Inflation data could be key this week as the dollar faces an inflexion point

Macro Outlook

“Around six months” was Janet Yellen’s response to the question of what was meant by a considerable amount of time between the end of the tapering of asset purchases and the tightening cycle. However, the Fed meeting minutes showed no mention of this. With the projections for US growth scaled back, investors jumped at the chance to sell the dollar. With Governor Kuroda of the Bank of Japan denying the need for further monetary stimulus, and ECB members toning down the potential for QE in the Eurozone, the established divergence between the major global central banks may have been overestimated. Shorter term US treasury yields are falling once more, whilst the lack of perceived growth projection has hit yields at the longer end of the curve too. With good news considered once more to be good for the markets, this has been taken badly as equities have come under considerable pressure. Investors need some good news to give the markets a lift. Improving prospects for the US consumer and housing market could be supportive this week, with retail sales and building permits due, whilst better inflation numbers would also help.

Must watch out for: Eurozone Consumer Price Index Inflation

Impact: April’s ECB press conference showed the governing council were increasingly concerned by a prolonged period of low inflation. The final reading of April CPI could mark a low in inflation for the Eurozone with projections expected to subsequently pick up. Last month’s final CPI figure was higher than the flash but was then revised down. Expectation this month is for no change on the flash number, but with the Euro having run so far higher last week, any disappointment could lead to significant profit taking.

Foreign Exchange

The turnaround in the Dollar since the Non-farm Payrolls report has been remarkable. From a 7 week high on the Dollar Index on Friday 4th April, it has now tested its key March multi-month low at 79.4. The downside has been accelerated by Governor Kuroda’s suggestion that there was no imminent need for further stimulus by the Bank of Japan. The dollar is now within range of some key levels on its major pairs, such as 101.17 on Dollar/Yen, $1.6822 on Cable and $1.3967 on Euro/Dollar. These are all crucial levels to prevent a significant dollar sell-off. Over the weekend though, Mario Draghi has once more looked to talk the Euro lower and the dollar is beginning to bounce back early in the new trading week. This comes ahead of the key inflation data throughout this week could be the tipping factor for the greenback. US inflation has been trending lower but any sign of stabilization could give the Dollar the boost t needs.

WATCH FOR: The US retail sales could provide an early fillip to the dollar if high street sales follow Friday’s consumer sentiment number higher. The key inflation data though starting on Tuesday could drive sentiment through the week. Cable will be especially volatile with both UK and US inflation. Wednesday’s Eurozone final March number will also be key. Chinese GDP will impact he commodity currency majors.

Indices

Equities have come under considerable pressure in the last few sessions. A sharp increase in the VIX index of options volatility shows the increasing investor concern. However, the real concern will be whether the big primary uptrends will break. Of the major indices, the FTSE 100 is the first to be questioned. A breach of 6492 would now be seriously worrying for the bulls. This week will be key for the S&P, as earnings season really ramps up and the big banks all report results. JPMorgan have already missed on earnings of $1.28 (versus an expectation of $1.40 which had already been already lowered by 5%) which was 19% lower than Q1 2013. With JPM also missing on sales this is a concerning start to banks earnings as it is one of the better thought banks in the sector. Citigroup announces on Monday with Bank of America on Wednesday, whilst Morgan Stanley and Goldman Sachs are both on Thursday. S&P earnings are expected to grow by just 1% this quarter and revenue by just 2.7%. PM. The tone for earnings season could be set next week by the banks who earnings are forecast to decline by 2.8% this quarter.

WATCH FOR: Four big US banks report earnings this week to drive the S&P. Inflation data from the UK, US and Eurozone could also drive sentiment. Global risk appetite could also be impacted by Wednesday’s China growth data, with any miss of the 7.3% consensus likely to result in further equity downside.

Commodities

The bounce back in the gold price has been driven once more by the weak performance of the US dollar which has in turn been driven by the slight miss on the Non-farm Payrolls and apparent dovish Fed meeting minutes. Further more, he geopolitics of the Ukraine and Russia are never too far away as a sentiment driver for investors and early in the new week further gains in gold suggest that it is still an investment to play the event. This dollar weakness has also helped to support other commodity prices such as silver and oil. Reports that President Putin is warning the west about the $2bn bill for gas supplies still unpaid by Ukraine is also supportive for the oil price. Oil prices are also being impacted by the prospect of increased supplies into the market by re-opening of the Libyan port with the Western Zawiya refinery having a full capacity of 230,00 barrels of oil per day . Protesters have resulted in the port being closed again.

WATCH FOR: Interest in the insurance trade should continue to underpin support for gold and silver as the geopolitics in the Ukraine continue to bubble on the backburner. The inflation data for the US and Eurozone could significantly impact o the US dollar and subsequently on the price of commodities. Watch for news on the protests at the Libyan oil port in Western Zawiya which could impact on oil supplies.