Oil Rebounds, EUR Pares Gains Post-Macron

The risk-on environment pushed the global indices and equity futures higher. Nikkei and Topix rallied past 2%, as gold, yen and the franc retreated. Australia’s S&P/ASX 200 gained 0.50% despite a failed recovery attempt on iron ore prices. Shanghai Composite (-1.03%) diverged negatively, as data showed that Chinese exports grew by 8% year-on-year in US dollar terms, from 16.4% printed a month earlier. The trade surplus improved to $38.05 billion from $23.92.

The CAC (-0.17%) failed to gather a positive momentum on Macron’s victory in the final round of the French presidential election. The DAX (+0.25%) outperformed its peers as Volkswagen (DE:VOWG_p) (+1.07), Daimler AG NA O.N. (DE:DAIGn) (+0.86%) and BMW (DE:BMWG) (+0.71%) lead gains in Frankfurt.

The FTSE opened firmer in London, yet failed to preserve gains. Rebound in oil prices were jeopardized by stronger pound and softer commodities.

The downside risks prevail, as the GBP/USD flirts with the 1.30 resistance.

Cable flirts with 1.30 before the BoE, QIR

The GBP/USD strengthened to 1.2989. It is just a matter of time before the 1.30 resistance is tested.

The key mid-term support stands at 1.3044, the major 38.2% retracement on post- Brexit sell-off. This level should distinguish between a mid-term bullish reversal and a short-term downside correction.

Is Cable ready for a mid-term trend reversal against the US dollar?

The Bank of England’s Quarterly Inflation Report (QIR) due on Thursday could bring some clarity regarding the Bank of England’s (BoE) policy outlook.

The QIR could reveal an upside revision to the inflation forecasts, yet the BoE is set to maintain its soft growth forecast, due to the Brexit. According to the latest figures, the UK’s GDP growth may have eased to 0.3%q/q in the first quarter, down from 0.7% printed previously and versus 0.4% expected by analysts. Soft data may refrain the BoE members from shifting toward the hawkish camp. The BoE is expected to maintain the status quo 9 to 1; Kristen Forbes could bring the rising inflationary pressures on the table.

Oil rebounds on Iran’s comments, speculators are in charge

Oil rebounded after Iran stated that it will comply with any OPEC decision regarding an eventual production cut at the May 25th meeting. WTI traded at $47/barrel in Asia, after having bottomed at $43.90 on May 4th. The recovery could extend past the $50 level, as the period until the next OPEC meeting will likely be an interesting playground for speculators. We remind that the speculative oil positions are sufficiently short, hinting at the possibility of a short-term unwind.

ECB hawks should not get overexcited about Macron's victory

Emmanuel Macron won the presidential election with 66.1% of the votes, a very solid victory which proved to be better than the most Macron-positive poll (62%). The EUR/USD gaped higher at the open, yet the upside remained capped at 1.1023, given that the Macron-win was fully priced in prior to the final vote. Top sellers jumped in to bring the pair back below the 1.10 mark, which has been breached for the first time since November. The ‘buy-the-rumour-sell-the-fact’ and the profit taking could encourage a deeper short-term correction to 1.0915 (minor 23.6% retracement on April – May rise), and 1.0849 (major 38.2% retrace).

With the French election out of the way, the long-term outlook for the euro and the Eurozone remains positive. The attention will now shift to German election, which however doesn’t carry similar risks vis-à-vis the integrity of the Europe’s monetary and economic union.

In France, the legislative elections due on June 11 and June 18 will be the major political highlight, as the independent candidate Macron is now due to form a government.

In the aftermath of the French election, the European Central Bank (ECB) hawks could regain some territory. However, we stay away from an excessively hawkish attitude, given that the ECB-tapering speculations were clearly pushed back from President Mario Draghi at the latest meeting. The next EUR/USD resistance is eyed at 1.1073, the minor 23.6% retracement on post-Trump decline.

A consolidation in the EUR/USD could be healthy before a fresh leg up. Against the safe haven currencies, the euro should extend gains on higher allocation from risk averse traders. The EUR/JPY should challenge the 125.00 level for the first time in more than a year, while the EUR/CHF should consolidate and extend gains with support at the 100-week moving average (1.0820).

Fed June rate hike is given 100% probability

Released on Friday, the US nonfarm payrolls (211K) beat the expectations (109K) in April. The unemployment rate unexpectedly improved from 4.5% to 4.4%, the average monthly earnings remained unchanged at 0.3% month-on-month. Average earnings on yearly basis eased to 2.5% from 2.7% printed a month earlier. The satisfactory jobs data gathered little momentum on the upside. In fact, the market was already heavily positive in US dollar following last week’s Federal Reserve (Fed) policy meeting. Currently, the market assesses 100% probability for a June rate hike.

Gold hit $1220

Gold extended losses to the 100-day moving average ($1’220). Improved global risk appetite and higher US yields could drive more capital from the non-interest bearing gold to better yielding fixed-income assets. Sellers are touted below $1.238 (minor 23.6% retracement on April – May decline) and $1’249 (major 38.2% retracement) for a further slide toward the $1’200 mark.