There's a sense of every man for himself ahead of the US inflation data this evening, a data point that has left markets in limbo and seems to be taking an interminably long time to arrive. Equity markets continued taking risk off the board overnight, although US futures are staging a modest comeback in Asia today. US 10-year bond yields slipped below the 1.50% mark after a strong auction, with the whole US yield curve continuing to edge lower. Oil retreated modestly, as did gold, while commodities had a mixed night. The US Dollar moved lower with US yields initially but recovered to be almost unchanged.

The divergence between equities and bond yields is intriguing. It suggests an element of either complacency or confusion about the US inflation data tonight, with transitory versus sticky argument clearly not resolved. Despite the gentle retreat this week, equity markets remain a hairs breath away from record highs, while the US longer-dated yields have fallen to lows not seen since Q3 last year. With gold, oil and commodities at or near multi-month highs, either the street think the inflation story is overdone, or there is a severe degree of complacency out there. US data over the past two months has not confirmed the story one way or the other.

With that in mind, tonight's data should give markets a nice binary outcome. A MoM print of 0.50% or less should greenlight a return to business as usual by the buy everything trade. But a print after last month's 0.80% MoM could see a nasty sell everything reaction as the street is now clearly positioned in its business as usual buy everything happy place. I'll not hazard a guess, I mean forecast, on the numbers tonight. As asset classes go their own way into the US inflation data release, I will turn up Fleetwood Mac and chill from the sidelines. (Millenials: Fleetwood Mac are the original performers of Landslide, not these Dixie Chicks people)

Somewhat overshadowed in the US inflation noise, the European Central Bank announces its latest policy decision later today. The ECB should be as neutral as distilled water, with no change in rates or guidance on asset purchases. Only a slip of the tongue in the post-meeting conference mentioning the "t-word" is likely to provoke a market reaction. In that case, expect bunds to tank and the Euro to jump.

Bitcoin made a huge comeback yesterday, rising over 10% after the El Salvador President confirmed the Bitcoin would be accepted as legal tender. But, of course, we all know that, like meme stocks, reality is a disposable commodity like single-use plastic in the virtual currency space. So unless Elon Musk is going to Tweet that he is buying El Salvador, the country remains an economic basket case, and 99.99999999999999% of its people can't afford even one Bitcoin. The President might have had better luck using DogeCoin instead; it's priced appoachably, and Elon likes it. My guess is the average El Salvadorean and Central American, in general, finds a good old fashioned US Dollar bill more useful for transactions and as a store of wealth. 

Meanwhile, the Wall Street Journal is running a story saying the meat processor JBS USA Holdings Inc. paid an $11 million ransom last week in, you guessed it, Bitcoin, to restore operations. Given that JBS processes 20% of American animal protein and American's like their steaks, I believe this will be another step on the way to a watershed by governments to rein in the virtual currency sector. Whether Agent Smith of the FBI manages to step into the matrix and retrieve the ransom this time, or not.

Still, the rally is impressive, but my technical chart remains bearish, if only marginally so now. Bitcoin is trading around $37,000.00 currently, and a daily close above $38,000.00 will invalidate the bearish symmetrical triangle. Cue phone calls - sorry encrypted messages - by Bitcoinista's to their friends at Reddit to continue giving me an old-fashioned short-seller slapping.

US President Biden is heading to the UK for the G-7 leaders meeting with the administration, sending out mixed messages regarding China. On the one hand, it is clear from various comments that the President intends to maintain a hard line on China and will use the meeting to rally support. On the other, the President cancelled the TikTok and WeChat bans overnight. The China and US Commerce Ministers also held a constructive phone call on trade this morning, according to Chinese media. As a result, Asian equities have edged up today, and the region appears to be focussing on the former and not the latter.

PBOC Governor Yi Gang has also been on the wires this morning. Among a plethora of comments, Governor Yi said CPI growth would ease back below 2.0%. He also hinted that the PBOC might loosen its grip on the Yuan via adjustments to the basket mechanism. The Yuan is modestly higher versus the US Dollar after the comments. 

Asia equities move higher on US/China hopes

Wall Street edged lower overnight as investors continued reducing risk into the US inflation data. The S&P 500 finished 0.18% lower, with the Nasdaq losing just 0.09%, and the Dow Jones falling 0.44% as inflation fears ebbed. Asia has turned direction, though, after a constructive phone call today between US and China officials, with futures on all three indices rising just over 0.10%.

Any good news on US/China relations is always positive as far as Asia is concerned, having a massive beta to that trade. Asian equities markets have duly followed the US futures higher for the most part. The Nikkei 225 is 0.25% higher, with the Kospi climbing 0.45%. China's Shanghai Composite has risen by 0.70%, and the CSI 300 has surged 1.0% higher. Hong Kong has risen 0.20%.

Across the region, Singapore has climbed 0.50%, with Kuala Lumpur 0.15% higher and Jakarta unchanged. Taipei, meanwhile, is up by 0.50%, with Bangkok climbing by 0.60%. In Australia, the ASX 200 and All Ordinaries have risen by 0.30%.

If nothing else, the price action this morning highlights how important the trajectory of US-China relations is to the rest of the region. I expect gains to be limited from here, though, barring a headline surprise, as equity markets overall remain cautious ahead of the US data tonight. 

Currency markets remained rangebound

The US Dollar headed South in early New York trading as US bond yields fell once again. However, those losses were quickly recouped and most major currencies, along with the dollar index, finished the day barely changed. They remain almost unchanged in Asia, and currency markets are clearly on hold until tonight's US data.

The dollar index finished unchanged at 90.13 overnight, edging higher to 90.17 this morning in directionless trade. Similarly, both the EUR/USD and GBP/USD are almost unchanged at 1.2170 and 1.4120 this morning. EUR/USD is trading in a wider 1.2100 to 1.2250 range this past fortnight, while GBP/USD has clear support and resistance at 1.4100 and 1.4250. In the bigger picture, only failure of 1.2100 and 1.4100 respectively undermine the longer-term bullish outlook for both currencies. Today's ECB meeting is highly unlikely to impact either currency unless the ECB springs a major tapering surprise.

The PBOC Governor has boosted the Yuan this morning after an almost unchanged PBOC USD/CNY fix. However, his comments that the PBOC will keep the Yuan stable at reasonable levels will limit the gains by the Yuan. At 6.3850, the USD/CNY is at the lower end of its range for the week, and a test of 6.3500 is only likely to happen this week if a very weak US CPI number tonight prompts a US Dollar sell-off. 

Oil retreats on US Inventories

Oil beat a modest retreat overnight after US crude inventories fell, but US gasolene inventories rose sharply. Brent crude was almost unchanged at $72.00 a barrel after giving back intra-day gains, while WTI finished the day 0.40% lower at $69.75 a barrel. Both contracts have continued to move lower in Asia, falling 0.50% to $71.65 and $69.45 a barrel, respectively.

The pullbacks are modest in scale and look more look position adjustments into the US CPI data tonight than a structural turn in sentiment in the greater scheme of things. Given that the speculative market is clearly very long, that makes sense in the circumstance.

Only a retreat below $70.00 a barrel for Brent crude and $68.00 a barrel for WTI suggests that the rally is over for now. Otherwise, inflation data or not, Brent crude should target $75.00 a barrel in the week ahead and WTI $73.00 a barrel.

Long-covering continues in gold markets

Gold drifted 0.22% lower to $1886.50 an ounce overnight, as investors continued to reduce long positioning into the US CPI data. Like the moves seen in other asset classes, though, the correction's scale is modest, and gold's rally should resume if the CPI data comes in on the lower side, prompting US Dollar selling.

With gold's fate remains tied to the US inflation data tonight, it remains settled into a $1880.00 to $1920.00 an ounce range. Only a failure of the $1840 to $1845.00 an ounce support zone calls the longer-term rally into question in the bigger picture. Once $1920.00 an ounce is cleared, gold's next target will be the $1960.00 to $1965.00 an ounce region.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.

Opinions are the authors — not necessarily OANDA’s, its officers or directors. OANDA’s Terms of Use and Privacy Policy apply. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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