Monthly Outlook – May 2021

Recovery on its way

By: Ahura Chalki

Market analyst – IFC Markets

The overall look of the April review and My Preview

Based on data released in April, the U.S. economy expanded at a rapid 6.4% yearly base in the first quarter. Almost every part and the financial group developed this year so far, as government stimulus increased with the arrival of Biden. 

On the other hand, vaccination improvement helps the economic recovery and Jobless numbers to decrease, based on the NFP report of April. And while earnings reports continuing, April done with Nasdaq touched its sixth straight month of gains, S&P 500 and Dow both printed new records high and third successive month of closing higher. Generally, in April, Nasdaq gained 5.4%, SP500 gaining 5.24%, and Dow is higher by 2.72%. 

However, it is not just about the U.S. In French, CAC40 rose to its 13-month higher, and DE30 printed a new all-time high. The uptrend in the stock markets has been on its well all around the globe. 

On the vaccination front, April ended great for the U.S. and U.K., as both countries have led the way. U.K. vaccinated more than 50% of the population while the U.S. passed the 100 million. In the E.Z., by the middle of the month, there were concerns about the vaccination process.

Before going to May preview, have to mention that despite the excellent progress and positive numbers in GDP numbers of Japan, China, the U.K., and the U.S., in E.Z., GDP developed a bit; however, it is still in the negative area for the second consecutive month, confirming the recession in this economic block. 

May – Forex Market 

 USD 

Despite the U.S. economy’s remarkable recovery in April, the greenback staged a spring decline as the Fed hold the low-interest rates for the predictable future. After a 3.6% gain in the first quarter, the USD index tested two months low in April, as the excellent stimulus package of the U.S. government helped the economy, while retail sales jumped 9.8% -The fastest growth in past ten months- and U.S. 10-year treasury yield ended the month under 0.160% from 14-month highs (1.77%). In the month ahead, along with other events, Treasury yields will lead the dollar’s direction. We expect more decline in May, as positive signals from the economic recovery, decreasing the USD demand, moving the cash flow to Stock markets. 

The main events of the month for the USD Index are ISM manufacturing (3rd), Initial Jobless Claims (6th), NFP number (7th), CPI (12th), Retail Sales (14th), and Home Sales (23th). 

Euro 

After some worries in the first half of the month, an acceleration of the E.U. vaccination rollout, and activity surveys showing economic resilience in the region despite new Covid restrictions, helped offset pessimism toward the European outlook for the second half of 2021. speeding of the E.U. vaccination progress, and different surveys of economic activities, confirming the better than expected recovery in the region, despite the restrictions in some countries. And it helped the Euro to regain some of the losses of Q1. 

In May, we expect to see another solid month for the common currency, as most of the restrictions are ending and E.Z. opens up for tourists. The summer holidays and tourism business will be the critical economic recovery for Europe. 

And finally, the main events which can affect on Euro are PMI data (5th), German ZEW Economic Sentiment (11th), EU GDP (18th), and EU CPI (19).

Pound

Since the beginning of April, Serling has been suffering as slowing the U.K. vaccine was one of the fears alongside geopolitical tensions. The North Ireland border issue, primarily due to Brexit, added the doubts on U.K. reopenings. GBP/EUR fell 2.5% in eight days, and GBP/USD fell to a one-month, but rebound faster to regain the 1.40 level. The Bank of England’s (BOE) chief economist announced his resignation had some short-lived pressure on GBP; however, positive economic data and positive market sentiment supported the pound. In April, wage growth slowed, inflation was less than expectations, but GDP GDP contracted less than expected in three months published data to February, and it was supportive for GBP. 

In May, the critical driver of Sterling will be the COVID-19 headlines. After easing the lockdowns last month, the third stage of lifting the restrictions expected in the second half of May. Therefore, if the vaccination progress gets better and the economy continues reopenings, then Sterling willing to see higher numbers against its crosses. On the other hand, the Scottish Parliament election must be in the spotlight as it can add the market volatility. 

While Cable trading stable above its five-year average rate of $1.30, in May, the most important event, which we have to take care of them, are Manufacturing PMI (4th), Service and Composite PMI and BoE Interest Rate decision (6th), GDP, Manufacturing Production and CPI (12th), Employment data (16th) and Retail Sales (21st).  

Commodity currencies

AUD, NZD, and CAD all gained in recovery mode, as economic recovery mostly increases the demands for energy and production. Canadian economy showing signs of good recovery after the pandemic triggered a record 5.4% contraction in 2020, while higher Oil prices also helping the Loonie. These improvements led the BoC to reduce the economy-supportive bond purchases to C$3 billion weekly from C$4 billion. BoC also revised its 2021 growth outlook to 6.5% from the 4% forecast in January. So far, USD/CAD has declined around 3% in its Year-to-date performance. 

AUD topped out above 0.8000 in Feb, and since that, it was in an apparent side movement and got support from the Global economic recovery, since Iron and Copper both had more demand, and it is supportive for Aussie.  

The New Zealand dollar rebounded as fast as possible after its sharp decline to four-month lows in March. Monetary policy changed to restrict lending in the overheated N.Z. property market and volatility driven by higher U.S. bond yields combined to hit the kiwi. However, Global economic recovery and improvement supported the NZD in April. For May, the RBNZ meeting at the end of the month will be in the spotlight. With positive sentiments of the commodity market, the focus remains on the fortnightly dairy auctions, next due on May 4.

May still will be positive for commodity currencies as hopes for better recovery are increasing. 

Gold. 

In April, Gold gained again, despite the significant gains in the Stock market, while they usually have opposite relations. The main reason for Gold payments in April would be the higher treasury Yields, increasing the fears of higher inflation rates. Higher inflation rates move the cash flow to anything other than a cash deposit. Gold got some of this cash flow, and that’s why it moved in the same direction as stock markets. On the other hand, lower USD also helped it gain, as cheaper dollar means More expensive Gold. In May, we expect to see more gains for Gold, as long as it moves above 1,774, as profit-taking in the stock market is what we hope to see after ending the Earnings reports in the second half of the month. Technically if the price cannot hold above 1,800.00, then it can test the side movement. And in return, breaching below the 1,774 and then1,756.00 can open the doors for a lower price at 1,738, 1,700, and 1,678. However, Trading stable above the crucial level of 1,800 will put the 1.850 spotlights for yellow metal in May. 

Oil

The Opec monthly report of April 13 raised its demand forecast by 190,000 b/d from its March estimate. According to the buoyant Stock Market and great stimulus programs, the future easing of lockdowns and more travels will increase the market demands supporting higher prices or staying positive above $60. The energy market generally will be favorable during May as well, as “global oil demand, which slumped last year as the pandemic put the brakes on land and air travel, is set to reclaim 96% of 2019 demand, according to the OPEC report.” (SPGlobal.com) 

Technically the third support at $60.00 still supports the current uptrend. And at the uptrend, above third resistance at $66, doors will open for $70 and above. 


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