The return of risk-on/risk-off?


  • US economic data fluctuations are having an impact on the outlook for the market. Last week’s positive retail sales and Michigan sentiment have run out of steam by a much weaker than expected New York Fed manufacturing. There is an increasing feeling of risk-on/risk-off moves in trading sentiment. The market appears to have completely priced out the possibility of a June rate hike despite the surprise improvement in the US consumer data on Friday. However, the recent dollar rally seems to still be considered to be a near term and this could provide another chance to sell the dollar. However uncertainty from a day to day basis is not helping consistent positioning.

risk on risk off

  • According to CME FedWatch there is a 4% probability of a rate hike in June. Considering the FOMC speakers continue to talk up the prospects of two hikes in 2016, this is an incredibly potential. The economic data has been reasonable without shooting the lights out in recent weeks. There would need to be a considerable string of upside data surprises for there to be a material re-pricing of the dollar and possibly upside in the 2 year Treasury yield. US inflation this afternoon could be a key driver and if the drop in core CPI continues for a second month to +2.1% then this could add to the swing away from the dollar.
  • Volatility in sterling is ramping up ahead of the crucial EU referendum on 23rd June. Looking at the options market it is more costly to buy 3 month At The Money options on Sterling/Dollar than at any time in the past six years. The price is way more than the levels reached during the Scottish referendum in September 2014 and also the run up to the UK General Election in May 2015. This volatility is likely to remain elevated in the coming weeks as the opinion polls suggest that the vote is becoming increasingly tight. This will be reflected in the price of GBP/USD through increasingly spikey moves but also what is likely to be a lack of trend clarity.

GBP 3m

  • According to Goldman Sachs the rebalancing of demand and supply in the oil market is now forecast to come sooner than previously thought. All the oil bulls must now be hoping that the investment banks infamously bad forecasting track record does not put the mockers on the recent rally. Robust demand from China, India and Russia have managed to now offset the supply glut which has reduced in recent weeks amid the supply disruptions in Canada and Nigeria.
  • Could the gain in the oil price manage to prevent a “Sell in May” scenario for equities? So far the key supports have managed to hold up this month and certainly the oil price pushing out to six month highs has helped to maintain these key support levels.
  • Although the dollar has been recovering in May, since the April FOMC meeting on 27th April, gold has performed better than all of the forex majors and that includes the yen. Gold should remain supported by the continued expectation that the Federal Reserve will hold off from a rate hike in June. However upside could also be relatively limited if risk appetite driven by the lack of a hike and strength in the oil price helps trading sentiment.
  • UK data is prevalent this week as inflation (already disappointed) is followed by average earnings growth and retail sales. After inflation surprisingly dropped, if wage growth holds up tomorrow there could be a surprise uplift in real wages, something that could help to bolster spending in future months. The recent slide in real wages would have been a factor in the declining trend of retail sales which is again expected to struggle again this month.
  • Japanese GDP is expected to bounce back to +0.1% in Q1. This would prevent Japan falling back into technical recession after -0.4% in Q4 2015. However this would do little to take any pressure off Shinzo Abe to act further on his three arrows, or off the Bank of Japan to further ease monetary policy.
  • Watch for: US CPI, UK earnings growth, Japanese GDP



EUR/USD – Has the dollar rally given another chance to buy?

  • The stronger dollar has dragged the pair back but the risk on/risk off continuation is being driven by fluctuating US economic data. With the market massively pricing out a Fed hike, the dollar rallies continue to be seen as a chance to sell.
  • The 55 day ma is supportive around $1.1280 with momentum indicators unwound to levels where the buyers have historically returned. This means a medium term pivotal time has been reached. The April low is supportive at $1.1215 but the long term pivot support at $1.1100 is key.
  • Watch for: US CPI

GBP/USD – Brexit continues to drive volatility

  • With opinion polls driving sterling expect further volatility on the pair in the coming weeks. The UK CPI disappointment has done little to impact, so it will be interesting to see if US CPI makes a difference.
  • A bounce off $1.4330 has improved sentiment once more. With the Brexit polls driving the market it is difficult to see any consistent trends forming and this could mean that the chart is littered by false breaks in the coming weeks. Near term resistance at $1.4530 is growing.
  • Watch for: Brexit polls, US CPI, UK earnings growth

USD/JPY – Consolidation breaking higher?  

  • US inflation and Japanese GDP will be driving the market in the next couple of days but and this could mean the difference between selling rallies on the dollar and a sustainable trend.
  • A daily close above 109.50 would open a target of the old key floor which is overhead supply at 110.80/111.00. However whilst trading below 111.90 the bears will still be in control medium to longer term.
  • Watch for: US CPI, Japanese GDP

Gold – Performance remains strong

  • Any weak US data is supportive for gold as it holds off any thoughts of a Fed rate hike in June.
  • The support band $1257/$1263 is holding and this is an increasingly important floor for the medium term bullish outlook. For now the outlook suggests that this correction will be bought into, but the gold bulls are struggling to find the traction for a breakout. Above $1288 re-opens the $1303 high.
  • Watch for: US CPI

Oil – Near term corrections remain a chance to buy

  • Recent supply disruptions have helped to realign the supply/demand imbalance and this is price supportive. Watch the EIA oil inventories report which have also been supportive in recent weeks.
  • Technically the outlook remains strong and pushing above the November high at $48.35 re-opens the key October high at $50.90 on WTI. Near term corrections remain a chance to buy on both WTI and Brent Crude with momentum indicators very strong
  • Watch for: EIA oil inventories to drive volatility

Indices – Bullish oil is helping to support markets   

  • S&P 500 – With the prospect of a medium term top pattern formation the bulls will be keen to breakout above 2084 which was the May reaction high last week – a move wthat would help to avoid the rolling over that still seems to be building.
  • DAX Xetra – Medium term technical indicators are increasingly neutral and the re-emergence of risk-on/risk-off moves seems to be adding to the general uncertainty. Key support remains 9737 this week.
  • FTSE 100 – The continuation of a series of uncertain trading sessions may be coming above the 6036 key support but there is no clear trend emerging and the bulls are unable to gain any traction as resistance around 6200 is preventing any renewed positivity.

Economc Calendar


Tuesday 17th May

  • US – Building Permits & Housing Starts
  • US – CPI
  • US – Industrial Production & Capacity Utilization

Wednesday 18th May

  • Japan – GDP (prelim)
  • UK – Unemployment & Average Weekly Earnings
  • US – Crude Oil Inventories
  • US – FOMC meeting minutes

Thursday 19th May

  • Australia – Unemployment
  • UK – Retail Sales
  • US – Philly Fed Manufacturing
  • US – Weekly Jobless Claims

Friday 20th May

  • US – Existing Home Sales



Monday 23rd May

  • Eurozone – Flash Manufacturing PMIs
  • US – Flash Manufacturing PMI

Tuesday 24th May

  • Eurozone – ZEW Economic Sentiment
  • US – New Home Sales
  • US – Richmond Fed Manufacturing

Wednesday 25th May

  • Eurozone – German IFO Business Climate
  • US – Goods Trade Balance
  • Canada – BoC monetary policy
  • US – Crude Oil Inventories

Thursday 26th May

  • UK – GDP (Q2 second reading)
  • US – Durable Goods Orders
  • US – Weekly Jobless Claims
  • US – Pending Home Sales

Friday 27th May

  • Japan – CPI
  • US – GDP (Q1 Preliminary)
  • US – University of Michigan Sentiment (revised)


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