Overnight Headlines

*USD finished lower as better US data underpinned demand for riskier assets

*US equities rose after President Biden reached a bipartisan infrastructure deal

*Vix and other “fear gauges” dropped at or near to post corona lows

USD closed lower with many majors printing “inside days” where the trading range falls inside the previous day. Commodity-$s outperformed and EUR edged higher but GBP fell after the BoE warned against “premature tightening”. USDJPY printed another new cycle high at 111.12, the highest level since last March before closing lower.

US equities rose once more with the S&P500 and Nasdaq posting fresh record highs at 4,266 and 14,369. The Dow has now reversed all its losses from the hawkish shift by the Fed last week. US and European futures are in the green with the Eurostoxx 50 and Dax eyeing up recent highs. Biden had to compromise on some parts of the infrastructure deal and it still needs to be voted on, but further fiscal stimulus is expected in the coming months which will likely necessitate rising taxes.

Market Thoughts – More US inflation data

US Core PCE data released this afternoon is expected to post year-on-year gains of 3.4%, a rise even faster than the nearly three-decade pace of 3.1% recorded last month. Upside surprises have of course been the trend in inflation data recently with the “transitory” explanation also hugely in vogue among the Fed and other central bankers.

While hotter-than-expected inflation readings continue to bolster the inflationistas, policymakers will be wary of higher prices starting to become psychologically entrenched as one-off drivers last longer than anticpated. We also get US consumption data which will be of interest as it could point to Americans beginning to buy more services and less goods. Regarding market moves, risks are tilted to the upside so it would be telling if we see a willingness of the dollar to slip away.

Chart of the Day – DXY holding gains

The dollar is holding just below two-month highs and 92 as it consolidates its gains made after the Fed last week. With such a strong move higher recently and with the index moving sharply through the upper Keltner channel, it’s natural to see some retracement to ease overbought conditions. The widely-watched 200-day SMA capped prices at 91.51 on Tuesday and now acts as strong support. Prices printed a narrow range day yesterday closing very near to where we opened signalling some indecision, but bullish momentum is still evident so we would ordinarily expect buyers to prevail with near-term resistance at 91.90 before strong resistance at the recent cycle highs at 92.37/40.