Yesterday was a slow Monday. The US and the UK markets were closed, the news flow was light and the trading volumes were thin.
The barrel of US crude trades a touch below its 100-DMA. The tense geopolitical setup is supportive of further gains along with the rising US demand into summer and OPEC’s restrictive tone regarding its outlook. China is also spending big to prop up its sputtering property market – a thing that brings further support to oil and commodity prices. Sentiment in oil is tilted to the upside, but there is one major risk to rebound above the $80pb level: a potentially waning reflation trade. If the central banks temper their rate cut plans into summer, the demand outlook for oil could get hammered and the latter could limit recovery.
Back-to-Back ECB Cuts?
European Central Bank’s (ECB) Francois Villeroy de Galau said yesterday that the ECB could lower interest rates both in June and the July meetings – a comment that doesn’t match the ECB’s official communication that keeps its options open beyond the June meeting. And I prefer keeping the latter as the base-case scenario because if inflation in Europe picks up momentum, the ECB can’t afford back-to-back rate cuts. Inflation updates from Eurozone countries will flow in throughout this week, the aggregate number is due Friday morning. That gives time to the ECB doves time to dream on Mr. Villeroy’s early-week comments and should – in theory – limit the topside potential in the euro.
But the EUR/USD is pushing higher at the start of this week, on the back of a broad-based weakness in the US dollar. The US Dollar Index is preparing to test the 200-DMA support against hawkish odds. There is too much optimism that Friday’s PCE print will bring relief. So much in fact that even a softer-than-expected Bank of Japan (BoJ) core inflation this morning didn’t send the USD/JPY higher. So if that’s the case, if the US PCE index hints at softer inflationary pressures at Friday’s release, we could see the dollar index sink below the major 38.2% Fibonacci level and into the medium-term bearish consolidation zone. That would allow the EUR/USD to extend gains above the 1.09 resistance but a dovish shift in Federal Reserve (Fed) expectations would also boost the dovish ECB expectations, and the latter would limit the EUR/USD’s upside potential. In summary, I don’t see the EUR/USD spike above the 1.10 level when the ECB is sitting on the front seat of the monetary policy easing bus.