark.

On the other hand, a sharp rise in the US Treasury bond yields helped to put a tentative floor under the US dollar and kept a lid on any further gains for the major. In fact, the yield on the benchmark 10-year US government bond jumped back above the 1.60% threshold amid concerns about the coming supply of government debt. This further fueled worries about rising inflationary pressures, which might force the Fed to act faster and tighten its monetary policy sooner rather than later.

On the economic data front, the number of Americans filing new claims for jobless benefits fell to the lowest level since mid-March 2020. A separate report confirmed that the US economy expanded by a 6.4% annualized pace during the first quarter of 2021. Adding to this, the Durable Goods Orders indicated an acceleration in business spending on equipment. The market reaction to the data, however, turned out to be muted as the focus remains on Friday’s release of the PCE price index.

Meanwhile, the pair struggled to capitalize on the previous day’s strong positive move, instead met with some supply during the Asian session on Friday. The pullback lacked any obvious fundamental catalyst and could be solely attributed to some repositioning trade ahead of the Fed’s preferred inflation gauge. The data, along with the US bond yields, will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the major.

 

5) NZD/USD Retreats Further Multi-Month Lows, Slide Below Mid-0.7200s

The NZD/USD pair continued losing ground heading into the European session and dropped to fresh daily lows, around the 0.7240 region in the last hour.

Having struggled to find acceptance above the 0.7300 mark, the pair witnessed some heavy selling on the last day of the week and snapped four consecutive days of the winning streak. The sharp fall was exclusively sponsored by a modest pickup in the US dollar demand, which found some support from the overnight upsurge in the US Treasury bond yields.

Long-dated US Treasuries sold off on Thursday in reaction to mostly upbeat US economic data and reports that US President Joe Biden will announce a $6 trillion budget for the fiscal year 2022. This further stoked worries about rising inflationary pressure, which might force the Fed to act faster and tighten its monetary policy sooner rather than later.

The global markets cheered the Biden administration’s multi-trillion spending plan, which was evident from an extension of a strong rally in the global equity markets. This might extend some support to the perceived riskier kiwi and help limit any further losses for the NZD/USD pair ahead of Friday’s release of the key inflation data from the US.

The US Bureau of Economic Analysis (BEA) will release the Fed’s preferred inflation gauge – the core PCE Price Index later this Friday. This, along with the US stimulus headline, will drive the US bond yields and influence the USD. Traders might further take cues from the broader market risk sentiment to grab some short-term opportunities around the NZD/USD pair.