Dollar softens ahead of Fed minutes

The dollar and Treasury yields softened on Tuesday though temporary profit taking was more probable than a sustained retreat

The beginnings of dollar softening in step with stalling Treasury yields has levered risk appetite higher as investors look toward the release of Federal Reserve minutes on Wednesday.

Profit-taking pause

A pause by the dollar following its resolute fightback of recent weeks was evident, but anecdotally and visually—looking at 10-year Treasury yields’ trickle off 7-year highs—profit taking, and technical factors were reasonable explanations. It’s notable that recent sessions have seen the dollar against the yen rejected at January failure highs slightly above 111.39 yen per dollar and late January peaks, slightly lower on the 111 handle. USD/JPY was last supported by 110.81 from which it kicked up to 113.74 in December. If the floor breaks in the near term, it is likely to be associated with the return of yield concerns; or, if heavy-looking USD/JPY breaks lower, vice versa, as well as more hesitant risk appetite. Oil, as a component of inflation reckoning, will be a significant input should it remain near $80 a barrel. Brent crude oil maintained a bid off Monday’s $78.10 low, having last week set its latest four-year high at $80.50.

Italy examines Giuseppe Conte

Unwinding Italian government bond yields from 14-month highs looked to have more to do with the wider yield slack-off than improving local sentiment. The caretaker president’s unusual decision to delay an endorsement of 5-Star/Northern League’s PM choice signalled concern over the suitability of the academic, Giuseppe Conte, who has no experience as a politician. Sergio Mattarella said he would hold a fresh round of talks with heads of upper and lower houses of parliament on Tuesday. He has recently signalled that a rubber stamp for the coalition’s PM candidate was not a foregone conclusion. A rejection would be unprecedented in recent times, but having been mooted, the possibility can’t be dismissed. If offered a mandate, Conte faces a baptism of fire politically and with markets. As such, disorientation in Italy’s markets will not necessarily be resolved in the near term by Mattarella’s decision, either way.

Euro longs held hard

Still elevated Italy risks may mean a deeper flush of euro long positions that survived sharp selling from early -2018 peaks has merely been delayed. Exits from those positions have been far tardier than late-2017 buying, according to recent EBS FX data. The single currency got to within five pips of its 9th May low against the dollar on Tuesday. Slippage then recommenced. Buyers need the rate to race over that line and keep going to avoid a resumption of weakness that reached as low as $1.1717 on Monday.

Carney qualifies

Wednesday’s UK inflation data may be more influential for sterling than the Bank of England’s inflation report and an appearance of The Bank’s governor before the Treasury select committee. The pound posted most of its 80-odd pip rise against the dollar from early AM lows before Mark Carney spoke. He attempted to qualify commentary that followed this month’s policy decision. Qualification didn’t add any information about rate timing though, so cable had returned 50 pips of the earlier move at the time of writing.

Hot minutes

A similar sense of damp squib is probable from Wednesday’s Federal Reserve minutes. The central bank’s Philadelphia president, Patrick Harker, on Monday echoed much of the content of the statement issued following the FOMC’s hold decision in April. He said he would back three further rate rises this year—one more than the Fed projects—if warranted by sustained inflation at current levels. But he also saw “no rapid acceleration” of inflation and would rather not “contract the economy” with rates above neutral.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.