European Open: Bond yields march higher, 1.1386 pivotal for EUR/USD

Bond traders seem to be fully on board with the Fed’s hawkish rhetoric, with the US yield curve continuing its ascent overnight as they offloaded their holdings.

Charts (4)

Asian Indices:

  • Australia's ASX 200 index fell by -8.5 points (-0.11%) and currently trades at 7,408.80
  • Japan's Nikkei 225 index has fallen by -60.86 points (-0.21%) and currently trades at 28,272.66
  • Hong Kong's Hang Seng index has fallen by -103.54 points (-0.43%) and currently trades at 24,114.49
  • China's A50 Index has risen by 113.8 points (0.75%) and currently trades at 15,261.26

UK and Europe:

  • UK's FTSE 100 futures are currently down -3 points (-0.04%), the cash market is currently estimated to open at 7,608.23
  • Euro STOXX 50 futures are currently down -19 points (-0.44%), the cash market is currently estimated to open at 4,283.14
  • Germany's DAX futures are currently down -43 points (-0.27%), the cash market is currently estimated to open at 15,890.72

US Futures:

  • DJI futures are currently down -84 points (-0.23%)
  • S&P 500 futures are currently down -157.25 points (-1.01%)
  • Nasdaq 100 futures are currently down -22.5 points (-0.48%)
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Bond traders were happy to offload their holdings when futures markets opened during the Asian session. The 2-year yield now trades at its highest level since February 2020 and reached an overnight high of 1.060% after closing above 1.0% yesterday. The 10-year now yields 1.84% and reached its highest level since January 2020 whilst the 20-year has risen 4 bps to 2.23%. One has to question whether bond traders are actually on board that the Fed might actually hike by 50 bps.

BOJ upgrade economic outlook, USD/JPY probes 115

Japan held monetary policy unchanged as widely expected today, which means that interest rates remain at -0.1% and they maintained their 10-year JGB target at around 0%. But they did upgrade their economic outlook. It wasn’t by a huge amount but, in the case of Japan’s elusive search of 2% inflation, a little can go a long way when it comes to upgrading ones’ forecasts. Inflation for 2022 is now at 1.1%, up from 0.9% in October and also at 1.1% in 2023, up from 1.0% in October.

Obviously, this is quite a way off from their 2% target. But it would be good to remember that several ‘sources’ this week suggested that the BOJ never said they would have to wait until inflation reaches 2% before hiking rates. So perhaps we can take that uncharacteristically hawkish view of BOJ a bit more seriously, should inflation continue to trend higher this year. But we’re not at the stage of betting the house it will happen just yet.

Rising yields boosts the US dollar

The rise in yields has been a tailwind for the US dollar which is currently the strongest major. USD/JPY has been a top performer today and we just saw a spike above the 1.15 handle. We might see a few more whipsaws around this level before a directional move, given its round-number status (which is popular with options traders) and the fact it marks the 11th January swing low and coincides with trend resistance from the 6th January high. Antipodeans are the weakest which currently sees AUD/USD and NZD/USD on track for bearish outside days.

1.1386 could be the line in the sand for EUR/USD bulls

The stronger dollar pushed EUR/USD back to its December highs overnight but prices have since recovered back above 1.1400. If we look at the daily chart it shows bearish momentum is, so perhaps bulls can hold that key level and drive the market higher. But if yields continue to climb higher then any such bounce could be short-lived, and that makes 1.1386 a pivotal level for today’s session.

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Euro explained – a guide to the euro

 

We can see on the 1-hour chart that prices fell aggressively to the weekly pivot point (P) and the December high. Two lower highs formed ahead of its recent drop so we are on guard for a break below 1.1380 to assume bearish continuation. Until then, a countertrend bounce also sees plausible from current levels.

GBP mixed ahead of UK employment data

UK employment data is released at 07:00 GMT although, if recent trends are to persist, the British pound might not take much notice. That said, better than expected GDP data on Friday suggested the negative impact of Omicron may not be as bad as feared, and traders may be more inclined to favour ok data over bad.

GBP/AUD and GBP/NZD are testing cycle highs, GBP/USD pulled back to a 4-day low and GBP/CHF is testing trend support. It’s touch and go (literally) as to whether momentum can burst higher or simply break lower. Either way we have a pivotal area to monitor for bullish and bearish setups.

 

Guide to Pound sterling

 

FTSE 350: Market Internals

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FTSE 350: 4316.64 (0.91%) 17 January 2022

  • 254 (72.16%) stocks advanced and 89 (25.28%) declined
  • 26 stocks rose to a new 52-week high, 18 fell to new lows
  • 51.14% of stocks closed above their 200-day average
  • 46.88% of stocks closed above their 50-day average
  • 16.19% of stocks closed above their 20-day average

Outperformers:

  • + 5.33%-Cineworld Group PLC (CINE.L)
  • + 4.60%-Network International Holdings PLC (NETW.L)
  • + 4.47%-Euromoney Institutional Investor PLC (ERM.L)

Underperformers:

  • -7.06% - Darktrace PLC (DARK.L)
  • -6.97% - Unilever PLC (ULVR.L)
  • -5.09% - Baltic Classifieds Group PLC (BCG.L)

 

Up Next (Times in GMT)

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