The monthly core PCE Price Index in the United States is expected today and has the power to shift the market sentiment. Because it represents the Fed’s favored inflation measure, traders watch it carefully.

If we are to summarise the trading month, there is one single theme that dominated financial markets – a weaker US dollar. The greenback fell to its lowest since the start of the trading year, giving back its modest gains from the first quarter.

As such, the EUR/USD pair rose from 1.17 in April to 1.2260 in May. Moreover, the GBP/USD broke above 1.42, and the AUD/USD regained the lost ground and threatened to break above 0.79 again.

The weak dollar pushed equities higher. The Dow Jones and the S&P500 are close to their all-time highs, rebounding from every single dip. It is fairly difficult to be bearish on equities considering the stream of positive economic data and the accommodative policies coming out of the United States.

On the one hand, the Fed shows no intention of removing the easy monetary stance anytime soon. On the other hand, the US government keeps pumping money into the economy. Yesterday, for example, the US administration announced that it will increase its 2022 fiscal year budget to $6 trillion and that it plans to keep doing so until it reaches $8.2 trillion by 2031.

In this context, European equities traded with a bid tone as well. Whatever happens in America has spillover effects in the developed world, despite some (minor) divergences in monetary policies. The biggest divergence comes from the fiscal space, but still, the European indices performed well in May. The FTSE 100 index holds above 7,000 points, the German DAX is bid above 15,400, and the French CAC40 trades with a bid tone as well, holding above 6,400 points.

Commodities also liked the weak dollar. Both gold and silver overperformed during the month, in line with inflation fears. The crude oil price remains bid as well, hovering around $65 on the back of stronger than expected economic perspectives both in the United States and in other parts of the world.

Monthly Analysis

The main economic event of the week is due to be released in the North American session – the Core PCE Price Index. The market expects it to rise by 0.6% and any surprises, both to the upside or downside, will move markets.

Inflation is running hot in the United States lately, with the April CPI up in April by most since four decades ago. Because the Core PCE is the Fed’s favored inflation measure, traders pay attention to the release, and the volatility is poised to rise.

US Personal Income and Personal Spending indicators, together with the Chicago PMI will close the economic calendar for the week. The trading week was pretty slow up to this point because the market participants waited for the PCE before positioning for the end of the month flows and the upcoming NFP release one week from now.

Markets to Watch

Silver, EUR/USD, NZD/USD  – markets in focus today.

Silver

The month was dominated by commodity prices moving higher, led by precious metals. Silver, together with gold, had an impressive run, reaching above $28.50. At this point, the technical picture shows a contracting triangle that may act both as a continuation, and as a reversal pattern. A move below $27 spells trouble for bulls, while a daily close above $28.50 is bullish.

EUR/USD

The EUR/USD exchange rate appears to have broken a rising wedge. Moreover, it had retested it, a typical move after such a pattern, and now seems ready for more downside. However, before becoming too bearish, keep in mind that rising wedges may also act as running triangles (i.e. bullish patterns). While that is not a pattern that forms often, one should not discount the possibility. At this point, the EUR/USD looks weak, with 1.20 in sight should we see the dollar coming back in the last trading days of the month.

NZD/USD

The Kiwi dollar was bid this month as well, benefiting from the Reserve Bank of New Zealand’s upbeat tone. The central bank suggested that it will hike in 2022, providing a positive outlook for the economy as the COVID-19 pandemic eases.

Winners and Losers

The weak dollar dominated the month, sending all assets higher, from commodities to equities. The euro and the pound gained.