After a few weeks of recovery on the dollar there are now a few question marks over the longevity of the rebound. Economic data and yield differentials are playing a big role again. We consider the outlook for forex, equities and commodities this week.
After weeks of trading on geopolitics, newsflow and the occasional tweet, once more yield differentials are key for financial markets. Relative moves on bond yields are impacting on forex, equity markets and also on gold. Within this, economic data becomes a key component. The dollar has been strengthening significantly but the move is being questioned following a miss on core CPI. Apparently the miss (that meant core CPI remained at +2.1%) was driven by a fall in used car prices, a one off following comparatives from hurricane season last year, so this should be short-lived and a trend of increasing inflation increasing should continue. Treasury yields have dropped but 2.90% to 2.95% on the 10 year should be a floor and a pick up should help to ensure dollar stability. Expect the trend of US data relative outperformance to continue, with Retail Sales in focus this week. Positive data is not though forthcoming for the UK, however the Bank of England seems convinced that recent growth disappointments have been overdone and Q1 GDP will be eventually revised higher to +0.3%. However, given a fall in productivity, in addition to cuts to the BoE’s own inflation and growth forecasts been cut for the coming years, Mark Carney’s desperate attempt to sound upbeat are confusing (especially given his recent very dovish BBC interview). The assertions from “unreliable boyfriend” that it is “likely” that rates will rise this year become a little harder to believe. A fairly significant improvement in data will be vital for this being true. At this stage, that also appears hard to believe.
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