Is anyone listening to the central banks?

Today we are expecting trading to be choppy, especially in FX as participants try to decide whether higher yields will lead to another risk sell off, as they did last week, or whether Central Banks can talk in a smooth recovery.  With equities this uncertainty may mean we see the continued switch from growth to value stocks.

US yields are pushing higher again as the 5-yr US breakeven rate pushed above 2.5% for the first time since 2008.  The move is even more interesting given FOMC efforts to talk down the moves.  Harker said that they do not see inflation running out of control.  Evans noted that “We’re getting back to a good economic outlook and the 10-year rate is going to adjust,” but added that if needed they have tools such as Operation Twist or shifting maturity duration of purchases to curb outsized moves.

To us it feels like some of the inflation concerns that led to last week’s sell off are creeping back into the market despite central bank efforts to stem the moves.  Powell’s words will hold even more weight when he speaks later today so markets are likely to be waiting for what he has to say before finding a clear direction.

RBNZ’s Orr said Monetary Policy needs to remain stimulatory.  When speaking about the government’s move to make RBNZ take house prices into account he said “Importantly, the Monetary Policy Committee’s remit remains unchanged, that is, solely focused on maintaining low and stable consumer price inflation and contributing to maximum sustainable employment”. He added that housing will be managed by macro prudential measures.

Biden has agreed to narrow the eligibility for the $1,400 stimulus checks in a move to get the stimulus bill passed.  The Senate will debate the legislation later.

OPEC+ group is meeting today to discuss raising production. They are expected to agree on a production increase of around 1.5m bpd.

Rishi Sunak trod a careful line in the UK’s budget.  He extended the furlough scheme and increased spending in the short term with a promise to tighten policy in the future.  This seems enough not to derail the recovery in the short term but also show fiscal prudence medium to long term. For GBP it feels balanced, and we expect spot to be dominated by moves in USD.

Our overview and outlook of the key trading pairs and indices is as follows

EURUSD – The euro found resistance at 1.21 and got rejected towards 1.2050 amid firmer yields and stronger USD. Risk appetite is also dented from the pace of the yields surge, sending US equities to close around critical levels. Today, Chairman Powell will may potentially hint the Fed is ready to act to put pressure on the USD and contain the recent panic in the market. If that occurs, then we could see the single currency jump towards 1.21 and possibly higher.

GBPUSD – US Treasury yields gaining upside momentum, driving the US dollar higher and putting pressure on the Cable. Today, traders will keep following the bond moves while waiting for Fed’s Powell to confirm the reflation fears. If the Fed doesn’t act to cap the bond yields, the US dollar can extend the latest run-up and weigh on the sterling. The pair will remain in consolidation until further clarity.

USDJPY – The USDJPY is inching higher following US Treasury yields higher, with the spread between US Government bonds and Japanese Government bonds widening, making the US Dollar a more attractive investment. Looking ahead, a speech by Federal Reserve Chairman Jerome Powell will determine the trend for the forex pair today with a sustained move over the ¥107.15 level to indicate further strength targeting the July 2020 top at ¥107.50.

FTSE 100 – The FTSE100 surged past our 6670-resistance level yesterday before retreating during US trading hours tracking Wall Street lower on the back of rising treasury yields. In the UK government’s annual budget, Rishi Sunak laid out a GBP65 billion plan to repair the nation’s finances post-pandemic by extending the furlough scheme, with more choppiness expected today ahead of construction PMIs from the UK to be released at 0930 GMT.

DOW JONES – The 10-year US Treasury bond yield is rising again up from 1.42% yesterday to 1.48% today. Rising yields on the back of expectations for higher interest rates have recently been weighing on equities with the Dow Jones hitting our resistance level at 31600 yesterday, before reversing and closing 500 points lower. It is worth noting that the sell-off is mostly affecting growth stocks while real economy stocks such as Boeing, Citigroup, JP Morgan, Goldman, and 3M finished positive as the stock market seems to be rotating out of growth and speculative stocks. Technically, the 31400 level has now turned resistance while a breach of weekly lows around 30900 will trigger further declines ahead of US initial jobless claims data due at 1330 GMT.

DAX 30 – The DAX surged past our resistance target yesterday before reversing and closing below the 200-period moving average and below the 14000-figure as the investors remain worried over higher interest rates and inflation expectations, with a softer tone observed in early trading this morning after the meltdown in Asian equities that sent both the Nikkei and Shanghai Composite indices falling by over 2%. However, from a technical perspective, the near-term RSI is pointing higher signalling strong upside momentum ahead with a breach of the 14000 line to trigger a bounce back to the 14100 resistance.

GOLD – Weaker than expected ADP employment change had little effect on gold yesterday as a 2-basis point rise in treasury yields dragged the yellow metal around $20 lower to near nine-month lows. All eyes on Fed Powell’s speech today along with Initial Jobless Claims data, as a weaker print could dent market optimism, spurring demand on the safe-haven with $1730 as the closest resistance target.

USOIL – WTI Crude oil hit our long resistance targets, printing a high a tat below $62 pbl and ending yesterday’s session above the $61 handle despite EIA inventories registering a 21.653Mb build-up while an attack on Saudi Arabia’s Aramco and today’s OPEC+ decision kept prices supported. A bullish surprise from Saudi Arabia today could push prices towards $63-$65, wish short term technical indicators favouring further upside on an hourly close above $62.