We take a look at what is driving forex, equities and commodities markets this week. Moves on yield differentials and the US dollar are still key for market direction whilst geopolitical factors are once more impacting.

1. Weekly Outlook
Monday 21st May 2018 by Richard Perry, Market Analyst
Forex and CFDs are high risk leveraged products that can result in losses greater than your initial deposit and you should
therefore only speculate with money you can afford to lose. FX and CFD trading are not suitable for everyone. Please
ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such
transactions. You should first carefully consider your investment objectives, level of experience, and risk appetite and only
invest funds you are prepared to lose entirely. For our full risk warning, please go to the end of this report.
Key Economic Events
WHEN: Wed 23rd May 0930BST
LAST: +2.5% headline, +2.3% core
FORECAST: +2.5% headline, +2.2% core
Impact: Last month’s surprise lower than expected
decline in UK inflation really started the ball rolling on a
sell-off on sterling and ultimately resulted in no rate hike
from Bank of England. However, wages are now
climbing close to 3.0% and with the expected further
decline on core CPI this month, this improvement in
real wages seems set to continue. A more steady
settling of inflation would help to stabilize confidence in
sterling and could help to once more build expectation
of a BoE hike in 2018 after all. UK Gilts will certainly be
reactive, along with sterling crosses and FTSE 100.
Date Time Country Indicator Consensus Last
Wed 23rd May 0900BST Eurozone Flash PMIs (Manufacturing / Services / Comp) 56.0 / 54.7 / 55.0 56.0 / 55.0 / 55.2
Wed 23rd May 0930BST UK CPI (headline / core) +2.5% / +2.2% +2.5% / +2.3%
Wed 23rd May 1445BST US Flash PMIs (Manufacturing / Services) 56.5 / 54.9 56.5 / 54.4
Thu 24th May 0930BST UK Retail Sales (ex-fuel YoY) +0.1% +1.1%
Thu 24th May 1230BST Eurozone ECB monetary policy minutes
Thu 24th May 1330BST US Weekly Jobless Claims 220,000 222,000
Thu 24th May 1500BST US Existing Home Sales 5.60m 5.60m
Fri 25th May 0930BST UK GDP (Q1 2nd reading) +0.1% +0.1%
Fri 25th May 1330BST US Durable Goods Orders (core ex-transport) +0.5% 0.0%
Fri 25th May 1500BST US University of Michigan Sentiment (final) 98.8 98.8
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N.B. After daylight savings time shift, please note all times are British Summer Time (BST) i.e. GMT +1. Data: Reuters
Macro Commentary
Following a few weeks of reduced geopolitical risk and reduced volatility, the forces of global politics are once more
taking more of a grip again. The question is whether this will begin to impact more negatively on market sentiment.
Trade negotiations between the US and China have been constructive so far, with tariffs “on hold” and apparent
offers from China to reduce the enormous $335bn trade deficit. However, this could all still change on the sending
of one tweet. Currently, the difference this time around is that market volatility is far lower and more settled this time
around. However, could this be a sign of market complacency? With European equity markets having seen a huge
recovery already, some (FTSE 100 and CAC 40) pushing record levels and the VIX serenely hovering around 13
again could this primed for a market shock again? The US/Iran nuclear sanctions situation seems to have been
overlooked somewhat, whilst Donald Trump’s proposed summit with Kim Jong Un could be at risk as they seem
unable to settle upon a common definition of the word “de-nuclearisation”. Italian politics is never settled for long
and the new coalition could destabilize. With BTP yields spiking higher and Bund spreads widening it seems that
the fallout which has been contained within Italy so far, could still begins to translate to broader Eurozone markets.
Back on trade, the progress in NAFTA discussions is not that great either, with US Trade Rep Lightizer suggesting
that the negotiations are “nowhere close to a deal”. Geopolitics could yet play a role in driving markets in Q2.
Must Watch for: UK CPI
UK Inflation
With average earnings recent crossing higher than falling
inflation, real wages are finally increasing

2. Weekly Outlook
Monday 21st May 2018 by Richard Perry, Market Analyst
Foreign Exchange
With US/China trade negotiations progressing amicably so far, traders seem fairly sanguine and subsequently
bond yield differentials are still a major factor in driving majors. With the US 10 year yield breaking to its highest
since July 2011 helping dollar outperformance, further upside in yields should sustain this dollar bull run.
Widening Bund/BTP spreads would also play into increased pressure on the euro and this would mean further
downside on EUR/USD. The pair broken below $1.1800 last week and is eyeing the next low at $1.1715 from
December and then the key reaction low at $1.1550. Sterling will also be a key currency to watch, with a raft of
tier one UK data points which will drive volatility. The huge sell-off on sterling was initiated by a big downside
surprise on CPI last month, so this will be a key factor this week. Consensus is not expecting too much of a
change but another downside surprise would once more see sterling under pressure. Retail sales are a key
concern for the Bank of England and with strong base effects dropping of the monthly data in April, the yearly
data is worryingly close to going negative. Finally a second reading of GDP will be key as the BoE expects GDP
to be ultimately revised higher to +0.3% (forecast to be just +0.1%). Any slippage to this would see further
questions asked of a 2018 rate hike, could a November hike even be scuppered by a negative surprise. Expect
elevates volatility across GBPXXX pairs which have been could see their technical improvements questioned.
WATCH FOR: GBP driven by CPI, retail sales and GDP, USD driven by durable goods
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FX Outlook
GBP/USD
Watch for: The break below $1.3450 implies a
move to $1.3300 this week
Outlook: A two week consolidation has broken
to the downside to imply 165 pips lower and this
means the key December lows around $1.3300
is the next prime support to test. It also means
that the 165 pip trading band of recent weeks
becomes an area of key overhead supply. The
market is though just continuing along its way in
the medium term correction following the break
below $1.3710 which implied 570 pips lower
which implies $1.3140 in the coming months.
How the market reacts to $1.3300 will be the
next factor in how the outlook develops in the
near term. However, rallies remain a chance to
sell this week.
EUR/USD
Watch for: Near term rallies remain a chance to
sell
Outlook: Selling pressure continues on
EUR/USD with the bear run into its fifth week
now and testing the December lows around
$1.1715. If this support is broken on a closing
basis then this opens the way towards a test of
the November low at $1.1550. Momentum
remains very negative and rallies remain a
chance to sell. There is overhead supply starting
at $1.1820 now near term with a band of
resistance now forming between
$1.1820/$1.2000 that is now likely to prevent any
potential rebound from gaining recovery
momentum this week.

3. Weekly Outlook
Monday 21st May 2018 by Richard Perry, Market Analyst
Equity Markets
The run higher in European equity markets has been incredible in recent weeks and although Wall Street has
been unable to quite match the performance, there is a key factor in allowing the run higher to develop, the
strength of earnings season. The fact that geopolitical risk has reduced and volatility has subsided means that
the decks have been cleared for earnings season to be a key driver. Q1 earnings have been strong in the US,
with the final stragglers just to report, blended earnings look to be over 24% for the quarter. This is a significant
boost to the 17% that had been expected before reporting began, and with market valuation around 16.5x this
has been s strong supportive factor in the bull run. The number of corporates beating expectations around 78%
this would be the “strongest” quarter since FactSet began documenting it in Q3 2008. However, only around 50%
of European companies have beaten expectations, although this probably says more about how much US
expectations are massaged than any lack of performance in Europe. In fact, earnings in the STOXX 600 are
expected to improve strongly as the year progresses. With just around 3.7% earnings growth -0.8% revenue
growth in Q1 this certainly appears set to be a low point for 2018, with improvement expected into Q2 and then
again in Q3. Furthermore, the next three quarters average c. 4% revenue growth and earnings growth of c. 13%.
The question is whether these European markets can sustain their huge gains of recent weeks. The DAX and
CAC have both gained around 11.5% since the end of March, whilst the FTSE 100 has jumped by 13.6%.
Clearly oil is a key driver of FTSE outperformance but technically all markets are looking very stretched.
WATCH FOR: UK data impacting FTSE 100 with CPI, Retail Sales & GDP. Currencies and yields also key
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DAX Xetra
Watch for: The bulls will look to hold support at
12,918/13,034 this week
Outlook: The uptrend channel on the DAX is not
as aggressive as the FTSE 100, nor the gains as
strong. However the momentum is still decisively
positive and corrections remain a chance to buy.
The uptrend channel support comes in at 12,935
today which is now within a confluence of the
support band 12,918/13,034 and gives good
grounding to any corrective move. Resistance
comes in with last week’s high and a pivot of old
support at 13,140 but with the RSI still trending
higher and below 70 there is still plenty of upside
potential if another breakout is seen.
FTSE 100
Watch for: A break to all-time highs but
momentum is ever more stretched
Outlook: The impressive rally in the past eight
weeks has now broken through to a new all time
high above 7792 as a well-defined uptrend
channel has pulled a series of higher lows and
higher highs. The momentum indicators have
been extremely strong throughout this run
higher, with the RSI at its highest level since
January 2017. However the big question is
whether this run higher can be sustained this
week. Momentum effectively confirms the
strength of the trend. One factor to watch could
be that since the rally began back in late March
there has never once been a run of two
consecutive closes. How would the bulls react to
a little wobble?
Index Outlook

4. Weekly Outlook
Monday 21st May 2018 by Richard Perry, Market Analyst
Other Assets: Commodities & Bonds
With the US 10 year yield the highest since July 2011 and ongoing dollar strength, gold is struggling. Yields
have consolidated recently but the concern for gold bulls is that further upside in Treasury yields (seen as likely
at this stage) will result in additional downside on gold. Reduced safe haven demand is also weighing on gold.
Oil continues to push to record levels not seen since 2014 as both WTI and Brent Crude continue higher. The
Iran sanctions set to be re-imposed by the US remain a key factor in this and it is notable that French explorer
Total is set to withdraw from its $1bn operation in Iran in the coming months and is a sign of the reducing
supplies in the Middle East. Coming as US production continues to increase, it is interesting to see that the
WTI/Brent spread is now over $8 which is the widest the spread has been since Q1 2015.
With the Fed engaging Quantitative Tightening and oil prices pulling ever higher into new multi-year highs, this
is a recipe for yields moving higher. It is interesting to see that the US yield curve began to steepen towards the
end of last week, with the 2s/10s spread back above 50 basis points but even the 5s/30s spread widening.
Widening of spreads is also being seen across Europe as Italian BTPs have spiked higher on increased political
risk. Although nowhere near the dangerous 6%/7% area, this still has the potential to impact on the euro.
WATCH FOR: There is a lack of major US data to drive Treasury yields but Flash PMIs will be of interest,
however, geopolitics could play a major part too
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Gold
Watch for: Losing the key floor at $1300 opens
further retracement back towards $1235/$1260.
Outlook: Having spent well over four months
holding firm as tests of the long term pivot band
$1300/$1310 had been rebuffed, a decisive
downside break has changed the medium term
outlook. Completing a $65 top pattern implies a
test of the December low at $1235 now. The
next support is not until $1260 and a continued
failure under $1300 will extend what looks to be
an increasingly corrective momentum outlook.
The long term pivot band $1300/$1310 now
becomes an area of overhead supply once more
where the rebounds are likely to flounder. The
RSI is in the low 30s and does still have
downside potential in this bear leg.
Markets Outlook
Brent Crude oil
Watch for: Uptrend continues, but a near term
correction will be used as a chance to buy
Outlook: The bull run higher on Brent crude has
been accelerating in the past few weeks. Clearly
the decision by Donald Trump to re-instate the
sanctions on Iran have had a part to play in this.
Technically this has driven the market to levels
not seen since November 2011 and back above
$80. Momentum indicators reflect a very strong
trend although look stretched near term with the
RSI above 70, the bulls are likely to continue to
see corrections as a chance to buy. The 21 day
moving average is supportive of recent
corrections (way back c. $76.10) but the bulls will
look to hold on to $76.55/$77.60 support.

5. Weekly Outlook
Monday 21st May 2018 by Richard Perry, Market Analyst
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