US dollar continues higher as risk assets wilt on inflation fears

EUR/USD falls to the lows of the day

The US dollar is near the best levels of the day as it resolves higher on falling US equities and rising Treasury yields.
Today’s CPI report was a shocker and it puts the potential for a premature taper back on the table. Initially the dollar strengthened and then it reversed lower. Now it’s climbing again and at the best levels of the day against most counterparts. Some of that is risk aversion with the Nasdaq nearly 2% lower and S&P 500 down 50 points to 4101.
EUR/USD falls to the lows of the day
The transitory inflation debate is the main event in markets for the rest of the year. The period before now was pre-game hype. Everyone expected inflation to come out swinging but it landed an absolute haymaker in the 1st round.

Eurozone March industrial production +0.1% vs +0.8% m/m expected

Latest data released by Eurostat – 12 May 2021

  • Prior -1.0%; revised to -1.2%
  • Industrial production +10.9% vs +11.8% y/y expected
  • Prior -1.6%; revised to -1.8%

Not much change in factory output towards the end of Q1 but the year-on-year reading shows a big jump though that owes mostly to base effect adjustments, considering the plunge seen at the start of the pandemic in March last year.

The jumps in production of non-durable consumer goods (1.9%), energy (1.2%) and intermediate goods (0.6%) were offset by falls in capital goods production (1.0%) and durable goods (1.2%) during the month of March.

European Commission raises Eurozone 2021 GDP forecast from 3.8% to 4.3%

The EU expects the euro area economy to rebound more strongly

  • Eurozone 2021 GDP growth forecast raised to 4.3% from 3.8% previously
  • Eurozone 2022 GDP growth forecast raised to 4.4% from 3.8% previously
  • Eurozone 2021 inflation seen at 1.7%
  • Eurozone 2022 inflation seen at 1.3%
  • Euro area economic output to reach pre-virus levels in Q4, sooner than expected
  • Sees all EU economies returning to pre-virus GDP by the end of 2022
The bump higher in the forecasts owes much to the assumption that they expect a significant easing in virus restrictions, especially during 2H 2021 (summer vacation period also) as vaccinations allow for economies to reopen in a more meaningful way.

IEA says that oil demand recovery will outpace growth in supply

That despite cutting its demand forecast for India

  • Demand recovery forecast assumes COVID-19 situation in India improves
  • Extra supply is due from Canada, Brazil
  • Under current OPEC+ scenario, supplies will not match expected demand recovery
  • OPEC+ has pumped far below the call on its crude
  • However, demand recovery is fragile amid India’s COVID-19 situation

That fits with conventional market wisdom for the most part but just continue to keep an eye on India as they are a major wildcard considering the virus situation. If that persists for many more months and well into 2H 2021, it could alter the landscape.

BoE: Is June the time for a bond taper?

Optimism grows

On the face of last week’s Bank of England rate decision it was very uneventful. Rates were kept the same & asset purchases the same. Some investors had been hoping for a repeat of the Bank of Canada’s hawkish shift by tapering bonds and bringing forward interest rate hikes. The only dissenter to the on hold narrative was Andy Haldane. However, he is on the way out shortly from the Monetary Policy Committee, so that didn’t register with investors.

Minutes paint a better picture.

However, looking at the minutes the BoE has adopted a more optimistic outlook for the UK economy. They are expecting the country’s GDP to fall by less than forecast back in February, with the low Covid case numbers and success of the vaccine rollout clearly playing a big part in this. Crucially, there is an expectation that the estimated £150 billion of savings that consumers have accumulated over the past 14 months or so will steadily be released into the economy in the months ahead. GDP is expected to rise sharply in 2021 Q2 and to recover strongly to pre-Covid levels over the remainder of this year in the absence of most restrictions on domestic economic activity. Demand growth is further expected to be boosted by a decline in health risks and a fall in uncertainty, as well as announced fiscal and monetary stimulus.

GBP & FTSE reaction

The GBP responded in a confused fashion with the meeting and chopped around before moving higher sharply this week helped by a very poor NFP report.

The FTSE 100 was far more confident and moved higher on the higher growth forecasts. However, the general sell off in stocks this week has since brought in lower.

Optimism grows

June taper?

This look like a June taper can be expected now as there has been two upbeat MPC meetings in a row now.One approach would be to look for suitable technical areas to buy the GBP into the next BoE meeting. The key risk, as always,is on some kind of vaccine resistant COVID-19 variant.

UK Q1 GDP -1.5% q/q (vs. expected -1.6%, prior +1.3%)

March quarter economic growth in the UK -6.1% y/y

  • expected -6.1%, prior -7.3%
For the March month alone GDP +2.1% m/m
  • expected 1.5%, so a solid beat
  • prior 0.4%
GBP is trading up a touch, the March month result is encouraging despite a difficult quarter. April should be better when that data comes given the success the UK is having with its vaccine rollout.
Full UK GDP report is here, link

US inflation data due Wednesday 12 May 2021 – preview

Coming up at 1230 GMT, CPI numbers from the US for April.


  • expected 0.2%, prior 0.6% m/m
  • expected 3.6%, prior 2.6% y/y
Core – i.e. excluding food and energy
  • expected 0.3%, prior 0.3% m/m
  • expected 2.3%, prior 1.6% y/y
Snippet from Scotia comments on what to expect:
  • Base effects on their own would drive inflation from 2.6% to 3.3% y/y and core from 1.6% to 2.1%. 
  • Supply chain pressures and seasonal influences on month-over-month price changes account for the rest.

UN Special Envoy says Israel and Palestine are heading towards a full-scale war

uN Special Envoy to the Middle East Peace Process Tor Wennesland urged both sides to de-escalate.

“Stop the fire immediately. We’re escalating towards a full-scale war. Leaders on all sides have to take the responsibility of de-escalation” 
Apart from the deaths and injuries the latest from Reuters is a report that an Israeli energy pipeline has been struck in a rocket attack.
UN Special Envoy to the Middle East Peace Process Tor Wennesland urged both sides to de-escalate. 
Oil traders are keeping an eye out for further escalation. Mid-East tensions tend to push the price of crude higher.

ICYMI – OPEC still optimistic on oil demand despite India severe coronavirus ‘challenges’

The Organization of the Petroleum Exporting Countries (OPEC) released its monthly report on Tuesday.

  • It left its prediction of a strong recovery for global world oil demand in 2021 intact.
  • Said growth in the US & China will counter the demand slump in India
Said demand will rise by 5.95 million barrels per day (bpd) in 2021 (i.e. +6.6%), a forecast that is unchanged from last month.
The report also noted:
  • significant uncertainties surrounding the pandemic
  • “India is currently facing severe COVID-19-related challenges …  face a negative impact on its recovery in the second quarter …. is expected to continue improving its momentum again in the second half of 2021”
  • OPEC forecasts 2021 world economic growth at 5.5% (from 5.4% projected in the previous month’s report)
Go to top