The decisive USD positive moves of recent sessions have just given some back in the wake of the US inflation data yesterday. With markets taking a bit of a mid-week breather, we take the opportunity to see where the majors across asset classes are positioned and how the past few days impact our outlook.

  • In forex, USD has slipped in the past 24 hours, as safe-haven majors have rebounded. We still see this as a temporary move.
  • In commodities, we see rebounds on gold and silver as near term moves, with the outlook still looking negative
  • Indices are creeping through resistance once more as the path higher continues. We still prefer to buy into weakness.  

Fed on course to taper will underpin yields and USD

There was a fairly exuberant US dollar (USD) positive reaction in the wake of the Nonfarm Payrolls report. The decisively positive labor market data firmed up expectations that the Federal Reserve will move to taper asset purchases at some stage this year (most likely to be Q4). However, some of the pressure to tighten policy was reduced yesterday, as US inflation appears to now be peaking. The Fed’s insistence that inflation is transitory seems to now be playing out.

However, we do not believe that this changes too much for the Fed. We believe there is far more focus on the FOMC with the labor market, which according to the payrolls report is improving decisively and is on track for meeting the substantial progress needed before tapering.

What this means is that the increase in Treasury yields is set to hold. A move above 1.30% was a key moment for the 10yr (implying a recovery towards 1.47%). The next barrier is 1.422%.

If yields do continue higher (which we believe will happen in the event of continued strong data), this will also underpin USD strength. 

Forex majors: EUR/USD rebound will be temporary

Subsequently, in the past 24 hours, there has been a basis of support coming in for EUR/USD around the 1.1700 key floor. However, we would view this as temporary and expect ongoing pressure on 1.1700. Momentum is negatively configured, with moving averages all in decline and the Relative Strength Index suggests that rallies will continue to struggle before being sold into. Initial resistance is 1.1750/1.1800 and we see a bull failure around here as another chance to sell.

Given that the ongoing positive correlation between US yields and USD/JPY, with yields falling yesterday, USD/JPY also slipped back. However, also given that we are looking for further upside in yields, this should mean USD/JPY moves higher once more. Therefore, we see near term weakness on USD/JPY as a chance to buy. Once any near term slip has settled (initial support around 109.60/110.00) we expect further pressure towards the 110.60/110.80 resistance and towards 111.65 key high is due course.   

Commodities: Gold rebound will be temporary

Gold was the big loser out of the payrolls report. So with US inflation falling and less pressure on the Fed to tighten policy, the elastic snapped back on gold yesterday. However, we see this as a temporary move. 

The initial consideration is how the Gold (MT5 code: XAUUSD) reacts around the key pivot band, which is now resistance, at $1750/$1765. If the bulls can break through here then there is further room in a rebound towards $1790. However, we are looking for the next lower high to be between $1750/$1790 (ideally between $1750/$1765). Once a lower high is in place we expect gold to begin tracking back lower once more for a likely test of $1676 in due course. For now, though, a rebound is still playing out.

Indices: Wall Street drifts to new highs but for how long?

With sentiment risk positive with (marginally) less pressure on the Fed to tighten policy gives equities the excuse for another push higher. With volatility again falling back, this is more of a drift into all-time highs for the S&P 500. Interestingly, this move is not being mirrored on the NASDAQ which has fallen back in recent sessions. We wonder whether the two can continue like this.

Essentially the path of least resistance is higher on Wall Street. However, unless this is a return of the “reflation trade” (where value stocks drive markets higher and growth stocks struggle), then we are wary of chasing the S&P 500 futures (MT5 code: SP500ft) higher at these levels. 

So often, these drifts into new high ground are followed by a corrective slip which gives a better opportunity to buy around the big uptrend (currently around 4326).