USD reclaims some lost ground, but the outlook has changed

  • US yields fall by record speed: The yield on 2-year Treasuries has not fallen this fast since 1987
  • Reaction to US CPI could be telling: Markets are cautiously settled today, but the reaction to US CPI could be a key gauge for whether sentiment can hold a recovery.
  • USD is tentatively rebounding: The USD is finding support on major forex.
  • Equities look more settled today: European indices have at least started to look for tentative support as US futures rebound by +0.3% overnight.
  • Precious metals unwind lower: In commodities, gold and silver are starting to pull back lower after huge recent gains. However, oil is still falling.

The outlook for Fed tightening has completely flipped 

There have been incredible moves in US interest rate expectations and bond markets in recent days. 

The stresses and fear of contagion through the US banking system have completely redrawn the outlook for what the Federal Reserve can/will do in the coming months.

Economists at banks are falling over themselves to slash forecasts and price in likely rate cuts now in the back end of this year. 

In yesterday’s report, we showed a chart of the Fed Funds futures which suggested the terminal rate was 5.08% (so another 25bps from the current 4.75% level).

Just 24 hours later the prospect is that the Fed may now have already hit its peak rate. Fed Funds futures are suggesting a peak rate of 4.76%.

The outlook for Fed tightening has completely flipped

Furthermore, the Fed is also expected to now begin rate hikes in Q3 this year.

The US 2 year yield (seen as a gauge of the Fed’s interest rate outlook) has fallen by a stunning more than -100 basis points in the past three days. This is the fastest decline since 1987.

The US 2 year yield (seen as a gauge of the Fed’s interest rate outlook) has fallen by a stunning more than -100 basis points in the past three days.

Whilst it seems as though there may well have been a huge overreaction, the outlook for US rates and the USD has certainly changed on a medium to longer-term basis now. 

The reaction to today’s US CPI will be telling 

There is still huge volatility showing through US bond markets, but it is interesting to see yields ticking back higher this morning. This is coinciding with a basis of support forming for the USD.

The key question now becomes how the Fed reacts moving forward. 

It now has to juggle the contradictory forces of:

  1. Stresses in the financial system (which would normally drive looser monetary policy
  2. The need to bring inflation under control (which should require tighter monetary policy)

On the immediate horizon is today’s US CPI inflation.

If inflation comes in hotter than expected, and bond yields move higher again, we could easily see a USD rebound taking hold near term.

The Dollar Index has rebounded from the bottom of the old pivot band 103.40/104.09

The Dollar Index has rebounded from the bottom of the old pivot band 103.40/104.09. A decisive move above 104.09 would open for a continuation of the near-term USD rebound.

USD/JPY is the classic gauge

On days of US inflation data announcements, USD/JPY is the classic forex pair to gauge for moves on US bond yields.

If yields react normally (stronger than expected inflation, drives yields higher), then USD/JPY can be expected to move solidly higher. 

USD/JPY resistance at 134.75 will be watched

The pair has fallen sharply in recent sessions, however, has started to find support early today. 

There is an old pivot band between 133.60/134.75 that can be seen as a gauge now. 

USD/JPY resistance at 134.75 will be watched

A close above 134.75 in the wake of today’s inflation data would suggest that the USD is setting up for a near-term recovery.

The support of yesterday’s reaction low at 132.28 will also be watched as an important signal. 

Having rebounded this morning, a turn back lower would add further momentum to the USD correction and open further downside. 

S&P 500 futures (SP500ft) 

On US futures we are still watching the resistance band between 3901/3947 as an important gauge.

Unless the market can get back above this resistance, any near-term rebound will continue to look tentative.

Support and resistance levels for Forex, Commodities, and Futures/Indices

EUR/USD R2 1.0748
R1 1.0715
S1 1.0650
S2 1.0635


R2 1.2268
R1 1.2199
S1 1.2140
S2 1.2046
USD/JPY R2 135.18
R1 134.69
S1 133.02
S2 132.28


R2 1918
R1 1914
S1 1894
S2 1871


R2 22.30
R1 21.92
S1 21.34
S2 20.90
Brent Crude Oil
R2 82.45
R1 81.00
S1 78.40
S2 77.40


S&P 500 futures
R2 3973
R1 3941
S1 3854
S2 3846
DAX Index 
R2 15,280
R1 15,150
S1 14,921
S2 14,894
FTSE 100 Index
R2 7634
R1 7566
S1 7500
S2 7421

Data: MT5/IXOne

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