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Reflation trade kicks on

April 30,2021 06:17:21

Overnight Headlines

*USD gained against most of its peers on data showing accelerating US recovery

*US stocks close at all-time highs, Amazon’s stellar results adding to positive sentiment

*Higher bond yields in focus, Eurozone and German GDP released this morning

USD rebounded off a two-month low of 90.42 on the USDX as EUR/USD’s ascent got stuck at 1.21 while USD/JPY drew support from rising Treasury yields trading close to 109. Since falling to 1.53% last week, the interest rate on the widely watched 10-year government bond touched 1.68%.

US equities pushed higher overnight to fresh records underpinned by solid US economic data and strong corporate earnings. US economic growth accelerated in the first quarter to 6.4%, and aside from the bounce back in the third quarter of last year, this is the highest quarter of growth since 2003.

Market Thoughts – Positive risk sentiment all around

With the Fed staying the course, the reflation trade is very much alive and kicking. Along with strong earnings and President Biden’s assertion that the US has turned the corner in fighting the pandemic, equities have only one way to go. Commodities have been on a tear with Copper hitting multi-year highs while oil has rebounded with robust economic data supporting the market. It will be interesting to see if oil producers can’t help themselves and attempt to boost output further, with resistance in Brent around $70.

Chart of the Day – EUR/USD’s fourth week of gains

We started the week looking at the world’s most traded currency pair and with 3.3% gains so far this month, EUR/USD is on course for its biggest monthly rise in nine months. The day ahead features some headline-grabbing data to watch out for. Eurozone Q1 GDP is released at 9am GMT and is expected to print negative again resulting in a technical recession. The markets will likely ignore this as it is backward-looking and stale, looking forward instead to the reopening of economies. We also get European inflation figures with the headline forecast to jump to 1.6%, but again this has been widely flagged due to year-on-year effects comparing the numbers to last year’s collapse in energy prices.

We highlighted 1.2120 as a target for bulls on Monday and a close above here (and the down trendline from the January high) will help the bulls push on to 1.22 and the 76.4% Fib level of the January to March drop. The positive risk mood should help the euro extend its run, having touched a two-month high at 1.2150 yesterday, though we have had four weeks of gains, so consolidation is quite possible. The month of May is seasonally also a good month for the dollar. Support comes in at the 61.8% Fib level around 1.21 and the 100-day moving average at 1.2052.

Jamie DuttaAnalyst / Trader

"With extensive experience as a full time trader and financial market commentator, I have worked as a trader in top tier investment banks and trading houses, including Morgan Stanley and GAIN Capital trading Forex, Index derivatives. and Bonds. I combine technical analysis with a deep fundamental knowledge to identify trade set-ups. My real life experience allows me to break down the complexities of financial jargon and trading. This means everyone can better understand the compelling forces of greed and fear which are realised every day in countless ways across markets."

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