May 10, 2018
US indices pushed higher on Wednesday boosted by energy and technology shares. President Donald Trump announced on Tuesday the exit of the nuclear deal helping oil prices to break to the highest levels in more than three years. Energy companies rallied higher on the strengthening oil prices where energy sector ended the session by rising almost two percent. Moreover, the technology sector was the second biggest winner and ended the session 1.4% higher. From a technical analysis perspective, US indices were able to break above a downward trend-line that was being formed since early February.
The Dollar index held steady near 4-1/2 month highs as investors wait for the Consumer Price Index today. The DXY traded at 93.40 supported by the US 10-Year yields that touched the 3% for the first time in two weeks. The Treasury yields are being supported by the rising oil prices which are weighing on inflation expectation. Higher oil prices will lead to higher inflation figures that will allow the Federal Reserve to continue tightening its monetary policy.
The Euro drifted lower against the US dollar yesterday to post a new 2018 low. The common currency has been suffering since mid-April as the economic indicators from the Eurozone showed weakness in the first quarter of the year. The soft economic data raised the expectations of a divergence in the monetary policy between the European Central Bank and the Federal Reserve. Is the five percent drop in the euro able to provide support to the economy and raise inflation expectation?
The British Pound has been trading in a consolidation pattern for the past five trading day waiting for the Bank of England meeting today. The Cable weakened almost six percent against the US dollar since mid-April due to the weaker-than-expected economic figures. The economic indicators weighed on the expectation of an interest rate hike in May, as the markets were pricing in a ninety percent chance that the BOE will hike interest rates in the meeting, but this probability dropped to less than ten percent due to the soft economic readings. Industrial and Manufacturing Production is due today along with Inflation report and interest rate decision.
The Reserve Bank of New Zealand kept interest rates unchanged at 1.75%. The statement from the central bank confirmed that the interest rates will remain stable for quite some time and that the probability of raising or lowering interest rate in the next move is equal. On the other hand, they confirmed that growth and employment are still solid but inflation is still below the two percent target due to low food prices, import prices, and wage growth.
Gold is still trading in a tight range between a major psychological level of $1300 and $1320. Gold prices are being supported by the rising geopolitical tension but on the other hand, they are being pressured by the higher Treasury yields. These two factors are behind the consolidation in Gold prices.
Oil prices rose to new multi-year highs on the expectation of tighter oil market supply after the US abandoned the nuclear deal. Oil jumped in early Asian session on the news of missile launching and airstrike occurring between Israel and Syria. Yesterday the Energy Information Administration showed that the crude oil inventories for the past week fell by 2.2 million barrels to a total of 433.76 million barrels.
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