PlusMarkets Analysis • May 7, 2021
The Federal Reserve warned that covid still poses a major financial risk and that prices are vulnerable to significant declines. Stocks advance on Thursday as most Fed officials continued saying the US economy has a long way to go. Robert Kaplan, President of the Dallas Fed, stood out by urging a discussion about tapering bond-buying.
The US dollar has been edging lower as 10-year Treasury yields remain in low ground under 1.60%. Supply chain strains and skills shortage issues are pushing prices higher but also cooling the economy.
President Joe Biden is set to maintain bans on Chinese investment slapped by the previous administration, adding to tensions. In the meantime, Beijing reported better-than-expected increases in both imports and exports in April.
Nonfarm Payrolls: The US is expected to report an increase of 978,000 jobs in April, topping March’s 916,000 increase. Economists expect the Unemployment Rate to drop from 6% to 5.8% and earnings are projected to drop. Uncertainty about such robust hiring implies surprises are due, with some expecting 1.3 million positions gained. As of March, some 8.4 million Americans that lost their jobs in the pandemic are still out of work.
Canada also publishes its labor figures on Friday, and the economic calendar is pointing to a loss of 175,000 jobs, accompanied by an increase in the jobless rate to 7.8%. Low estimates come despite the broad recovery. USD/CAD is trading below 1.22 ahead of the release.
UK local elections: Investors are still waiting for the results of elections in Scotland, where pro-independence parties could clinch a majority, reopening the topic. Elsewhere, voters seemed to back Prime Minister Boris Johnson’s Conservative Party.
The Bank of England announced it is slowing down the pace of bond purchases but left the total unchanged. The pound traded choppily before stabilizing around 1.39.
Sterling displayed a fairy messy knee-jerk reaction in the immediate aftermath of the BoE’s policy decision this month. Putting the momentary whipsaws aside, however, GBP/USD has settled and currently stands little changed from pre-announcement levels. Economists at TD Securities note that cable continues to exhibit all the hallmarks of a range-trade and highlight the key levels to watch.
Near-term risk backdrop calls for a still cautious view on GBP/USD
“The MPC simply delivered few surprises to the overall market. As such, the decision to taper asset purchases looks fully priced. As a final component, part of the underwhelming response could be the result of the way in which the move was communicated.”
“We think the FX market will still see this as a policy shift – at least at the margin. Superficially, it is simply the confirmation of the BoE’s earlier intent to draw a line under its latest balance sheet expansion. Together with the Norges Bank, the BoC, and – perhaps – the RBA, we now have a subset of DM banks that are moving toward a change of tone, at least to varying degrees. This should help solidify sterling’s fundamental footing relative to some of its major trading partners. However, this is likely to play out only over the medium term.”
“A break higher looks path-dependent upon both a softer NFP reading and a pledge by the Scottish pro-independence factions not to pursue an immediate referendum if they achieve the expected majority in the local parliament. That set of outcomes would likely be followed by another test of the recent range highs in the 1.4000/10 zone. A clear break above would naturally target a move toward the late February peak at 1.4237.”
“We think dip buyers are likely to emerge first around 1.3800, while the double-bottom at 1.3670 should provide fairly robust support at this stage.”
The price of gold finally raced past the $1800 psychological level. The yellow metal is extending the recent upsurge, sitting at a new 11-month top at $1822, as the bulls take a breather, in anticipation of the all-important US NFP report. In the view of FXStreet’s Dhwani Mehta, XAU/USD eyes $1840 after the technical breakout on the 4H chart.
Overbought RSI conditions caution bulls ahead of the key NFP data
“The US economy is seen adding 978K jobs in April vs. 916K reported previously. A big NFP blowout is needed to revive the Fed’s tapering talks, which could likely trigger a sharp correction in gold. However, disappointing figures would back the central bank’s dovish approach, fuelling further upside in gold.”
“Gold’s four-hourly chart shows that the price extended the upside break from the rounding bottom formation. The next barrier awaits at the $1830 round figure, above which the pattern target measured at $1840 could be tested.”
“With the Relative Strength Index (RSI) holding in the overbought region, a pullback towards Thursday’s close of $1815 cannot be ruled. Further south, the $1800 mark could protect the downside. The pattern neckline resistance now support at $1798 will be the level to beat for the gold bears.”
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