Having spent most of last week in negative territory, US markets managed to close higher for the second week in succession. It was also a three-week high, but this was as a result of a strong one-day gain that coincided with a sharp two-day decline in US yields. This saw the US 10-year drop from 2.95% at Wednesday's close, to finish the week 8.4 basis points lower at 2.8660.
The so-called 3% yield trade that some investors appear to have been fearful of, and which appears to have gone some way to prompting some of the recent stock market volatility, seems to have been delayed. This in turn has helped put in a little bit of a floor for US and global stock markets.
The decline in US yields does appear to have only been at the long end with the 10/2’s spread narrowing sharply from just below 0.8% two weeks ago to just above 0.6%, which would suggest that markets still remain in two minds, despite last weeks Fed minutes, as to whether we’ll see four US rate rises this year, or something less than that.
The outlook for inflation, which markets appear to be increasingly pricing in, continues to look a little uncertain in terms of speed of trajectory, and it is this lack of conviction that appears to be driving some of the caution in pushing current longer-term yields too high, and too quickly.
It was also a mildly positive week for European stock markets last week, though the FTSE 100 lagged behind, but we should start the new week on the front foot as a result of the late surge in US markets on Friday.
Despite this markets are still expected to focus on the outlook for prices as we start the new week with a host of inflation reports from the EU as well as the latest US core PCE numbers, which is the Federal Reserve’s preferred inflation measure, and which despite evidence of significantly higher prices in various areas of the economy from wages to prices paid reports, still remains below the level it was a year ago.
We’ll also get the first real in depth look at new Fed chief Jerome Powell and how he sees the US economy when he testifies to US lawmakers tomorrow in his first semi-annual testimony.
EUR/USD – currently stuck in a range between the peaks this year at 1.2530 and solid support just above the 1.2200 area with a bigger area of support at 1.2160. A break of this sideways consolidation is likely to give a decent indicator of the next move, with a slight bias towards the downside after the key day reversal of a few days ago.
GBP/USD – has so far been unable to move beyond the recent peak at 1.4145 but for now support at the 1.3750 area is holding. A break of that and the 50 day MA could prompt a move back to the 1.3660 area which prompted the recent move higher.
EUR/GBP – the bias remains for a move lower while below the 0.8910 area which has held for all of this year. While below the highs for this year the bias remains for a return to the lower end of the recent range at 0.8740.
USD/JPY – having hit a low of 105.54 last week the dollar has rebounded with the 105.00 area being the initial primary support area. The current rebound needs to get back above the 2017 lows at 107.30 to stabilise and signal a more positive story with a move back towards 108.00. Below the 105.00 are targets the 100.00 level.
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