There is an ongoing negative drift on longer-dated US Treasury yields which continues to weigh on the US dollar (USD). The impact is being felt across major markets but more significantly on major forex, gold. However, as equities stutter, these could be the signs of a correction looming.
The correction on USD may not be done yet as bond yields continue to drift lower.
In forex, this is helping to support EUR/USD, and dragging USD/JPY lower.
There is a continuation of a recovery in Gold which looks set to pull the price above $1800.
Equities are looking vulnerable at the end of the week and this could be the signs of a correction to come.
USD still under pressure
The dollar has been corrective for a few weeks now. Today’s move lower on Treasury yields is once more hitting the dollar. A breakdown on Dollar Index under 91.25/91.30 this week marked a decisive shift in sentiment. A failure to recover back above this support shows that the market is accepting this is the end of the Q1 USD recovery.
It is still uncertain as to whether this now means a ranging USD or a continued downside move (possible back towards the January and February lows). For now though, if the US 10 year yield continues to fall (which is not our preferred outlook, but the next key level to watch is 1.475%), then USD will remain under pressure.
EUR/USD building above 1.1990, with USD/JPY failing under 108.35
In forex, the decisive shift in USD outlook is showing. EUR/USD has broken above 1.1990 which was the latest key reaction high of the Q1 sell-off. Moving above this, this old resistance was supportive yesterday and the market is looking to push higher today.
It is worth watching an old near-term reaction high of 1.2110 now as the next resistance. A move above here would open 1.2200.
On USD/JPY there was a breakdown below 108.35 earlier this week. This opened a move down towards the next key level of support at 107.00. We still see a very clear positive correlation between USD/JPY and the US 10 year yield. So if yields do continue to fall then USD/JPY can be expected to test the 107.00 area.
Technically, 108.35/108.95 is now a key band of initial resistance.
Gold continues to drift higher
The weakness of the dollar is also positive for Gold. Late last week there was a breakout above $1755 which completed a base pattern. Moving to close above $1765 (which was an old key long term floor) has confirmed the improvement. This $1755/$1765 band has since become a basis of support.
The base pattern implies a target of $1845. The price is gradually moving higher (along with the drift lower on USD). Further USD weakness will usher Gold above $1800, through initial resistance at $1825 and towards the target.
A strong run higher on equities is showing signs of faltering
We have been noting recently that the strong bull move higher on equities is looking stretched. Whilst bull runs can remain stretched for a while, the upside potential is looking limited and the potential for a correction is growing.
The S&P 500 futures have been increasingly choppy in recent sessions. However, with the Relative Strength Index pulling back under 70 this is a corrective signal. A top pattern threatens on a closing break under 4100/4110 support. This would then imply a corrective move back towards 4035, with the key breakout support coming in around 3960/3980.
We are seeing potential top patterns also forming on DAX and FTSE 100. The development of these moves will be something we keep a close eye on next week.