The first quarter of 2021 was all about how major markets reacted to sharply rising bond yields and US dollar strengthening. As we move into Q2, the medium-term trends on the US 10 year Treasury yield and US dollar are still intact. The longer this continues, the more we will see a continuation of the Q1 moves on major markets.  

  • If recent trends in the US 10yr yield and Dollar Index continue throughout April, they will hit key target levels.
  • In forex, we expect further downside in EUR/USD and upside in USD/JPY. 
  • Equity markets are drudging higher, for now. 
  • Gold could yet still be able to find support.

US 10yr towards 2% will help USD recovery

You can pinpoint it to the day. The bottom in the Dollar Index came on the 6th of January, which was the day that US bond yields began to accelerate higher. The “reflation trade” had kicked in. Yields had already been rising for the last five months of 2020 but in an orderly calm fashion. This changed in 2021 as the uptrend sharpened significantly.

US 10 year Treasury yield

Note the huge acceleration higher in the 10yr yield since early January. 

Acceleration since January

Also, note the bottom in the Dollar Index in early January. Since early March, the USD rally has taken off. A base pattern implies a recovery towards the key resistance band 94.30/94.75. If the uptrend holds, this will be seen by the end of April. We also see strong support now 92.50/92.75 to buy USD into weakness. 

EUR/USD downside to test 1.1600, with USD/JPY a buy into weakness

So, if these trends continue on yields and USD, then we can expect the corrective move on EUR/USD to continue. The technical analysis looks on track to test 1.1600. Selling into strength is likely to be the strategy, with resistance around 1.1760/1.1800. The 14 day RSI is around levels where near-term technical rallies tend to kick in, so this would support selling into strength.

EUR/USD corrective move to conticue

For USD/JPY the outlook seems to be closely tracking the acceleration higher in bond yields (which is a very normal relationship for this pair). Looking at the weekly chart, we see any unwinding into 109.85/110.00 would be a good opportunity to buy for continued upside into the key resistance band 111.70/112.40. 

USD/JPY unwinding into 109.85/110.00

US equities still grinding higher

The S&P 500 has become a grind higher in recent weeks. Tech stocks have become a drag on the market. Low yielding and very expensive, the tech sector is unattractive with bond yields shooting higher. However, the S&P has managed to ride the corrective waves and push all-time highs. The concern we have is that technical momentum is a bit sluggish and if bond yields continue to shoot higher in the coming weeks, some more considerable profit-taking could kick in. 

Graphical user interface, chart, histogram description, US Futures

Note the lower support of the trend channel is shallowing. This shows that the corrective moves are extending. Chasing all-time highs is becoming increasingly hazardous.

 But, is Gold ready to find a low?

We recently asked the question of whether gold was ready to find a bottom. A retest of $1676 has held firm with two days of recovery. A multi-month downtrend is still intact and RSI is still stuck under 50. So, nothing yet, however, the support band $1660/$1676 is strong. Also, the gold bulls have shown some signs of encouragement recently. Perhaps gold could still be the market to break these trends.