The harmony of message between the 8 Fed officials who spoke on Tuesday was remarkable in its consistency, even as pressure mounts. GBP was the top performer while the CHF lagged.  US CPI is due up next, expected +0.2% m/m from 0.6%,  but the big figure is the y/y number expected 3.6% from 2.6%.  The big debate is whether a higher than expected figure will give USD a lasting lift, given the Fed's increased focus on jobs

Equities were the main event on Tuesday as the risk-off trade that bubbled up on Monday extended. Europe and Japan were hit hard and US was on track to tumble as well but after a punishing run, it was tech that set off a bounce from the bottom as the Nasdaq turned a 2% decline into a flat close.

Those gyrations dictated FX moves with commodity FX following closely but the overall currency market moves weren't large.

Another source of support was an overwhelmingly consistent message from the 8 separate Fed officials who spoke. They unanimous preached some variation of patience before hiking rates and a belief that higher inflation is transitory. That kind of strong consensus should continue to offer comfort to equities for the months ahead.

One risk that several highlighted was an unwelcome rise in inflation. That's something that could start as soon as Wednesday with the April CPI report. The year-over-year reading is expected to jump to 3.6% from 2.6%. Excluding food and energy, the consensus is a rise to 2.3% from 1.6%.

We anticipate that the Fed has well-prepared the market for a short-term rise in prices so even a 0.1-0.3 pp upside miss on the y/y numbers should be well tolerated and may present a short-term buying opportunity. Watch bonds closely, particularly if there's an upside surprise.

The Tech wreck made way for the DOW to join the selloff, after reusrging inflation signs lifted yields at the expense of NASDAQ and bond prices (higher yields). But yesterday's pro-cyclicals rotation died down, dragging DOW30 and SPX by 1.5% and 0.9% respectively, while USD lost most of its ground gained earlier. Metals are also making a bounce, ahead of Wednesday's crucial US CPI release.  The big miss in non-farm payrolls on Friday led to some soul searching in markets but little in terms of a lasting move. Sterling surged on Monday after a middling mandate for Scottish independence. Subscribers made +300 pips in GBPUSD (see our video for the how and whys behind the trade). 

Whether a higher than expectec CPI helps the USD, will depend on the follow-up in US bond yields. But what's many are ignoring is that rising supply-driven inflation does not move in a vaccum. Do you think inflation will remain muted in Europe? 

Was the soft jobs report a game-changer? The trade on Friday was that it meant rates would stay lower for longer, or would at least give the Fed some leeway to try out it's patient approach to normalizing. On Monday though, the mood was more that it was a one-off report and that the dozens of other inputs of better growth are more relevant. That led to a big unwind in the stock and yield moves.

The US dollar though hardly bounced. A particularly large move came in cable, which jumped more than 150 pips to the highest since February. Some of that was technical as a series of March/April highs gave way but the tipping point was the Scottish election. Today's Queen's speech also helped boost GBP via improved political prospects for PM Johnson, following Labour's horrid showing in last week's local elections.  

The SNP and pro-indepenced Greens together got enough votes for a majority but it wasn't a resounding win and will independence polls flagging and better growth on the way, the market clearly took the impression that no referendum is coming soon. Combine that with ongoing UK vaccinations and reopenings and there isn't much in the way of a return to the Feb high of 1.4242 and potentially to back to 2017 levels.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR +85K vs +81K prior

GBP +20K vs +29 prior

JPY -41K vs -49K prior

CHF 0K vs -1K prior

CAD +26K vs +16K prior

AUD +1K vs -1K prior

NZD +9K vs +7K prior

Specs are beginning to buy into the Canadian dollar rally and that's no surprise given the positive backdrop in commodities and acceleration in Canada's vaccine rollout. Friday's Canadian employment report was on the soft side but lockdown measures should begin to ease this month and then it will be clear sailing. The report prompted Ashraf to trigger longs in GBPCAD on Friday, as stated late in the video and to the WhatsApp Broadcast Group on Monday.

US and Canada jobs data are due, with gold and GBP clearly edging higher vs USD. GBP awaits the results of the Scottish Elections, which will likely be finalised on Saturday. Gold and silver broke into key levels as the Bank of England was the latest central bank to fear tapering more than its shadow. The BoE performance on Thursday was a mess as officials tapered and at the same time desperately tried to avoid saying they tapered. US non-farm payrolls and Canadian jobs are due up next (more below) The following are selections from the WhatsApp Broadcast Group, with yesterday's insights to go long XAUUSD at 1781 targetting 1791 and the follow-up to target 1811 upon the break of 1801. Clients were also forewarned ahead of the BoE decision for a preliminary drop towards before the subsequent rebound.

Cable traded in an 80 pip range in minutes after the BoE announcement as traders and algos were left confused by a statement that was more or less unchanged followed a minute later by the monetary policy report, which said the pace of QE purchases could be slowed somewhat. Cable initially dropped to 1.3858 then spiked to 1.3940 – both session extremes.

It was a communication mess, largely because Bailey was frightened (no other way to put it) to admit to anything like tightening or signal that it's on the horizon. There appears to be a strong school of thought outside of the Bank of Canada that markets and the economy can't handle any taper talk. Given the enormous improvements in the global economy, it's all getting a bit ridiculous.

Outgoing chief economist Andy Haldane dissented in favor of a real taper. His comments with it emphasize a different possible approach, noting that there's evidence of a rapidly recovery economy and good reason to believe it will be maintained.

The risk is that by being overly cautious, central bankers will fall behind the curve. A brighter outlook along with associated inflation risks are a big part of the gold recovery. It rose to the best levels since February on Thursday, rising $30 to $1815.

Further evidence of economic strength could come in jobs reports from the US and Canada up next. Non-farm payrolls are expected at exactly 1 million but digging through the estimates, there's a clear skew higher. There's every reason to believe there was massive hiring in April, notwithstanding the disappointing ADP print (it also underestimated March jobs by nearly half). Economists tend to get gun shy when predicting extremes so there's room for an upside reading, with some bolder economists calling for 2m jobs. The unemployment rate is expected to ease to 5.8% from the prior 6.0%, while average hourly earnings edging up to zero from -0.1%.

In Canada, it's a different picture as many parts of the country went in a tight lockdown in April that has continued. The consensus is between -150K & -160K. The loonie is trading at 4-year highs though, and is looking beyond this tough stretch, so this datapoint is likely to be ignored.

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