Now that the French election risk is little more than an afterthought; the market is quickly pivoting to the Federal Reserve Board’s expectations while focusing on this week’s key economic data releases. Friday’s retail sales and CPI data will be very critical. While we think the Fed will be resolute on its course towards at least two rate hikes, the market is underpricing the risk that the US Fed will tighten rates more quickly than expected, so a robust Retail Sales print and a stronger-than-expected CPI print will be a call to action for dollar bulls.
Overnight, the equity markets were quiet, with stock traders desperately seeking volatility as “Vol’s” fell off the cliff, as the event risk lapsed. The main topic was Friday’s strong payroll headline, which, after a weekend of reflection, has traders questioning their cynical view on the state of the US economy.
One final thought on the French election: despite yesterday’s unassuming market reaction to the runaway victory by Emmanuel Macron, the well-behaviour of the markets suggests that despite a major pop to the upside, the result cannot be viewed in any other light than positive for market sentiment.
Australian Dollar
It’s been a rough start for metals this week, with continued fragility in iron ore and copper likely translating into AUD weakness. The commodities lower narrative still looks to have more to run, which will keep the Aussie on the defensive. Also, we’ve yet to see a relevant retracement during this recent downtrend, suggesting that dealers still favour the AUD/USD to trade lower.
Euro
The market-positive election outcome should be a boost to both euro and risk appetite, but short term market noise and position (i.e. the crowded EUR and EUR/JPY trade) is dictating near-term price action. And with the close below 1.0930 in New York, it certainly points to a bearish outside day. Despite the profit-taking and stops getting a trigger on the move below 1.0950, there was a lack of new catalysts to buy euro once the election narrative had played out. Dealers are now in a state of flux awaiting some central bank direction, whether it be Fed or ECB.