After a packed few weeks of major risk events, focus turns to the overall macro picture and hard economic data releases to influence price action. In the absence of less bad news from the US banking sector, market volatility has sunk in the Vix, commonly known as Wall Street’s “fear gauge”. It is now back below its long-term average. The index, which reflects expected stock market swings in the S&P 500 over the next 30 days, has closed below this level 57 times so far this year. This compares with just 23 times in the whole of 2022. The May 1 low at 15.51 was the lowest reading since November 2021.

Fears about US interest rate rises have eased, especially after last week’s latest US inflation data. This showed elevated monthly prints, but a softer side to service price pressures in the part of the economy which has been running particularly hot. This triggered a move lower in US Treasury yields with money markets pricing in around three 25bp rate cuts for the rest of this year. A series of Fed speakers this week could see them push back against this dovish pricing given the job market remains tight and that both core and headline monthly inflation data is still strong.

This could give added legs to last week’s dollar rally which is battling with the US fiscal drama and debt ceiling crunch, as well as lingering banking stress and the tightening in lending conditions. The main data point will be US retail sales which should get a lift from decent auto sales figures for April. The weekly jobless claims numbers are also getting some attention as they appear to be moving higher as a lagged response to the surge in job lay-off announcements.

We do get key UK data out on Tuesday. Labour market figures with wage and employment data is an important release for the MPC at the Bank of England. Policymakers said at last week’s meeting that more tightening will be required if inflation proves “persistent”. Strong wage growth has been a big part of this with markets currently pricing in more than 42bps of hikes by September. This essentially means one 25bp hike in June and around a two-thirds chance of another one. Any softening of wage growth will dent these bets on rate rises and see GBP struggle.

Major risk events of the week

16 May 2023, Tuesday:

-UK Jobs: The labour market continues to send mixed signals with the jobless rate rising and vacancies slowing, but employment also rising and pay growth holding up. Surveys suggest that tightness in the job market is unwinding but wage growth remains elevated, given the very high starting point.

– German ZEW Survey: Consensus forecasts less optimism in this measure of business sentiment in the region’s biggest economy. Both expectations and the current situation are expected to fall to -5.0 and -35.2 respectively. The latter would be the first time in negative territory since December and the third straight monthly fall. This comes amid a big plunge in industrial orders and production. EUR/USD had its biggest weekly fall since September breaking down through near-term trendline support. The 50-day SMA at 1.0869 may offer some support.

-US Retail Sales: After declining 0.6% in March, analysts forecast a rise of 0.7% in April. Economists predict activity will get a lift from robust auto sales numbers. But otherwise, the release will be softer with credit card figures pointing to modest growth on most items. The base in the DXY around 101 was solid enough to see a push higher last week. This advanced above long-term trendline resistance. This now becomes support around 102, with the 50-day SMA at 102.51 initial support.

18 May 2023, Thursday:

–Australia Jobs: The market median is for 25,000 job gains in April following 53,000 the previous month. Elevated job vacancies and immigration recovery is seeing robust employment outcomes and low unemployment for longer. The jobless rate is expected to remain unchanged at 3.5%. The RBA is focusing on near-term developments in the labour market and inflation. Tightness in the former is expected to ease through the year as a consumer-led slowdown in growth takes place. AUD/USD topped out around 0.68 again last week and looks like it could test 0.66 if the recent bearish momentum continues.