US INFLATION EXPECTATIONS SOAR TO 12-YEAR HIGHS

The US Dollar starts the new week on a softer footing for now following a solid rally late last week which saw the Dollar Index breaking out to its highest levels in over a month. The move was driven in part by comments from various Fed members pushing back against the idea of rate cuts coming later this year. Additionally, US consumer inflation expectations on Friday were seen hitting 12-year highs. Consequently, the market view is shifting back towards expecting US rates to stay higher for longer. Traders now look to Yesterdays US Empire State Manufacturing Index which is expected to have contracted last month.

KEY FACTORS FOR MONDAY 15th MAY

• Better start to risk appetite as USD weakens following Friday rally

• US rate cut expectations fall back

• Bitcoin recovering sharply

MARKET MOVERS

• EURUSD bounces off $1.0840

• Bitcoin back above $27500

• FTSE back above £7775

• Gold rallying

ECONOMIC CALENDAR

• USD Empire State Manufacturing Index (1.30pm)

• GBP BOEs Pill Speaks (5pm)

• USD Feds Cook Speaks (10pm)

US PPI DROPS, JUNE RATE HIKE CHANCES FALL FURTHER

Stock markets were knocked a little lower on Friday as soaring US inflation expectation dented rate cut forecasts for later in the year. Uncertainty continues to grow too ahead of the US debt ceiling deadline. Talks are scheduled to continue this week with Biden citing optimism over the weekend that a deal can be done to avoid default. Equities indices are starting the week with a mildly bid tone. The Nasdaq is seen turning back towards highs after breaking out to fresh 2023 levels last week. The FTSE is turning higher too as the rebound off the 7697.7 level gathers momentum putting 7835 in sight as the next target for bulls.

Interestingly, crypto assets have seen strong demand at the start of the week. Bitcoin futures have bounced firmly off last weeks lows with BTC now trading around 7% higher. Industry data shows the stable-coin supply ration has fallen around 11% over the last week, showing that buy was increasing as price was falling, suggesting perhaps that bigger accounts are using the pullback to reload long positions, turning the near-term view bullish for now.

In FX, the better tone to risk appetite at the start of the week has seen the Aussie bouncing back. AUD had been hard hit recently amidst the downturn in risk assets. However, with equities seeing better demand across the European open on Monday, AUD has emerged as the best performer so far. By the same token, JPY has seen the weakest performance with better risk appetite fuelling weaker safe-haven demand for the Yen.