Sive Morten
Special Consultant to the FPA
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Fundamentals
This week investors mostly were watching for earnings reports. Although positive numbers were widely expected and matched to expectations, some surprises had made impact on markets, not just to equities, as they come from Alphabet and Apple monsters that were not as good as suggested. Second major event of this week is the Fed statement. Although it has brought nothing new, and statistics through the week was good - investors were cautious and start worrying on inflation again.
Market overview
Edward Moya, senior market analyst at OANDA, said while the Fed could stay the course this week, it could be a different story at the June meeting given the optimism surrounding robust COVID-19 vaccine distribution.
"That will complicate the outlook for the dollar," Moya noted, adding that initially people were expecting the Fed to keep its easy monetary policy stance for some time. But the success in U.S. distribution of vaccines, plus the improving economic outlook have prompted investors to believe that the Fed may taper its asset purchases sooner rather than later. "A lot of that could derail the dollar view that its day of reckoning is here," Moya said.
German business morale improved by less than expected in April as a third wave of COVID-19 infections and problems with supply of components in the industrial sector seemed to slow the recovery in Europe's largest economy. Analysts, however, kept focusing on the general direction of travel of the economy, seen firmly on its way out of the COVID-19 crisis.
Some analysts say signs of rising inflation expectations could nudge the Fed to abandon its rhetoric that a policy tightening is still a long way off.
Investors’ inflation expectations, measured by the break-even inflation (BEI) rate calculated from U.S. inflation-linked bonds, rose above 2.40% on Tuesday, the highest level since 2013.
“In a way, the rise in the BEI above 2% is what the Fed has been wishing for. Still, if it goes too far it could raise alarm at the Fed. The Fed will probably not be able to overlook a rise in BEI above 2.5%,” said Makoto Noji, chief FX strategist at SMBC Nikko Securities.
The Federal Reserve said last year it aims to bring average inflation to around 2% and to allow it to overshoot above 2%, rather than trying to cap it around 2%.
“When you look around, the Bank of Canada already started tapering. The Bank of England could come next. The ECB (European Central Bank) might drop a hint of tapering in June..."said Jun Arachi, forex strategist at Rakuten Securities.
Biden is expected to roll out a plan to raise taxes on the wealthiest Americans, including the largest-ever increase in levies on investment gains, to fund about $1 trillion in childcare. News reports about his tax hike plan dented markets’ risk appetite only briefly on Friday, but analysts think there could be a bigger reaction if the plan becomes more concrete.
“In addition to tax policies that have resurfaced as a market focus, his stance on diplomacy should attract some attention given recent tensions with China and Russia,” said Shinichiro Kadota, senior strategist at Barclays.
Fed Statement
The Federal Reserve held interest rates and its monthly bond-buying program steady on Wednesday, nodding to the U.S. economy’s growing strength but giving no sign it was ready to reduce its support for the recovery. In its statement released after a two-day policy meeting the central bank did note progress on vaccines and economic recovery, a slightly less negative view than the Fed’s description in March, when it said the health crisis “poses considerable risks to the economic outlook.”
Markets were initially steady after the FOMC statement, but stocks added to gains and U.S. Treasury yields fell after Fed Chair Jerome Powell said in a question and answer session that it was not time to start talking about tapering its bond buying program.
“If you look at the 2013 experience, they started talking about tapering about six months before they announced it… If we reach these goals on the pandemic by June, they probably start to feel comfortable enough to start talking about it then and then taper in December,” said Tiffany Wilding from Pimco.
“The economy’s sort of at this point where things can start booming rather quickly. And (the Fed) recognizes the inflation risk, but at the same time shrugs them off to sort of transitory factors. I think the market is a little disappointed here with the Fed that it’s not responding and reacting as quickly as they would like it to to the economic forecast that itself is projecting. ” said Garry Pollack from Deutsche Bank Private Wealth Management, NY.
“We do feel that a higher inflation reading this year and in 2022 will prove to be not transitory, that the Fed will hit that 2% threshold and above, if not even higher, on a more sustained basis. So that’s where I think we would be on the side of disagreeing with Chairman Powell, that we think inflation is going to gain a toehold,” said Kevin Flanagan from WisdomTree Funds, NY.
“The Fed’s optimism has some concerned that tapering or higher rates may occur sooner than expected. The future focus will likely be on the taper timetable. Powell has historically done a nice job saying the right things to keep markets calm but discussion about tapering could create some volatility," said David Carter, Lenox Wealth Advisors, NY.
"Nevertheless the pick -up in inflation is largely dismissed as transitory, sectors hit hardest by the pandemic are described as remaining weak and there is no hint that the ‘substantial further progress’ needed before tapering asset purchases is getting materially closer. We now think the Fed will start to discuss tapering over the summer but the actual taper probably still won’t happen until the turn of the year.” - Brian Coulton, Fitch Ratings.
“There was a change where they flagged that they’re no longer saying that the health crisis is weighing on inflation. It’s super minor, but I think that what that shows is that inflation has room to pick up and the committee is recognizing that inflation has room to go. They continue to use the word transitory, so much that’s becoming almost a humorous buzzword among strategists and traders in the marketplace, because it’s just hard to know what transitory is.
Right now the market believes them, its hard to say whether they’ll be right or wrong, but one thing I keep believing is that whether they are right or wrong about inflation I think the market is going to get impatient about the level of inflation and how long it might last, and it might be perceived by the market that that inflation is not transitory, causing a little bit of a revolt, so to speak, in the bond market. We’ll see how that plays out. I’m not sure the market will be comfortable with the Fed just saying it’s not a problem, ” - said Patrick Leary, Incapital.
The greenback had rallied in conjunction with the rise in U.S. Treasury yields on the view that a successful vaccination program and strengthening economic data would prompt the Fed to talk about reducing its bond purchases sooner rather than later.
"Powell threw cold water on talking about tapering," and that has been the main driver in the move lower in the dollar, said Ron Simpson, managing director, global currency analysis at Action Economics in Tampa, Florida.
"As it stands, there is nothing here to change our view that the Fed won't begin to taper its monthly asset purchases until the start of next year and won't begin to raise interest rates until late 2023," said Paul Ashworth, chief U.S. economist at Capital Economics, in a note sent after the Fed statement.
Powell also reiterated that the rise in inflation this year was transitory and that would not meet the standard for raising interest rates. Still, the eurodollar and fed funds markets , which track short-term interest rate expectations, on Wednesday have fully priced Fed tightening in March 2023. Eurodollar futures also show a more than 90% chance of a Fed hike by December 2022.
The dollar slid to nine-week lows on Thursday as a doggedly dovish outlook from the U.S. Federal Reserve and bold spending plans from the White House gave a green light for the global reflation trade.
President Joe Biden's push for another $1.8 trillion in spending also risked blowing out the U.S. budget and trade deficits. The twin deficits have long been an Achilles heel for the dollar.
"The risk is the Fed is very cautious and delays taking the first steps to normalising policy," said Joseph Capurso, head of international economics at CBA. "Low interest rates amid an improving U.S. and global economy is a recipe for the dollar to continue decreasing.
Even the outperformance of the U.S. economy had a sting in the tail for the dollar as it sucked in imports and drove the trade deficit to record highs in March.
The U.S. trade deficit in goods jumped to a record high in March, suggesting trade was a drag on economic growth in the first quarter, but that was likely offset by robust domestic demand amid massive government aid. The goods trade deficit surged 4.0% to $90.6 billion last month, the highest in the history of the series. Exports of goods accelerated 8.7% to $142.0 billion.
Economists expect the goods trade deficit will remain large at least until year-end, with demand reverting back to services like air travel and dining out following the expansion of the COVID-19 vaccination program to all adult Americans.
"The goods deficit will start to shrink by the end of 2021 and into 2022," said Bill Adams, senior economist at PNC Financial in Pittsburgh, Pennsylvania. "As the pandemic comes under control in the United States, American consumers will spend less on imported goods, shrinking imports, and foreigners will buy more U.S. exports as their economies recover further."
The Fed's dogged dovishness was a marked contrast to the Bank of Canada which has already begun to taper its asset buying, sending the dollar sliding to a three-year trough on the loonie at C$1.2303 .
The dollar recovered from a nine-week low on Thursday, lifted by a rise in U.S. Treasury yields after the government reported strong economic growth for the first quarter and an improvement in new jobless claims in the latest week.
Gross domestic product increased at a 6.4% annualized rate in the first quarter, the data showed, the second-fastest growth since the third quarter of 2003. First-quarter growth was powered by consumer spending, which increased at a 10.7% rate versus a 2.3% pace in the fourth quarter
That growth accelerated in the first quarter, buoyed by government stimulus cheques, setting the course for what is expected to be the strongest performance this year in nearly four decades. Signs that a strengthening economy, particularly in the labour market, might force the Fed into an earlier tapering of its asset-purchase programme had pushed the dollar index, or DXY, to a five-month high at the end of March.
"DXY may attempt a rebound in coming days as expectations turn to a potentially blockbuster April payrolls next week, but gains will prove short-lived with Fed officials to underscore Powell’s resolutely dovish stance," Westpac strategists wrote in a client note. The gauge is likely to drop below 90 in the near term, from 90.6 currently, but the "DXY's depreciation trend is likely more of an ongoing grind than a wholesale sharp setback," they said.
U.S. consumer spending rebounded in March amid a surge in income as households received additional COVID-19 pandemic relief money from the government, building a strong foundation for a further acceleration in consumption in the second quarter. Other data on Friday showed labor costs jumped by the most in 14 years in the first quarter, driven by a pick-up in wage growth as companies competed for workers to boost production.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 4.2% last month after falling 1.0% in February, the Commerce Department said. The increase was broadly in line with economists' expectations.
INFLATION RISING
In a separate report on Friday, the Labor Department said its Employment Cost Index, the broadest measure of labor costs, jumped 0.9% in the first quarter. That was the largest rise since the second quarter of 2007.
The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation as it adjusts for composition and job quality changes. Last quarter's increase was driven by a 1.0% rise in wages, also the biggest gain in 14 years.
Federal Reserve Chair Jerome Powell on Wednesday acknowledged the worker shortage saying "one big factor would be schools aren't open yet, so there's still people who are at home taking care of their children, and would like to be back in the workforce, but can't be yet."
Economists agree and expect the rising wages to contribute to higher inflation this year.
The strengthening demand and the dropping of last year's weak readings from the calculation lifted inflation last month.
The personal consumption expenditures (PCE) price index excluding the volatile food and energy component increased 0.4% after edging up 0.1% in February. In the 12 months through March, the so-called core PCE price index increased 1.8%, the most since February 2020.
The core PCE price index is the Fed's preferred inflation measure for its 2% target, which is a flexible average.
Powell reiterated on Wednesday that he expected higher inflation will transitory. But some economists have doubts.
"While labor costs are hardly getting out of hand, there is clearly more wage pressure in the economy at present than the early stages of the past cycle," said Sarah House, a senior economist at Wells Fargo in Charlotte, North Carolina. Stronger labor cost growth even before the economy hits full employment is a reason to think that even after the reopening-fueled pop this year, inflation is likely to settle above the anemic rate of the past cycle."
Households last month spent more on motor vehicles and recreational. They also visited restaurants.
When adjusted for inflation, consumer spending rebounded 3.6% last month after falling 1.2% in February. The rebound in the so-called real consumer spending sets consumption on a higher growth trajectory heading into the second quarter.
Most economists expect double-digit growth this quarter, which would position the economy to achieve growth of at least 7%, which would be the fastest since 1984. The economy contracted 3.5% in 2020, its worst performance in 74 years.
COT Report
This week we do not see any big shifts in market positions. EUR keeps positive sentiment and shows increasing of net long position on a background of rising open interest. Speculators have shown mixed changes as short position also has been increased slightly, but hedgers are shown more evidence with simultaneous contraction of positions against EUR drop and increasing hedge against EUR rising (Hedgers' positions are opposite to supposed future direction of the currency). It means that short-term tendency that we have now has all chances to continue. At least it has no barriers from position structure factor:
Next week to watch
Next Friday's U.S. monthly jobs report will give a crucial glimpse into the health of the labour market as the country seeks to broaden its economic reopening.
Non-farm payrolls come at the end of a busy week, including factory data and PMIs. Strong readings could give yields and the dollar another lift and test the Fed’s resolve after it said it was too early to consider rolling back emergency support.
Payrolls are expected to have added 925,000 jobs in April, according to a Reuters poll, after a 916,000 jump in March - the largest increase since last August.
THE SCOTTISH QUESTION
Elections, a central bank meeting and a probe into the redecorating of Prime Minister Boris Johnson’s official apartment make for a busy week ahead for Britain.
On Thursday, voters head for the ballot box in Scotland. Forecast to win is the ruling Scottish National Party, which wants to call another referendum on leaving the United Kingdom, a plan Johnson vows to block. Any fallout could shake the pound from its stupor.
English local elections and a by-election will also test whether the popularity of Johnson's Conservative Party has been dented by recent upheavals.
And ahead of the Bank of England’s Thursday meeting, markets will brace for a significant step towards reducing the pace of bond purchases as the economy rebounds from its COVID-19-induced slump.
Taking in consideration major fundamental factors we come to conclusion that dollar stands at the edge. When market comes to decisive moment, it becomes very unstable. Besides dollar stands under pressure of the factors that impossible to ignore any more. Market is stuck between two fires, and when the pressure in the pot is growing - it could blow at any moment. The first fire is the Fed that stubbornly repeat the same song concerning inflation - " It is not back", but reality could be different:
Second fire is real situation in US economy. Now questions - economy is rising. It is more and more difficult to deny the facts when we get GDP, NFP, consumption, real estate data, PCE and ECI reports. Today we're not occasionally show a lot of comments from big companies, concerning current situation. Despite recent Fed statement, investors are becoming worry on inflation and all together telling the same thing - since summer verbal preparation to rate change should start, in the beginning of 2022 - taper tantrum that gradually should lead the markets into next rate hiking starting Dec 2022. At the same time, many analysts point that these terms are arguable. Everything could happen earlier if data keep going with the same positivity.
In relation to our long-term view - everything goes well by far as market is tending to our 87.40 long-term target (Dollar Index). Overall situation is not overheat yet and markets still have time to support current trend. But once market is coming to turning point, it always becomes very nervous and sensitive, volatility is rising. So, the particular moment of reversal suddenly could come. All these things that we hear and see right now confirms that we're at the eve of long-term bullish dollar cycle that lasts for 3-5 years. This is our central long-term view. And it seems that yes - "He's really back"...
Technicals
Monthly
April is closed on a positive mood. Not as positive as on last week, but still, overall sentiment is bullish in short-term. As we've mentioned above - market expects changing of Fed rhetoric somewhere in summer. June is the first month, that was mentioned, but theoretically it could happen later as well. Anyway, as we're coming to turning point, it seems that EUR has 2-4 bars on monthly chart to hit major upside 1.2860 target.
Still, we suspect that an exceptional event exists that could let EUR to extend this time. This is more aggressive ECB rhetoric in June. Above we said that Canada already starts tightening policy, BoE on the way and June might become a clash of the titans - ECB vs. Fed. Early verbal action from ECB might push EUR higher, if Fed will keep its mantras.
As we've said earlier, despite that market has come very close to 1.16 vital area - EUR was able to stay above it and shows perfect recovery. MACD trend stands bullish. From technical point of view, this is good sign that price is jumping up from YPP.
Taking the parallel view on Dollar Index - EUR has corresponding upside AB-CD with 1.2860 OP, standing near Yearly Pivot Resistance of 1.26. If our suggestion is correct - 1.26-1.28 is an area that corresponds to DXY 87.40 target.
Weekly
Here we've got not very pleasant moment, guys. At least for the bulls. Just last week we've discussed great upside performance, possible "3 white soldiers" pattern and crash of bearish H&S and suddenly we've got this - bearish grabber. Of course that’s not saying much yet, as grabber sometimes might be the by-product of the rally without real bearish background. But, still we have to be careful with it. I've checked - this is real grabber that exists on CME futures as well. Besides it is formed right around key 1.21 resistance area. So, the primary subject is to watch what this "monster" brings us next week. Also it makes tricky any attempt to go long as situation becomes clear again only when grabber will be cancelled.
Daily
So, sell-off on daily chart looks impressive. Trend has turned bearish. In general, if we wouldn't got the grabber on weekly - it is nothing wrong with deep retracement now. Price has formed bullish reversal swing, hits our 1.618 upside target of XA retracement. Once we've agreed to keep an eye on reverse H&S pattern here - downside action is reasonable, if even EUR drops to 5/8 support area. Weekly pattern, in turn, brings additional component to downside action, that makes possible destruction of bullish context totally.
Still, next week we intend to focus on 1.1940-1.1970 support area. Besides of strong K-area and natural support zone, EUR is approaching to oversold level that should provide additional support. Thus, once the level will be hit - some bullish patterns could be formed around and it might be relatively low risk chance for long entry.
But, as we have too many bearish things around - we suggest taking long position only if patterns will be formed, not blindly just because EUR hits strong support area. This should safe us from bad things.
Intraday
At the first glance market stands in a shape of perfect H&S pattern - 1.618 ratio, great sell-off on the head's slope, strong neckline support. At the first stage, we're not interested with downside target - actually we get two of them (1.1922 and 1.1870 Agreement) but interested with minor upside trade. Minimum target should equal to the top of the left arm. This is around 1.2065, which makes this bullish trading setup is relatively safe.
On 1H chart scalp traders could get chance to make more trades as we have perfect thrust there. It might be B&B "Sell" or DRPO "Buy". We also could consider using of DRPO for our long entry purposes, as it could become the pattern that trigger upward action from the neckline.
This week investors mostly were watching for earnings reports. Although positive numbers were widely expected and matched to expectations, some surprises had made impact on markets, not just to equities, as they come from Alphabet and Apple monsters that were not as good as suggested. Second major event of this week is the Fed statement. Although it has brought nothing new, and statistics through the week was good - investors were cautious and start worrying on inflation again.
Market overview
Edward Moya, senior market analyst at OANDA, said while the Fed could stay the course this week, it could be a different story at the June meeting given the optimism surrounding robust COVID-19 vaccine distribution.
"That will complicate the outlook for the dollar," Moya noted, adding that initially people were expecting the Fed to keep its easy monetary policy stance for some time. But the success in U.S. distribution of vaccines, plus the improving economic outlook have prompted investors to believe that the Fed may taper its asset purchases sooner rather than later. "A lot of that could derail the dollar view that its day of reckoning is here," Moya said.
German business morale improved by less than expected in April as a third wave of COVID-19 infections and problems with supply of components in the industrial sector seemed to slow the recovery in Europe's largest economy. Analysts, however, kept focusing on the general direction of travel of the economy, seen firmly on its way out of the COVID-19 crisis.
Some analysts say signs of rising inflation expectations could nudge the Fed to abandon its rhetoric that a policy tightening is still a long way off.
Investors’ inflation expectations, measured by the break-even inflation (BEI) rate calculated from U.S. inflation-linked bonds, rose above 2.40% on Tuesday, the highest level since 2013.
“In a way, the rise in the BEI above 2% is what the Fed has been wishing for. Still, if it goes too far it could raise alarm at the Fed. The Fed will probably not be able to overlook a rise in BEI above 2.5%,” said Makoto Noji, chief FX strategist at SMBC Nikko Securities.
The Federal Reserve said last year it aims to bring average inflation to around 2% and to allow it to overshoot above 2%, rather than trying to cap it around 2%.
“When you look around, the Bank of Canada already started tapering. The Bank of England could come next. The ECB (European Central Bank) might drop a hint of tapering in June..."said Jun Arachi, forex strategist at Rakuten Securities.
Biden is expected to roll out a plan to raise taxes on the wealthiest Americans, including the largest-ever increase in levies on investment gains, to fund about $1 trillion in childcare. News reports about his tax hike plan dented markets’ risk appetite only briefly on Friday, but analysts think there could be a bigger reaction if the plan becomes more concrete.
“In addition to tax policies that have resurfaced as a market focus, his stance on diplomacy should attract some attention given recent tensions with China and Russia,” said Shinichiro Kadota, senior strategist at Barclays.
Fed Statement
The Federal Reserve held interest rates and its monthly bond-buying program steady on Wednesday, nodding to the U.S. economy’s growing strength but giving no sign it was ready to reduce its support for the recovery. In its statement released after a two-day policy meeting the central bank did note progress on vaccines and economic recovery, a slightly less negative view than the Fed’s description in March, when it said the health crisis “poses considerable risks to the economic outlook.”
Markets were initially steady after the FOMC statement, but stocks added to gains and U.S. Treasury yields fell after Fed Chair Jerome Powell said in a question and answer session that it was not time to start talking about tapering its bond buying program.
“If you look at the 2013 experience, they started talking about tapering about six months before they announced it… If we reach these goals on the pandemic by June, they probably start to feel comfortable enough to start talking about it then and then taper in December,” said Tiffany Wilding from Pimco.
“The economy’s sort of at this point where things can start booming rather quickly. And (the Fed) recognizes the inflation risk, but at the same time shrugs them off to sort of transitory factors. I think the market is a little disappointed here with the Fed that it’s not responding and reacting as quickly as they would like it to to the economic forecast that itself is projecting. ” said Garry Pollack from Deutsche Bank Private Wealth Management, NY.
“We do feel that a higher inflation reading this year and in 2022 will prove to be not transitory, that the Fed will hit that 2% threshold and above, if not even higher, on a more sustained basis. So that’s where I think we would be on the side of disagreeing with Chairman Powell, that we think inflation is going to gain a toehold,” said Kevin Flanagan from WisdomTree Funds, NY.
“The Fed’s optimism has some concerned that tapering or higher rates may occur sooner than expected. The future focus will likely be on the taper timetable. Powell has historically done a nice job saying the right things to keep markets calm but discussion about tapering could create some volatility," said David Carter, Lenox Wealth Advisors, NY.
"Nevertheless the pick -up in inflation is largely dismissed as transitory, sectors hit hardest by the pandemic are described as remaining weak and there is no hint that the ‘substantial further progress’ needed before tapering asset purchases is getting materially closer. We now think the Fed will start to discuss tapering over the summer but the actual taper probably still won’t happen until the turn of the year.” - Brian Coulton, Fitch Ratings.
“There was a change where they flagged that they’re no longer saying that the health crisis is weighing on inflation. It’s super minor, but I think that what that shows is that inflation has room to pick up and the committee is recognizing that inflation has room to go. They continue to use the word transitory, so much that’s becoming almost a humorous buzzword among strategists and traders in the marketplace, because it’s just hard to know what transitory is.
Right now the market believes them, its hard to say whether they’ll be right or wrong, but one thing I keep believing is that whether they are right or wrong about inflation I think the market is going to get impatient about the level of inflation and how long it might last, and it might be perceived by the market that that inflation is not transitory, causing a little bit of a revolt, so to speak, in the bond market. We’ll see how that plays out. I’m not sure the market will be comfortable with the Fed just saying it’s not a problem, ” - said Patrick Leary, Incapital.
The greenback had rallied in conjunction with the rise in U.S. Treasury yields on the view that a successful vaccination program and strengthening economic data would prompt the Fed to talk about reducing its bond purchases sooner rather than later.
"Powell threw cold water on talking about tapering," and that has been the main driver in the move lower in the dollar, said Ron Simpson, managing director, global currency analysis at Action Economics in Tampa, Florida.
"As it stands, there is nothing here to change our view that the Fed won't begin to taper its monthly asset purchases until the start of next year and won't begin to raise interest rates until late 2023," said Paul Ashworth, chief U.S. economist at Capital Economics, in a note sent after the Fed statement.
Powell also reiterated that the rise in inflation this year was transitory and that would not meet the standard for raising interest rates. Still, the eurodollar and fed funds markets , which track short-term interest rate expectations, on Wednesday have fully priced Fed tightening in March 2023. Eurodollar futures also show a more than 90% chance of a Fed hike by December 2022.
The dollar slid to nine-week lows on Thursday as a doggedly dovish outlook from the U.S. Federal Reserve and bold spending plans from the White House gave a green light for the global reflation trade.
President Joe Biden's push for another $1.8 trillion in spending also risked blowing out the U.S. budget and trade deficits. The twin deficits have long been an Achilles heel for the dollar.
"The risk is the Fed is very cautious and delays taking the first steps to normalising policy," said Joseph Capurso, head of international economics at CBA. "Low interest rates amid an improving U.S. and global economy is a recipe for the dollar to continue decreasing.
Even the outperformance of the U.S. economy had a sting in the tail for the dollar as it sucked in imports and drove the trade deficit to record highs in March.
The U.S. trade deficit in goods jumped to a record high in March, suggesting trade was a drag on economic growth in the first quarter, but that was likely offset by robust domestic demand amid massive government aid. The goods trade deficit surged 4.0% to $90.6 billion last month, the highest in the history of the series. Exports of goods accelerated 8.7% to $142.0 billion.
Economists expect the goods trade deficit will remain large at least until year-end, with demand reverting back to services like air travel and dining out following the expansion of the COVID-19 vaccination program to all adult Americans.
"The goods deficit will start to shrink by the end of 2021 and into 2022," said Bill Adams, senior economist at PNC Financial in Pittsburgh, Pennsylvania. "As the pandemic comes under control in the United States, American consumers will spend less on imported goods, shrinking imports, and foreigners will buy more U.S. exports as their economies recover further."
The Fed's dogged dovishness was a marked contrast to the Bank of Canada which has already begun to taper its asset buying, sending the dollar sliding to a three-year trough on the loonie at C$1.2303 .
The dollar recovered from a nine-week low on Thursday, lifted by a rise in U.S. Treasury yields after the government reported strong economic growth for the first quarter and an improvement in new jobless claims in the latest week.
Gross domestic product increased at a 6.4% annualized rate in the first quarter, the data showed, the second-fastest growth since the third quarter of 2003. First-quarter growth was powered by consumer spending, which increased at a 10.7% rate versus a 2.3% pace in the fourth quarter
That growth accelerated in the first quarter, buoyed by government stimulus cheques, setting the course for what is expected to be the strongest performance this year in nearly four decades. Signs that a strengthening economy, particularly in the labour market, might force the Fed into an earlier tapering of its asset-purchase programme had pushed the dollar index, or DXY, to a five-month high at the end of March.
"DXY may attempt a rebound in coming days as expectations turn to a potentially blockbuster April payrolls next week, but gains will prove short-lived with Fed officials to underscore Powell’s resolutely dovish stance," Westpac strategists wrote in a client note. The gauge is likely to drop below 90 in the near term, from 90.6 currently, but the "DXY's depreciation trend is likely more of an ongoing grind than a wholesale sharp setback," they said.
U.S. consumer spending rebounded in March amid a surge in income as households received additional COVID-19 pandemic relief money from the government, building a strong foundation for a further acceleration in consumption in the second quarter. Other data on Friday showed labor costs jumped by the most in 14 years in the first quarter, driven by a pick-up in wage growth as companies competed for workers to boost production.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 4.2% last month after falling 1.0% in February, the Commerce Department said. The increase was broadly in line with economists' expectations.
INFLATION RISING
In a separate report on Friday, the Labor Department said its Employment Cost Index, the broadest measure of labor costs, jumped 0.9% in the first quarter. That was the largest rise since the second quarter of 2007.
The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation as it adjusts for composition and job quality changes. Last quarter's increase was driven by a 1.0% rise in wages, also the biggest gain in 14 years.
Federal Reserve Chair Jerome Powell on Wednesday acknowledged the worker shortage saying "one big factor would be schools aren't open yet, so there's still people who are at home taking care of their children, and would like to be back in the workforce, but can't be yet."
Economists agree and expect the rising wages to contribute to higher inflation this year.
The strengthening demand and the dropping of last year's weak readings from the calculation lifted inflation last month.
The personal consumption expenditures (PCE) price index excluding the volatile food and energy component increased 0.4% after edging up 0.1% in February. In the 12 months through March, the so-called core PCE price index increased 1.8%, the most since February 2020.
The core PCE price index is the Fed's preferred inflation measure for its 2% target, which is a flexible average.
Powell reiterated on Wednesday that he expected higher inflation will transitory. But some economists have doubts.
"While labor costs are hardly getting out of hand, there is clearly more wage pressure in the economy at present than the early stages of the past cycle," said Sarah House, a senior economist at Wells Fargo in Charlotte, North Carolina. Stronger labor cost growth even before the economy hits full employment is a reason to think that even after the reopening-fueled pop this year, inflation is likely to settle above the anemic rate of the past cycle."
Households last month spent more on motor vehicles and recreational. They also visited restaurants.
When adjusted for inflation, consumer spending rebounded 3.6% last month after falling 1.2% in February. The rebound in the so-called real consumer spending sets consumption on a higher growth trajectory heading into the second quarter.
Most economists expect double-digit growth this quarter, which would position the economy to achieve growth of at least 7%, which would be the fastest since 1984. The economy contracted 3.5% in 2020, its worst performance in 74 years.
COT Report
This week we do not see any big shifts in market positions. EUR keeps positive sentiment and shows increasing of net long position on a background of rising open interest. Speculators have shown mixed changes as short position also has been increased slightly, but hedgers are shown more evidence with simultaneous contraction of positions against EUR drop and increasing hedge against EUR rising (Hedgers' positions are opposite to supposed future direction of the currency). It means that short-term tendency that we have now has all chances to continue. At least it has no barriers from position structure factor:
Next week to watch
Next Friday's U.S. monthly jobs report will give a crucial glimpse into the health of the labour market as the country seeks to broaden its economic reopening.
Non-farm payrolls come at the end of a busy week, including factory data and PMIs. Strong readings could give yields and the dollar another lift and test the Fed’s resolve after it said it was too early to consider rolling back emergency support.
Payrolls are expected to have added 925,000 jobs in April, according to a Reuters poll, after a 916,000 jump in March - the largest increase since last August.
THE SCOTTISH QUESTION
Elections, a central bank meeting and a probe into the redecorating of Prime Minister Boris Johnson’s official apartment make for a busy week ahead for Britain.
On Thursday, voters head for the ballot box in Scotland. Forecast to win is the ruling Scottish National Party, which wants to call another referendum on leaving the United Kingdom, a plan Johnson vows to block. Any fallout could shake the pound from its stupor.
English local elections and a by-election will also test whether the popularity of Johnson's Conservative Party has been dented by recent upheavals.
And ahead of the Bank of England’s Thursday meeting, markets will brace for a significant step towards reducing the pace of bond purchases as the economy rebounds from its COVID-19-induced slump.
Taking in consideration major fundamental factors we come to conclusion that dollar stands at the edge. When market comes to decisive moment, it becomes very unstable. Besides dollar stands under pressure of the factors that impossible to ignore any more. Market is stuck between two fires, and when the pressure in the pot is growing - it could blow at any moment. The first fire is the Fed that stubbornly repeat the same song concerning inflation - " It is not back", but reality could be different:
Second fire is real situation in US economy. Now questions - economy is rising. It is more and more difficult to deny the facts when we get GDP, NFP, consumption, real estate data, PCE and ECI reports. Today we're not occasionally show a lot of comments from big companies, concerning current situation. Despite recent Fed statement, investors are becoming worry on inflation and all together telling the same thing - since summer verbal preparation to rate change should start, in the beginning of 2022 - taper tantrum that gradually should lead the markets into next rate hiking starting Dec 2022. At the same time, many analysts point that these terms are arguable. Everything could happen earlier if data keep going with the same positivity.
In relation to our long-term view - everything goes well by far as market is tending to our 87.40 long-term target (Dollar Index). Overall situation is not overheat yet and markets still have time to support current trend. But once market is coming to turning point, it always becomes very nervous and sensitive, volatility is rising. So, the particular moment of reversal suddenly could come. All these things that we hear and see right now confirms that we're at the eve of long-term bullish dollar cycle that lasts for 3-5 years. This is our central long-term view. And it seems that yes - "He's really back"...
Technicals
Monthly
April is closed on a positive mood. Not as positive as on last week, but still, overall sentiment is bullish in short-term. As we've mentioned above - market expects changing of Fed rhetoric somewhere in summer. June is the first month, that was mentioned, but theoretically it could happen later as well. Anyway, as we're coming to turning point, it seems that EUR has 2-4 bars on monthly chart to hit major upside 1.2860 target.
Still, we suspect that an exceptional event exists that could let EUR to extend this time. This is more aggressive ECB rhetoric in June. Above we said that Canada already starts tightening policy, BoE on the way and June might become a clash of the titans - ECB vs. Fed. Early verbal action from ECB might push EUR higher, if Fed will keep its mantras.
As we've said earlier, despite that market has come very close to 1.16 vital area - EUR was able to stay above it and shows perfect recovery. MACD trend stands bullish. From technical point of view, this is good sign that price is jumping up from YPP.
Taking the parallel view on Dollar Index - EUR has corresponding upside AB-CD with 1.2860 OP, standing near Yearly Pivot Resistance of 1.26. If our suggestion is correct - 1.26-1.28 is an area that corresponds to DXY 87.40 target.
Weekly
Here we've got not very pleasant moment, guys. At least for the bulls. Just last week we've discussed great upside performance, possible "3 white soldiers" pattern and crash of bearish H&S and suddenly we've got this - bearish grabber. Of course that’s not saying much yet, as grabber sometimes might be the by-product of the rally without real bearish background. But, still we have to be careful with it. I've checked - this is real grabber that exists on CME futures as well. Besides it is formed right around key 1.21 resistance area. So, the primary subject is to watch what this "monster" brings us next week. Also it makes tricky any attempt to go long as situation becomes clear again only when grabber will be cancelled.
Daily
So, sell-off on daily chart looks impressive. Trend has turned bearish. In general, if we wouldn't got the grabber on weekly - it is nothing wrong with deep retracement now. Price has formed bullish reversal swing, hits our 1.618 upside target of XA retracement. Once we've agreed to keep an eye on reverse H&S pattern here - downside action is reasonable, if even EUR drops to 5/8 support area. Weekly pattern, in turn, brings additional component to downside action, that makes possible destruction of bullish context totally.
Still, next week we intend to focus on 1.1940-1.1970 support area. Besides of strong K-area and natural support zone, EUR is approaching to oversold level that should provide additional support. Thus, once the level will be hit - some bullish patterns could be formed around and it might be relatively low risk chance for long entry.
But, as we have too many bearish things around - we suggest taking long position only if patterns will be formed, not blindly just because EUR hits strong support area. This should safe us from bad things.
Intraday
At the first glance market stands in a shape of perfect H&S pattern - 1.618 ratio, great sell-off on the head's slope, strong neckline support. At the first stage, we're not interested with downside target - actually we get two of them (1.1922 and 1.1870 Agreement) but interested with minor upside trade. Minimum target should equal to the top of the left arm. This is around 1.2065, which makes this bullish trading setup is relatively safe.
On 1H chart scalp traders could get chance to make more trades as we have perfect thrust there. It might be B&B "Sell" or DRPO "Buy". We also could consider using of DRPO for our long entry purposes, as it could become the pattern that trigger upward action from the neckline.
