Fundamental analytics

Growth in inflation expectations and statements of San-Francisco FRB head led to a sharp USD gains

Yesterday, markets experienced an extremely volatile and interesting day. Let us start with the fact that on Tuesday, as we expected, US stock markets unloaded local overbought and fell by a significant 0.7%-0.8% at the end of the day. The reason for this was an increase in inflation expectations and an increase in yield on US government bond. In the US market, all major sectors were under pressure amid the maximums of yields on 10-year US bonds. It is noteworthy that the yield of bonds returned to the level of 2011. Yesterday session was also full of important information.

Despite the recent weak inflation data on last Friday, which caused the earlier strengthening of the dollar to stop, subsequent statistics, especially strong data on consumer spending, again aroused investors' interest in the US currency. In such a situation, there was additional driver for USD from Federal Reserve official’s comments on the expediency of 3-4 rate hike this year. We are speaking about the statements of the head of the Federal Reserve Bank of San Francisco that the "neutral" rate level is 2.5% in his opinion (now the rate is at the level of 1.5% -1.75%), and the Fed will come to him by the end of this year. As for inflation expectations, they also grew.

As for yesterday's statistics from the euro area, it was mixed. Industrial production in the euro area grew by 0.5%, which is less than the expected 0.7%. In annual terms, the indicator was 3%, and also did not reach the forecast of 3.7%. Gross domestic product for the first quarter in the euro area coincided with expectations of economists and amounted to 2.5%.

The main data of the current week went neutral - retail sales in the US grew in April by 0.3%. The volume of retail sales, excluding fuel and cars, showed similar growth, which was below expectations, and amounted 0.4%.

In general, yesterday's statistics did not have a strong impact on the market and a significant strengthening of the US currency. The growth in the yield of US bonds, the reduction of tensions in the trade relations between the US and China and the statement of San Francisco FRB head are the fundamental factors in our opinion that may have pushed and continue to push higher USD.

Today at European session, oil is traded at around $78 per barrel. The Tuesday maximum was marked at $79.50. It seems that on the background of a strong overbought, the growth momentum is exhaled. In addition, yesterday's statistics from the API disappointed, showing a strong increase in crude oil reserves (4.9 million barrels). Today, IEA report and statistics on reserves from the US Department are in focus. The range of pullback in the case of a large-scale decline seems to us around the mark of $75-$75.40.

Yesterday, the gold market reminded of itself by a decline of more than 2 percent. However, the most interesting is that the precious metal formed an application for a transition to a new price range, below the significant psychological mark of 1300. However, today's price action indicates that it might be a false breakdown. The decline in gold was primarily due to the continued strengthening of the US dollar, the growth of USD / JPY, as well as an increase in the yield of US Treasury bonds.

Today, the focus of the markets is still upon trade relations between the US and China, as well as data on industrial production in the United States.


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