Yesterday’s market action

The sparse calendar yesterday led to a quiet trading day, with the dollar re-asserting its strength versus other major currencies and crude, which slipped below $60 a barrel after revealed that crude oil exports from Saudi Arabia hit their highest level since 2003. This demonstrates the Kingdom’s determination to forcibly capture market share from other less efficient producers, the effects of which are already being felt, judging by the roughly $100bn worth of major E&P projects shelved this year as other producers hunker down and focus on capex reduction and adjust to the ‘new normal’ of crude prices below $100 a barrel for the foreseeable future. All eyes will now turn to the OPEC meeting in June for signs of dissent in the ranks within the Gulf producing states. Equities traded modestly higher, with European equities ending solidly positive and the S&P closing at a fresh all time high.


Today’s View

ECB’s Coeure provided fresh impetus for a sharp move lower in EUR/USD, with dovish comments leaked right on the European open at 8am, stating that due to seasonal factors QE will be front loaded to May and June, hypothetically deposit rates could be even more negative. The euro fell 150 points in an hour and helped the Bund retrace further some of the severe losses suffered in recent weeks. Equities, of course, reacted positively to the news, with the Dax climbing over 100 points and the S&P making new highs as well. So, with the dollar already on the front foot, the lower than expected UK CPI data released at 9:30 provided a further shot in the arm for sterling bears, with M/M inflation coming in at 0.2% in April but falling into deflationary territory on an annualised basis at -0.1%. As a result, sterling continued to trade lower throughout the morning and now sits a few ticks above the 1.55 handle. The German ZEW survey also turned lower in May, further strengthening the USD, although this was mitigated by European CPI coming in at 0.2% M/M, the first time in six months that prices in the Euro area didn’t fall, providing further evidence that the deflationary threat is receding in the world’s largest economic bloc.

Looking ahead to the afternoon session, where US Housing Starts and Building Permits, to be released at 13:30, is the only data release of note. It will be interesting to note whether the recent weakness seen in US consumer confidence and Retail Sales has spread to the housing market. A miss here would give dollar bulls the chance to take profits, but after such a big move this morning, traders should be careful trying to force a short entry in EUR/USD and cable. Likewise, the S&P, having finally made that break last week above the yearly highs, remains on the front foot and I would advise going with the trend. US equities continue to ‘climb the wall of worry’, making a mockery of those who feared Q1 earnings season, Greece, rate hikes and Russia would lead to a severe correction.

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