US DOLLAR, DOW JONES, NASDAQ, PCE, FED, INFLATION, AUD/USD – TALKING POINTS:
- Financial markets might reveal underlying trend bias in news-flow lull
- Pre-positioning before PCE may mark the dominant Fed, inflation view
- AUD/USD may mark major top with large Head and Shoulders pattern
A quiet start at the weekly trading open left the G10 FX currencies idling through Asia-Pacific trade. The Norwegian Krone managed a narrow lead amid near-standstill elsewhere, which may have been helped along by a bounce in crude oil prices. The Japanese Yen also managed meager gains.
Building momentum may not get any easier in European trade. Liquidity will be thinned by the absence of some key markets for the Whit Monday holiday, including Germany and Switzerland. The economic data docket is essentially empty.
The lull may prove to be instructive. It could help reveal the markets’ directional “default” – that is, the path of least resistance absent headline-driven volatility – after weeks of seesawing speculation about rising inflation and its implications for Fed monetary policy.
MARKET LULL TO REVEAL UNDERLYING PRICE TRENDS?
Thus far, a risk-on bias is prevailing. Futures tracking US equity benchmarks are pointing firmly higher. Still, it is perhaps notable that contracts on the cash-rich Dow Jones are outperforming those tracking the tech-heavy – and thus rates-sensitive – Nasdaq. A whiff of tightening jitters may be present.
Nevertheless, markets will have made something of a point if Wall Street manages a reasonably broad advance without the help of day-of catalysts. In fact, such a move may well find follow-through in the near term if only because this week is particularly short on scheduled event risk.
It would be likewise telling if sentiment crumbled without the influence of discrete triggers. Such an outturn may set in motion a very different kind of lead-in to Friday’s arrival of the week’s banner bit economic data – April’s PCE inflation reading.
PRE-POSITIONING FOR PCE DATA MAY REVEAL MARKET TREND BIAS
This is the Fed’s favored inflation gauge. The core on-year growth rate is expected to rise to 2.9 percent, the highest in nearly three decades. An upside surprise echoing similar results for CPI, PPI and wage inflation data over the same period may spur speculation that the outsized rise is more than just a base effect.
Tumbling into the release would suggest investors are already animated with worries about a sooner-than-expected withdrawal Fed stimulus. That could set the stage for a major trend reversal in growth-linked commodity currencies and a broad-based recovery in the US Dollar.
AUD/USD TECHNICAL ANALYSIS – AUSTRALIAN DOLLAR DOWNTURN IN THE WORKS?
Prices appear to be carving out a large, bearish Head and Shoulders (H&S) chart pattern below the 0.80 figure.Developing the setup from here calls for a push below 0.7677, a resistance-turned-support level reinforced by a rising trend line. That may clear the way toward the H&S neckline, the pattern’s defining boundary.
A daily close below it would imply a measured move down aiming in the vicinity of 0.7120 to follow.Alternatively, reclaiming a foothold above resistance in the 0.7820-49 zone is likely to neutralize immediate selling pressure and set the stage for another challenge of the 2021 swing top at 0.8007.
AUD/USD price chart created with TradingView
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--- Written by Ilya Spivak, Head Strategist, APAC at DailyFX.com
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