With the Federal Reserve monetary policy meeting in the next week, traders will begin to look ahead to what Fed chair Powell has to say. Major markets continue to be pulled around by the direction of US bond yields. As an extension of this, the US dollar (USD) continues to dominate the direction of major forex pairs and gold.
- In forex, the outlook is still a dominant factor driving major pairs. We still see a split in the performance where safer havens underperform versus higher-risk currencies.
- Gold is another market driven by USD strengthening. Whilst the dollar continues to strengthen, the gold price will continue to suffer.
- There is a developing underperformance of the US tech stocks versus broader US equities.
Forex majors continue to trade in a split performance
As traders look ahead, they see a 2021 global bounce back from the pandemic. As a result, a split has developed between the performance of safer haven currencies (such as JPY and CHF) and the higher risk commodity currencies (CAD, AUD, and NZD).
The chart shows performance relative to USD in the past three weeks. Safe havens are struggling and badly underperforming. It is interesting to see that only the Canadian dollar is outperforming the USD. Higher risk currencies are still underperforming versus USD, but less than safer haven currencies.
Gold still under downside pressure
The chart also shows the ongoing terrible performance of gold, right at the bottom. Gold is like a rabbit in the headlights at the moment, as rising US bond yields and strengthening USD combine to make gold unloved, especially amongst major markets.
US tech stocks also struggling now
Another impact of the big rise in US bond yields (as part of the big “reflation trade”) is that equity investors have been turning away from tech stocks. Tech stocks are extremely expensive and low-yielding. Investors are tending to favor value stocks that are seen as solid companies, undervalued with a higher dividend yield.
This is shown in the chart below where the S&P 500 is again around all-time highs, whilst the NASDAQ is around -5% back.
How does this impact upon markets you are trading?
After US core inflation came in slightly lower than expected, US bond yields pulled lower. This resulted in a slip for USD in recent days. However, the chart of the Dollar Index (a basket of currencies versus the dollar) shows that this pullback could now use a good area of support 91.25/91.75 as a near term “buy zone”.
This buy-zone on Dollar Index equates to resistance on EUR/USD around 1.1950/1.2020, which we see as a near term “sell-zone”. We still see 1.16/1.18 as a potential area that EUR/USD could fall to in the coming weeks.
Gold is also being impacted by USD strength. Rallies look to be a chance to sell and that further weakness on gold is likely, towards $1660/$1675. There is also a risk that if US bond yields continue to rise and USD continues to strengthen, this could pull gold below $1600 in the coming weeks.
Bond yields pulling higher also acts as a drag on the US tech sector (as shown in the underperformance of NASDAQ). This could in turn weigh on the S&P 500 still and mean that a near-term pullback. Initially, this could see a slip back towards 3820/3850. However, a deeper correction into the 3660/3720 area again should not be ruled out.