Caution returns as inflation fears mount

Stocks in Asia were fragile on Tuesday morning following the lack of indexes from Wall Street overnight due to the Memorial Day holiday in the United States.

Nonetheless, there is a sense of caution in the air after Germany’s searing inflation readings sparked concerns over the ECB’s aggressiveness in taming the inflationary beast. Soaring oil prices have soured the wounds, deepening inflation fears after the European Union agreed to cut oil imports from Russia. In the currency space, the dollar rose slightly but is still heading for its first monthly decline in five months, while gold prices remain trapped in a range. As inflation fears reduce risk appetite, European futures point to a negative open this morning.

A cautious outlook should remain the name of the game for the rest of the week as investors juggle inflation concerns, recession fears and ongoing geopolitical risks. Sentiment could also be influenced by major economic reports from major economies, including the US jobs report on Friday.

German inflation close to its highest level in 50 years

Last week, ECB President Lagarde reinforced expectations of the bank’s interest rate hikes in July and September. Those expectations were bolstered by the latest inflation figures from Germany, which showed consumer prices rose 7.9% in May from 7.4% in April, its fastest pace since the start. of 1974. Given geopolitical risks and upward pressures on energy, commodities and food prices may feed the inflationary beast, this will put pressure on the ECB to act.

This morning sees the release of the latest Eurozone inflation data with expectations of another record high. From a technical standpoint, the EURUSD could challenge 1.0850 if 1.0700 proves to be reliable support.

Will the US jobs report give the dollar a lifeline?

The dollar is expected to see a monthly decline despite rallying to 20-year lows two weeks ago.

Buying sentiment towards the greenback took a hit last week as less hawkish than feared Fed minutes kept the bulls at bay. However, the king of the dollar may have a chance to retaliate if Friday’s monthly US payrolls report beats expectations. Markets expect the US economy to add 329,000 jobs in May, with the unemployment rate falling to 3.5% and the average hourly wage rising 0.4%.

As for the technical picture, the Dollar Index (DXY) definitely needs some love. Prices are under pressure on the daily charts with 101.00 acting as the next key level of interest. If the bulls are able to fight back and stay above this level, then a move towards 103.00 could be on the cards.

Commodities Spotlight – Oil

Oil bulls are certainly in good spirits after the EU agreed to cut oil imports from Russia. This development comes at a time when demand is expected to increase during the summer driving season in the United States and Europe.

The global commodity is likely to extend its gains on improving demand prospects and signs of tighter supply amid lingering geopolitical risks. Although the fundamentals favor the bulls, certain themes could create obstacles in the way. If China is forced to renew Covid-19 restrictions, it could weigh on the demand outlook, especially if they continue to impact growth in the world’s largest energy consumer.

Looking at the technical picture, Brent appears to be pushing higher on the daily charts. If the bullish momentum holds, prices could test $123.70 and $130.00 respectively. Sustained weakness below $120 could encourage a decline towards $114.40 and $100.00.

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