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Sliding yields weigh on the US dollar

With most of the major event risk towards the back end of this week and after record highs last week, investors appear to be taking some money off the table, which in turn also appears to be boosting safe-haven assets like gold, which hit a six-week high just below the $1,300 level.

European and US markets both finished lower yesterday for the second day in succession, as investors trod a cautious path ahead of tomorrow’s UK election, European Central Bank rate meeting, and ex-FBI director James Comey’s scheduled testimony on Capitol Hill. Mr Comey's tesimony may well touch on his conversations with President Trump about Michael Flynn, the president’s former national security advisor.

The US dollar has also continued to come under pressure, as the enthusiasm for the reflation trade continues to wane. This in turn is starting to weigh on the banking sector, as yield curve differentials continue to narrow, with the gap between the 2-year and 10-year US yield now back down at levels prior to President Trump’s election win, as markets price in a much less aggressive Federal Reserve hiking cycle for this year.

Earlier this year hopes were high that the Trump reflation trade would widen these differentials out, on expectations that the Fed would be forced to hike more quickly as inflationary pressures increased. This hasn’t happened and as such markets are now having to readjust their expectations, against a US president who appears to be behaving more erratically with every passing day.

The latest bout of tension in the Middle East between Qatar, where the US has its main military command centre, and Saudi Arabia, with its allies who have cut off diplomatic ties, appears to be the latest example of a president who doesn’t get the nuances of diplomacy and politics in that region. Qatar’s isolation could be problematic for the US unless the current tension gets dialled back, with oil prices fluctuating quite sharply.

Sterling remain vulnerable

In the UK,  opinion polls continue to show differing outcomes for tomorrow’s vote. The trend does seem clear in that the Conservative lead has been leaking away, and while the pound hasn’t been significantly affected, it has remained vulnerable as a result of the prospect of a hung parliament outcome, as some polls have suggested. No polls so far though have predicted an outright Labour win.

Forex snapshot

EUR/USD – the November highs at 1.1300 remain within reach, with broader resistance at 1.1370. The current up move continues to remain stretched, which risks a pullback to 1.1170, and possibly even down as far as the 1.1020 area.

GBP/USD – slipped back from the 1.2950 area yesterday as it continues to range trade with support between the 50-day MA and the 1.2750 level, and resistance near the recent highs at 1.3040. We need to see a consolidated move through 1.3050 which has the potential to target the 1.3320 area. Only a move below 1.2750 argues potentially back towards the 1.2600 area.

EUR/GBP – continues to find support at the 0.8680 area and while above here the risk remains for a look at the 0.8800 area. A break below the 0.8680 area targets a return to the 200-day MA at 0.8600.

USD/JPY – the break below the 200-day MA and the 110.20 level has opened up the downside and the April lows at 108.00. We need a break back above the 110.30 level to stabilise and reopen a move back to 111.60.


Heightened market volatility is likely over the election period, which could result in widened spreads. We recommend that you monitor positions carefully, consider the use of appropriate risk management tools and maintain a sufficient account surplus throughout this period.

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