Vaccines Vex, Inflation to Fall

05/20/2020 9:33 am EST

Focus: FOREX

Ashraf Laidi

Founder, Intermarket Strategy Ltd.;

The markets are reacting to COVID-19 treatments and economic reports, says Ashraf Laidi.

Risk trades on Tuesday brushed up against the range tops but retreated late in the day on second thoughts about COVID-19 vaccines. The New Zealand dollar was the top performer Tuesday, while the Japanese yen lagged on the Bank of Japan’s announcement to go deep in leverage.

Several inflation reports are due on Wednesday. Gold and silver made a convincing rebound, highlighting their well-preserved trendlines. 

The NASDAQ 100 continued to try and fail in regaining the February gap, ditto for DAX, while the S&P 500 and Dow Jones Indexes couldn’t get near the April highs. 

On the fundamental side of things, Fed Chair Powell didn't add anything new and other Federal Reserve officials joined in on his campaign urging Congress to spend more.

It was a different story in Europe, where Germany and France joined together to announced aspirations for a grant program that could be as large as 500 Billion euros, which is larger than rumored. More details will emerge next week but, as always, the reaction in the euro was half-hearted. It initially made a solid move then backtracked owing to the usual doubts about the ability to execute and the long timelines.

In Japan, it was a different story as the BOJ moved up the timeline for its meeting to Friday. Local reports said the BOJ will add leverage for a business lending program. That sparked a broad slump in the yen and helped to boost gold.

Looking ahead, the top data to watch is inflation in the UK, eurozone and Canada. Price rises everywhere are expected to slow dramatically in year-over-year terms and in Canada they're forecast to turn slightly negative. The issue at the moment is measurement and interpretation. Due to stockpiling, shortages and the crushing drop in energy, the picture about what's next isn't clear. Still, at face value the numbers will clear the way for more easing, including potentially negative rates from the BOE.

In the longer-term, the enormous growth in deficits spending and money supply will make inflation a defining feature of the decade and a critical debate.

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