Daily Market Outlook, May 25, 2021

Asian equity markets are higher this morning after gains in Europe and the US yesterday. The ‘risk on’ mood was helped by comments from US Federal Reserve officials, which again noted that the current rise in inflation is probably ‘transitory’ and that an early tightening in monetary policy is not warranted.

In the UK, April public sector borrowing data showed a £31bn monthly deficit, which was close to expectations. That figure is about £15bn below its level at the same point a year ago, but well above the £9.9bn deficit recorded in April 2019 before the pandemic started to take hold.

Today’s German IFO survey for May will provide a timely update on the largest economy in the Eurozone. Last Friday’s PMI report showed falls in the manufacturing readings for both Germany and the Eurozone as a whole, albeit from very high April levels, alongside big rises in the services measures. That added up to an increase in the composite reading, consistent with an overall rise in activity. Expect the IFO to give a similar message, with improvements in both the current conditions and expectations components.

In the UK, the CBI retail survey will give an early gauge of May sales. Last week, the official retail survey for April showed a big gain of more than 9%, reflecting the easing in restrictions. Today’s report will show whether strong activity continued into May.

The US Conference Board’s consumer confidence measure for May will be watched closely after a similar survey from the University of Michigan posted an unexpected sharp monthly fall. That seemed to be due to a consumer concerns about evidence of a pickup in inflation.

Early tomorrow, the New Zealand central bank’s latest update is expected to leave monetary policy unchanged. However, the statement and the press conference that follow will be watched for any hints when policy may eventually be tightened. As a first step, it will be interesting to see if there are any discussions of a tapering of asset purchases.

Meanwhile, amongst today’s central bank speakers, potentially of most interest to UK markets will be Bank of England policymaker Tenreyro who seems to be one of the more ‘dovish’ members of the BoE’s Monetary Policy Committee. She is supposed to talk about the economic challenges of the pandemic and so her remarks may include some comment on future near-term policy moves.

G10 FX Options Expiries for 10AM New York Cut

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

EUR/USD: 1.2150 (427M), 1.2225 (570M), 1.2250-60 (330M), 1.2275 (980M)

USD/CHF: 0.8975 (210M)

AUD/USD: 0.7780 (284M)

USD/JPY: 108.00-05 (930M), 108.95-109.00 (487M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.2150 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 1.2270/80. A close through 1.2150 would suggest a corrective phase developing.

Flow reports suggest topside offers strong through the 1.2275 level and increasing on a push above the 1.2300 level all the way to the 1.2350 before weak stops are joined by buyers on the move through the highs of the last couple of years, downside bids light through the 1.2200 area and weak stops likely on a dip through the level and opening a quick move through the 1.2150 area and towards 1.2100 where stronger bids are likely.

GBPUSD Bias: Bullish above 1.41 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 1.41 would concern the bullish thesis opening the window for a corrective cycle.

Flow reports suggest topside offer through the 1.4200 level with weak stops likely to open a test through to the 1.4250 before stronger offers start to appear through to the 1.4300 level and a long term trend line likely to have attracted option barriers, a break here does however likely see stronger stops appearing and the market opening to a larger move towards the 1.47-1.48 area. Downside bids light into the 1.4100 with weak stops on a move through the level to test quickly through weak sentimental 1.4050 and stronger bids then appearing for any test of the 1.4000 level.

USDJPY Bias: Bullish above 108 targeting 112

USDJPY From a technical and trading perspective, as 108.30 supports bulls will target 110.70’s, a closing breach of 108.30 would suggest a corrective move to test 106.30

Flow reports suggest downside light through the 109.00 level with weak stops below the 108.80 and opening the market to a new test of the 108.00 level, stronger 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, the breach of .7790 refocuses attention on the downside as .7820 contains upside attempts, look for a test of .7680.

Flow reports suggest downside bids light through the 0.7750 area and stronger bids likely continue through to the 0.7700 area before weak stops appear below the 0.7680 and a stronger 0.7650 area then holds the downside, topside offers into the 0.7800 area with weak stops through the 0.7820 before opening for a new run higher and strong offers likely through the 0.7840-60 area to build for the 79 cent level.

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