Risk sentiment improves as inflation fears ease

2 mins read

By Lukman Otunuga, Senior Research Analyst at FXTM

Asian markets are flashing green on Tuesday, while US futures are rising after technology stocks led gains on Wall Street overnight.

As a chorus of Fed officials reiterated the recent pickup in inflation would be transitory, investor fears were soothed about rising prices forcing higher interest rates. US equity bulls rejoiced on this development, encouraging buying in expensive growth stocks in sectors such as technology.

While these comments have lifted risk sentiment and offered support to markets, concerns still linger over the Federal Reserve taking action sooner, rather than later if inflationary pressures mount.

In the meantime, financial markets are likely to remain highly sensitive to inflation expectations and comments from Fed officials on this topic.


Dollar drifts lower…

The past few weeks have not been kind to the dollar.

It has weakened against every G10 currency so far this month and remains vulnerable to further losses amid weaker treasury yields. Although inflation worries are receding following the latest comments from Fed officials, the damage has already been inflicted on the dollar.

The main risk events for the greenback on Tuesday will be the US new home sales and consumer confidence data.

For April, sales of new homes are expected to hit 950,000, falling from 1,021,000 new homes sales in March. As regards consumer confidence, it is expected to decline slightly in May falling to 119 from 121.7 in April.

Looking at the technicals, the Dollar Index is under pressure on the daily charts. Sustained weakness below the psychological 90.00 level may encourage a decline towards 89.30.


Germany GDP downgraded in Q1

The euro offered a muted response Tuesday morning to the news that Germany’s economy contracted in the first quarter by more than reported in the first release.

Europe’s largest economy shrank by 1.8% quarter-on-quarter in the three months to March 2021 which was weaker than the first estimate of -1.7%.

On the year, the economy shrank 3.1% compared to the -3.0% preliminary estimate. Despite the downgrade, the economic outlook is starting to brighten as coronavirus cases fall and lockdown restrictions ease across the continent.

The EUR/USD is trading at 1.2250 and dollar weakness could send the pair towards levels not seen since early January at 1.2300.


Commodity spotlight – Gold

Gold continues to shine thanks to a weaker dollar, falling Treasury yields and extreme volatility in the cryptocurrency space.

The precious metal is trading around levels not seen in four months and is up over 6% in May.

Despite the receding US inflation fears, gold is supported by other fundamental drivers. Although the path of least resistance points north, the price action around $1870 could determine whether gold extends gains or experiences a technical pullback this week.

Should $1870 prove to be reliable support, a move towards $1900 could be on the cards. However, a decline below $1870 may signal a drop towards $1855 and $1840, respectively.


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