The Fed Chair’s repeat yesterday of looser for longer policy irrespective of the improving economic outlook has modestly soothed market fears. Mr Powell’s high wire balancing act between acknowledging the upsides ahead while keeping the punchbowl full is seeing bond yields push to new cycle highs with the 10-year US Treasury hitting 1.42%. Next very big resistance stands around 1.43% which is the 2019 low and a major retracement marker of the 2018/2020 decline.
Meanwhile, stocks are mixed after the fun and games yesterday! The tech-heavy Nasdaq was down close to 4% at one point before Powell stepped in to help the index retrace and finish down only 0.5% with the S&P500 down 1.8% before finishing in the green. Of course, rising yields dent the allure of riskier assets, especially those high-growth tech companies that are not expected to reach the peak of their earnings potential for many years. That cost of waiting for companies’ earning growth increases, so we are perhaps at a critical juncture for certain stocks.
The dollar is slightly better bid today trading above 90 on the DXY. If all the market talk about inflation is slightly premature and we should dismiss concerns about excessive inflationary pressures, then the next bumper Biden fiscal package should keep expectations supported. Together with an immovable Fed, this means the greenback may continue to struggle as real rates are moribund.
Sterling rockets higher and triggers stops
We said yesterday how GBP likes to overextend and boy it looks to have done that overnight when liquidity was at its thinnest. Cable spiked higher to 1.4241 while EUR/GBP dropped to a low of 0.8538. The Boris “Highway out of Hell” plan is gaining traction with a full reopening of the UK now firmly in sight. Money markets have also reacted to this potential normalisation with traders now piling into bets that will pay out if the Bank of England raises interest rates for the first time since 2018. Quite unthinkable just six months ago, NIRP (sub-zero rates) might well be a mere footnote in history.
Technically, we haven’t quite made it to the April 2018 high at 1.4377 and the daily candlestick does look like a bearish pin bar at the time of writing – this is essentially a sharp reversal and clear rejection of price. Overbought momentum signals haven’t as yet kept sterling subdued but the bulls will want to keep prices above 1.40 at least if they want to build on all this upside and head further north to the mid-1.40s.
Kiwi leads major gains
Overnight, the RBNZ didn’t really surprise markets as they kept their dovish message and signalled the need for extended monetary support. However, they upgraded their GDP and employment forecasts and the market has taken this positively, especially as the bank appeared to be slightly less dovish than its antipodean brother, the RBA in its forward guidance.
NZD/USD has broken to new highs this week having pushed above the year-to-date high around 0.73. Traders now have the July 2017 highs in their sights around 0.7558, with support now resting at last month’s high at 0.7315.
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