Dollar cutting its gains and Yen is leading the safe haven
The Dollar pared gains against its Rivals apart from the Yen after rallying to five-month highs. In its statement, the FOMC said it is willing to let inflation run to the top of its 2 percent target for a temporary period. The Fed continued its gradual approach to rate hikes, sticking pretty much to script. Stocks finished with modest gains. The yield on the US 10-year bond slumped to 2.99% (3.06% yesterday).
Outlook: Markets are still pricing in a June rate hike although for many traders the Fed was not hawkish enough. The jury is still out whether the Fed will deliver 2 or 3 more rate increases this year. Geopolitical issues were relegated to the background although concerns remain.
Euro-area manufacturing and services PMI’s all missed forecasts. Meantime UK Headline and Core CPI rose less than expected. US Services PMI beat expectations while manufacturing was flat. New Home Sales in the US rose less than forecast.
Trading View: While the Dollar Index (USD/DXY) finished at fresh 5-month highs, the bulk of those gains came from a fall in the Euro and Pound. USD/DXY finished up 0.44% at 94.00, the resistance level. Both currencies take a combined weight of 70% in the Dollar Index.
Euro area and UK data disappointed. In Italy, Giuseppe Conte was given the mandate to form a government by President Mattarella. Both currencies take a combined weight of 70% in the Dollar Index.
Events and economic data due today: Japan Leading Economic Index, German Final GDP and GfK Consumer Confidence Survey, ECB Financial Stability Review, UK Headline and Core Retail Sales, US Existing Home Sales and Weekly Jobless Claims.
Emerging Market currencies finished mixed. The Turkish Lira sank to a record low against the Dollar (USD/TRY 4.9273) before reversing course to close 3.5% higher. In an emergency move, the Turkish central bank jacked interest rates by 300%.
Bond traders seem to have had a dovish take to the FOMC minutes, driving the Ten-Year bond yield down to 2.99%. While global yields were all lower, their falls were not to the extent of the US yield drop. Germany’s 10-year Bund yield dropped 6 basis points to 0.50%. Japan’s 10-year JGB yield was flat at 0.04%.
This enabled the haven Yen to outperform. USD/JPY dropped 0.6% to 110.02 (110.92).
It’s difficult to see further significant Dollar gains without yield support. At the end of the day, yields matter. The US 10-year bond yield will probably consolidate between a 2.95-3.10 range for now.
Dollar Index (USD/DXY) – traded to 94.188 overnight, highs not seen since December 12, 2017. The high traded then was 94.21 before it fell back to 93.00 and started the move all the way down to this year’s lows of around 88.50. While we don’t expect that to occur given the current backdrop, a corrective move to 93.00/92.50 is not impossible. The move in US yields will determine that. For today look for a likely range of 93.60-94.10. Prefer to sell rallies for now.
EUR/USD – briefly traded under 1.1700 to 1.16759 (November 2017 lows) overnight before recovering to 1.1705 this morning, following the FOMC meeting minutes. EUR/USD still trades heavy although we may see some fresh buying interest between 1.1675-1.1685. EUR/USD has immediate support at the 1.1670/80 level. The next support level lies at 1.1650 and that should hold in the current environment. Immediate resistance can be found at 1.1740 and then 1.1790.
Euro area data underperformed. Today sees German Final Q1 GDP and GfK Consumer Climate data. While Italian President Mattarella gave Giuseppe Conte the mandate to become Prime Minister, a government comprised of two anti-establishment parties remains a risk for the economy. Likely range today 1.1675-1.1745. Look to trade this range. And while the speculative community is still long Euro bets, I’m not prepared to buy on dips just yet.
USD/JPY – outperformed on its haven status and a fall in US yields. The Dollar slumped to an overnight low of 109.556 before recovering to 110.02 in New York. Geopolitical developments have left markets in more of a risk-off mode for now. Stocks pared their losses to end modestly higher. USD/JPY has always been sensitive to the moves in the US Ten-year yield and that’s not about to change now. Japan’s Leading Economic Index is out today. Immediate resistance can be found at 110.30/40 and then 110.80/90. Immediate support lies at 109.80 and then 109.50. Likely range today 109.60-110.40. Prefer to sell rallies.
GBP/USD – Sterling slumped to an overnight low of 1.3305 after the miss on the UK annual headline and core CPI data. Although Sterling rallied to 1.3350 at the NY close, it dropped 0.7% from yesterday, the worst performer among the Major currencies. GBP/USD has immediate support at 1.3330 and then at 1.3300. Immediate resistance can be found at 1.3380 and then 1.3410. UK Retail Sales data is released later today. Likely range 1.3320-1.3420. Look to trade this range.
AUD/USD – slipped on the back of risk-off, lower metals prices and an overall stronger US Dollar. Copper prices were down 1.9%. The Aussie traded to an overnight low of 0.75227 before rallying to 0.7560 post-FOMC. AUD/USD has immediate resistance at 0.7580 and then 0.7610. Immediate support can be found at 0.7550 and then 0.7520. The yield on the Australian Ten-year bond was 2 basis points lower at 2.84%. Likely range today 0.7530-0.7610. Look to trade this range shag.
USD/ZAR – The rand strengthened more than 30c from its intraday low to R12.40 to the US dollar after Turkey's central bank hiked interest rates by 300 basis points on Wednesday.
The bank took decisive action to put a floor under the cratering lira currency and win back investor confidence shaken by interventions from President Tayyip Erdogan.
“Emerging market currencies have taken a liking to this and USD/ZAR is trading back at R12.46 from R12.65 at the open this morning. The lira has reversed all its losses from the day as well,” commented Treasury ONE.
By 22:30 in overnight trade in New York the local unit was trading 1.01% firmer at R12.44/$ after trading in an R12.40 – R12.70 band against the greenback on the day
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