US Open Note – Upbeat data drive risk-on mode ahead of Powell's speech; Euro gears up on rate hike outlook

Pound is the best performer, but for how long?

Markets were volatile ahead of the US open, with the European currencies switching to recovery mode after a period of heavy selling, and the US dollar index losing some steam as some rosy data releases shifted funds to riskier assets and hopes for China easing lockdown measures flourished.

Upbeat employment and wage data out of the UK triggered the largest daily increase in the British pound in months. Strikingly, the number of people applying for unemployment benefits continued to decline at a faster pace in April too, suggesting the economy can afford additional rate increases in the foreseeable future.

Nevertheless, it is still too early to become confident on the pound. Besides growth risks from Ukraine and sanctions against Russia, post-Brexit trade issues with the EU are gradually resurfacing. Regional elections in Northern Ireland increased pressure on Boris Johnson to find a new negotiating solution to the so-called Northern Ireland protocol, which effectively created a customs border in the sea between Northern Ireland and the rest of the United Kingdom. Senior ministers will gather today to discuss Britain’s following steps before the UK foreign minister makes a statement to parliament. Although Northern Ireland’s finance minister ruled out new legislation this week, such a unilateral action will probably develop into a trade war between the UK and the EU.

Pound/dollar and pound/yen were advancing towards the 20-day simple moving average (SMA) at 1.2500 and 161.67 respectively, during the time of writing.

ECB hawk makes the case for sharper rate increase

Euro/pound staged a flash drop to a two-week low of 0.8392, but the hawkish Dutch ECB member Klaas Knot put the brakes to the decline a couple of hours later, pushing the pair quickly back above the 200-day SMA at 0.8440. Specifically, the rebound took place after he guaranteed a 25 bps rate hike in July and made a case for a more aggressive 50 bps rate increase if inflation broadens in the coming months. Earlier, second GDP growth estimates arrived slightly better-than-expected in Q1.

Euro/dollar cheered on the headlines along with European bond yields, extending its three-day rally to 1.0554, while euro/yen picked up steam to 136.42. The bullish action, however, is still under scrutiny given the failing negotiations between Russia and Ukraine and the rising risk of a gas embargo, which could still push the Eurozone to a recession, and therefore delay any rate hikes. From a technical perspective, a pullback is possible in the short term as the two pairs are approaching their 20-day SMAs.

US retail sales beat forecasts ahead of Powell's speech

Meanwhile in the US, monthly retail sales for April strengthened in line with expectations by 0.9% m/m, while the core equivalent, which excludes automobiles, came in stronger than expected at 0.6%, helping dollar/yen edge up to an intra-day high of 129.58. The pair will need a clear close above the tough 129.20 resistance to confirm additional gains, but Powell’s key speech on inflation at 18:00 GMT could create more volatility.

What's next on the calendar 

Japanese Q1 GDP growth figures will be next watched for a potential 1.8% (annualized) contraction on Thursday at 00:50 GMT. Perhaps a sharper GDP decline could re-activate the yen’s safe haven status.

Australian quarterly wage data will be another highlight during the Asian trading session at 02:30 GMT. A firm increase coupled with reduced Chinese Covid uncertainty may boost aussie/dollar towards the 20-day SMA at 0.7080 ahead of the federal election day on Saturday May 21.

Wall Street eyes a bullish open

Turning to stock markets, Wall Street is preparing for a roaring open, with futures tracking the S&P 500, Nasdaq 100 and Dow Jones advancing by more than 1.0%. European equities are set to close with solid gains, driven mainly by base materials despite the ECB’s renewed rate hike calls.

Commodities on the rise too

Commodities are in the green as well. Gold benefitted from stable Treasury yields and a relatively weaker dollar, inching up to test the 200-day SMA at $1,836/ounce. Copper enjoyed a sharper rebound of 1.4%, while WTI crude oil reached a new 2-month high of $115.53/barrel in the fifth consecutive day of increases as data showed OPEC+ production remaining below the required output level in April.

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