Risk Aversion Breathes New Life Into The US Dollar

So, what to make of the inflation data this week? The data showed that inflationary pressures have eased though they remain well above the Fed’s target level.

On the one hand, you could argue that the current interest rate level is working and that no more hikes are required, but on the other hand, you could make the case that further tightening is needed to reign in price pressures.

But while the results of the latest inflation gauges are open to interpretation, the move south rather than north in the inflation rate supports the case for a June pause by the FOMC at the very least.

US dollar gains as gold fades a little

Risk-averse trading conditions breathed new life into the USD, with the stronger greenback contributing to a fade in the gold price. Despite the latest minor dip, gold is having an extended stay above the US$2k level and from a technical and fundamental standpoint the outlook for the precious metal still looks quite constructive.

If the debt-ceiling negotiations drag on and we see a flight out of risk assets, both gold and the USD are top candidates for where investors may park their funds. And that is when traders will need to choose which of the two is the preferred safe-haven play.

During the Thursday US session, the USD won out at the expense of gold, but if a US credit default moves closer to reality, then this script may be flipped.

This renewed bout of USD strength has put currencies like the euro, pound and AUD on the slide. Euro continued to struggle during Asian trading hours with the currency but has so far managed to maintain the 1.09 handle. Support appears at the 1.0880 level, while moderate resistance can be seen at 1.0980. A return to 1.10 and above for the EURUSD rate will be conditional on some steam coming out of the greenback.

Meanwhile the Aussie Dollar has spent time trading below the US$0.67 handle with weaker stock indices, a higher USD, and softer Chinese data this week plaguing the AUD.

Oil under pressure

A downturn in sentiment had oil under pressure with the price following equity markets lower. The latest dip in the oil price can also be attributed to the underwhelming Chinese data seen in the last week, which has raised more questions than answers regarding the trajectory of the Chinese recovery.

Softer inflation and trade data this week have created some anxiety for traders who have positioned portfolios on expectations of a stronger Chinese re-opening.

In addition, oil remains susceptible to further near-term downside the longer that US debt ceiling discussions remain unresolved.

In Asia, the ASX200 was languishing as a result of energy and materials stocks being in the red, with the Australian index unable to shake off the weaker lead from Wall Street.

The Hang Seng index moved into negative numbers, meanwhile, the Nikkei went against the grain by trading in the green, despite the stronger yen.

Attention now turns to the next Consumer Sentiment reading in the US, the result of which could set the tone for how Wall Street caps off the week.

Market commentary and analysis from Tim Waterer, chief market analyst at KCM Trade

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