Wednesday May 18th, 2022

The US$ rebounds, oil prices firm, while equity markets & US yields are mixed after the Fed Chairs hawkish comments. Fed Chairman Powell said he will back interest rate increases until inflation comes down. “If that involves moving past broadly understood levels of neutral, we won’t hesitate to do that” Powell told the WSJ. Markets ease as risk-on sentiment remains fragile amid monetary tightening, Russia’s war in Ukraine and the ongoing covid lockdowns in China. Intraday US Housing starts & Building Permits & CAD CPI will help provide direction to markets. In other news. UK inflation hits 9%, a 40-year high on soaring energy costs. Finland and Sweden formally submitted NATO applications. US Treasury Secretary Yellen at the G7 meeting targets Russian oil in EU talks with price cap and tariff proposals. Australia election campaign centers on fears of China, with both parties broadly agreeing the challenge from China is Canberra’s security priority. Russia expels 34 French diplomats in an ongoing tit-for-tat retaliation. The currency markets. The US$ rebounds after the Fed chairs reaffirms hawkish outlook, the GBP falls as UK inflation hits 40-year high, and Turkish Lira falls for 10th straight session. CNY dips 0.1%, while Asian currencies are down 0.15% on average vs US$. Trading currencies are mixed with AUD, ZAR & NZD down 0.05%, CHF eases 0.2%, while NOK falls 0.35%, and JPY & MXN are up 0.25% vs US$.

Oil prices rise on China demand recover expectations and ongoing supply concerns. Morgan Stanley now sees Brent oil prices at US$120pb in Q3 and thinks oil prices could average US$150pb for remainder of 2022 in a “bull case”. C$ holds steady near 1.28 balancing the firmer US$ vs rising oil prices, with markets focusing on today’s CAD inflation report for direction. The CAD Consumer price Index is expected to hold steady at 6.7% which supports ongoing BoC interest rate hikes in 2022. Bias remains to sell US$ on any rebounds. Support holds at 1.2770, while remains at 1.2865

Euro retests 1.0500 amid a firmer US$ and steady EU inflation rates. Euro lost its bullish momentum after 3-days of advances as sellers re-emerged on the combination of hawkish Fed comments and lower EU inflation levels at 7.4% vs 7.5% expected. The ECB is expected to raise interest rates by 50bps by September, but the impact will be limited as the Fed is expected to raise by 250bps in 2022. Intraday the US Housing & Building Permits are expected to have a limited impact on markets today, with Euro anticipated to remain within its current trading range. Support holds at 1.0480, while resistance remains at 1.0550.

EURGBP firms on a weakening pound on the back inflation rates spiking to 40-year highs in the UK while economic growth is expected to continue to fall. Support holds at.8400 (1.1905) while resistance remains at .8500 (1.1764).

GBP slips to 1.24 amid spiking inflation levels and a return to the safe-haven US$. The pound fell against the US$ after data showed UK inflation rose to 9%, the highest level since 1982. The combination of a strong labor market and surging inflation levels has put the Bank of England in a difficult position. The spike in inflation levels is now fueling fears that the treat of recession may temper how far the BoE can go, which in turn put selling pressure on the pound. British foreign secretary Truss said on Tuesday she intended to introduce legislation in coming weeks to make changes to the Norther Ireland protocol, which is part of the Brexit separation deal. Support resets to 1.2370, while Resistance lowers to 1.2450.