Daily Market Outlook, May 12, 2021

Equities remain under pressure around the world. Following declines in Europe and the US yesterday, most Asian markets are down sharply for the second day in a row, although there has been a bounce in China. Tech stocks seem to be leading the decline. In Australia, the government announced a budget that boosted spending on infrastructure and aged care, and gave tax breaks to households and businesses.

Just released UK GDP data showed a fall in output in Q1 of 1.5%, but a rise in March of 2.1%. The second consecutive monthly gain suggests that the economy entered Q2 with considerable momentum as output rose by more than expected across construction, manufacturing and services. Consequently, and given the ongoing relaxation of restrictions, it seems likely that the economy will stage a sizeable rebound this quarter. Nevertheless, the quarterly data still showed the impact of restrictions, with big falls in consumer spending, fixed spending, exports and imports. The fall in international trade may partly reflect the initial effects of the Brexit trade deal.

Given ongoing concerns in markets about upside risks for inflation, today’s US CPI report is likely to command attention. Expect the April to show annual inflation rising to 3.7% from 2.6% in March, with a more modest increase in the ‘core’ measure to 2.3% from 1.6%. That is likely to be consistent with pushing the Fed’s preferred inflation measure well above target.

US inflation seems set to rise further in May, given ongoing rises in energy and other commodity prices and concerns about stretched supply chains. However, it seems likely that Fed will still say that they were expecting the rise and regard it as temporary. Fed policymakers speaking yesterday cited evidence of a considerable amount of ‘slack’ in the economy, particularly in the labour market, as a key reason why a sharp move up in inflation is unlikely to be sustained. The same message is likely to come from Fed policymakers set to speak today. Comments from Fed Vice Chair Clarida, who is seen as a key member of the policy-setting Committee, are likely to be followed particularly closely, but he seems unlikely to waver from the previous message.

In the Eurozone, industrial production is forecast to post a 0.3% rise in March. Already released data showed moderate monthly rises in Germany (excluding construction), France and Spain, and a fall in Italy. In the UK, Bank of England Governor Bailey is scheduled to speak, but he may not touch on the immediate monetary policy outlook.

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby)

EUR/USD: 1.2000 (541M), 1.2165-75 (440M), 1.2190-1.2200 (863M)

EUR/GBP: 0.8550 (275M)

AUD/USD: 0.7825 (571M), 0.7900 (619M)

USD/JPY: 108.00-10 (766M), 108.25-35 (769M), 108.85-109.00 (650M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.2120 bullish above

EURUSD From a technical and trading perspective, the close through 1.2120 is constructive but bulls must defend 1.21 to set up a test of 1.2240/50. Failure to find sufficient support at 1.21 would suggest a false upside break opening a retest of 1.2050.

Flow reports suggest downside bids likely to be limited on a dip through to the 1.2110 area and opening up the possibility of stronger stops through the 1.2080 level with weakness continuing through to the 1.2000 before finding a little stronger bids. Topside offers through the 1.2160 area and increasing into the 1.2200 level with weak stops likely to be absent and congestion through to the 1.2220 level before hopping any possibility of testing the highs of the year through 1.2300 and stronger stops still likely to slow any further movement.

GBPUSD Bias: Bullish above 1.40 bearish below

GBPUSD From a technical and trading perspective, as 1.3960 now acts as support, bulls will target a retest of 1.4230’s. Only a close back below 1.40 would concern the bullish thesis.

Flow reports suggest downside bids light through the 1.4100 level and then continuing in the same vein through the 1.4050 level with slightly stronger congestive bids through into the 1.4000 area with weak stops likely to open a move through into the low 1.39 handle before finding some congestive bids into the 1.3950-1.3900 levels, Topside offers light through to the 1.4200 area where stronger offers are likely to be waiting possible stronger stops through the 1.4220 area possible and opening the possibility of moving through to the 1.4280-1.4300 area before hitting stronger offers

USDJPY Bias: Bullish above 108 targeting 112

USDJPY From a technical and trading perspective, as 107.50 acts as support there is potential for a test of the pivotal 108.50, through here will open another look at 110.

Flow reports suggest downside bids into the 107.80 however, a break through the level is likely to see weak stops and breakout stops appearing and the market free to quickly test 107.50 and an old trendline then nothing until closer to the 107.00 area where stronger bids start to appear but the downside opening to Feb levels, topside offers through to the 110.00 level with light congestion through the figure level and weak stops possibly limited and stronger offers likely increasing on a move higher towards the 111.00.

AUDUSD Bias: Bearish below .7790 bullish above

AUDUSD From a technical and trading perspective, as .7790 now acts as support bulls will target a retest of prior cycle highs above .80 cents

Flow reports suggest downside weak stops through the 0.7780 area and possible sellers joining the market on a move through to test through to the 0.7740-60 area for weak congestion before stronger bids into the 0.7720 levels and stops again appearing around the 80 levels through 0.7700, Topside offers light through to the 0.7850 area with light offers then through to the 0.7900 area and stronger congestion with weak stops through the 0.7920 level however, stronger congestion then continues through to the 80 cents area and is likely to increase in size the high it goes

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