The Week Ahead – Stimulus and Moderate Inflation Cause Bull Market
US 30 hits all-time high on stimulus
The Dow Jones sets a new record supported by an unwavering stimulus.
The passage of the trillion-dollar infrastructure bill in the US Senate is a clear message to the market that liquidity will keep flowing.
Cyclical stocks such as energy, industrial, consumer, and financial companies would be the main beneficiaries of the deal. Meanwhile, the macro-environment offers a strong tailwind.
A steady recovery (yet not hot enough to warrant a rate hike) is the sweet spot for the stock market.
The index has bounced off the 30-day moving average at 34800. 36100 is the next milestone as the rally picks up steam.
EURUSD rebounds on easing US inflation
The US dollar softens across the board as US inflationary pressures ease.
Following a solid performance of the job market, July’s core CPI came out like cold water on the dollar bulls.
A slowdown in price increase from 4.5% yoy in June to 4.3% last month seems to corroborate the Fed’s claim that inflation may moderate over time. As the Fed has taken on the dual mandate of price stability and employment support, this data divergence may keep officials waiting on the sidelines.
Traders have bought the dip at last March’s low at 1.1710. They will need to push past 1.1900 before they could hope to keep the euro rolling.
NZDUSD consolidates ahead of rate hike
The New Zealand dollar bounces as traders bet on the RBNZ to kickstart the rate hike cycle this week.
The central bank has been facing increasing pressure to reign in soaring prices and a white-hot housing market. An uptick in the latest inflation expectations survey would further tip the balance in favor of a monetary tightening.
Economists expect the official cash rate to go from 0.25% to 0.5%. This would be the culmination of a buildup in hawkish guidance over recent months.
The bulls are testing the top of the consolidation range at 0.7100. That said, a bullish breakout would send the price to 0.7300 while 0.6900 stays as a key floor.
USDCAD edges higher as oil softens
The Canadian dollar struggles to bounce as oil prices remain under pressure.
The IEA warned that demand for oil dropped in July due to the spread of the Delta variant. New restrictions (as seen in Asia) could cap the price of the commodity.
The loonie faces additional pressure from the strong demand of the US counterpart.
Even though Canada’s inflation has been on an upward trajectory over the past quarter, a robust recovery in the US and the greenback’s safer appeal may make the latter more attractive.
The pair has met buying interest at 1.2420. The recent high at 1.2800 would be the next stop.