Stocks up again, USD down as all eyes on US CPI

Headlines

* Powell reiterates Fed likely to keep rates higher for longer

* Dollar softens following PPI data, ahead of inflation

* Nasdaq closes at a record high with tech and real estate leading gains

* Gold bounces nearly 1% as yields and USD slide

FX: USD closed lower for a second day after initially making gains on the strong headline PPI data. But sharp downward revisions made markets think again about price data ahead of today’s CPI figures. Markets also focused on Fed Chair Powell’s dovish comment, when he said he doesn’t see the next move as a rate hike.

EUR looks to have broken higher through 1.08, after surging past the 50-day and 200-day SMAs at 1.0785 and 1.0790 respectively. The German ZEW business survey was modestly better than expected. This reflects expectations for better growth and lower interest rates in the months ahead. Trend dynamics on the euro look bullish as the single currency touched a one-month high.

GBP moved higher for a fourth day as bulls touched the 50-day SMA at 1.2591. The pound initially briefly sold off around the UK jobs data. Softening in the labour market was seen as the unemployment rate ticked higher as expected. But wage data remains sticky, rising 5.7% versus the forecast 5.5%. BoE Economist Pill was mildly dovish saying it was not unreasonable to expect rate cuts over the summer.

USD/JPY pushed above the halfway point of the moves in the recent “yentervention” late last month and early in May at 156.03. The major is now up seven days in eight since the spike low at 151.85. The next Fib retracement level (38.2%) is 157.01. Japanese bond yields hit multi-year highs after Monday’s BoJ decision to slow debt purchases. This has caused narrower yield differentials, but worryingly for the authorities, no help to the yen.

AUD tried to make gains into medium-term resistance around 0.6616.  USD/CAD fell towards 1.36 and could be breaking down. Support is around 1.3623/6.

Stocks: US equities saw two-way price action after the initial PPI reaction and then Powell’s comments. The broad-based benchmark S&P 500 closed up 0.48% at 5,246. The tech-laden Nasdaq 100 outperformed, adding 0.68% to finish at a record closing high at 18,322. The Dow Jones settled up 0.32% at 39,558. Meme stocks extended gains with GME (GameStop) shares up 60% after flag bearer Roaring Kitty posted on X.com for the first time in three years. AMC rose 32% and was the most traded NYSE share.

Asian Stocks: APAC futures are in the green. Asian stocks were muted after the subdued US handover. The ASX 200 was dragged lower by real estate weakness. The Nikkei 225 was choppy amid a softer yen. The Hang Seng and Shanghai Comp were initially strong on tech and real estate. But gains were faded amid looming incoming US tariffs.

Gold clawed back most of the losses that kicked off the week. After initially ticking higher on the headline PPI data, the dollar turned lower and yields too. Copper touched its highest level since 2022 above $4.89. The strong bullish uptrend has been fuelled by forecasts of a growing global supply deficit. Optimism over fresh stimulus in China is also helping. The metal has climbed close to 20% so far this year.

Day Ahead –US CPI data

Headline inflation is expected to fall one-tenth to 3.4% from 3.5% in March. The monthly headline CPI figure is seen ticking one-tenth lower to 0.3%. Focus will be on the core print as this strips out volatile food and energy costs. The year-on-year figure is forecast at 3.6% from 3.7%, while the monthly reading is predicted to drop to 0.3% from 0.4%. The latter is still too high for the Fed as 0.2% m/m figures are required over a number of months to bring inflation back to the 2% target.

Some economists have highlighted that the annual figures might benefit from favourable base effects in this week’s data. However, this won’t be seen again until August, so further progress on falling prices may prove tricky in the next few months. Money markets currently price in roughly just under two 25bp rate cuts for this year. The first move is predicted to come in September, with around a 65% chance of that taking place.

Chart of the Day – Dollar under pressure

Markets will obviously be wary of the recent hot streak in the price data.  But lower-than-expected figures could hit the dollar harder. This is because it has shown a tendency to asymmetrically bearish reactions to soft data and is still relatively overbought.

The flip side and a hotter report could see the greenback push higher. But the chances of a big upside surprise moving USD significantly are also limited by money market pricing. The first full 25bp Fed rate cut is not currently priced until November, which seems a relatively high bar. Support sits at 104.72 and 104.31/26. Resistance is 105.25 and 105.74.

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