King Dollar reigns all before it

Overnight Headlines

*USD extended gains to hit its highest level since September 2020

*US stocks rebounded though tech continued to underperform

*US 10-year bond yields ended lower for the first time since last week’s FOMC

USD surged higher for a second day to close at 94.36. Prices are overextended on the daily RSI and through the upper Keltner channel so a pullback should be expected. EUR made an intraday low of 1.1589 while GBP plunged again to a low of 1.3411. NZD was the worst performing major dropping below 0.69. USD/JPY made new highs touching 112.

US equities bounced back as traders went bargain hunting, although earlier gains fizzled out. Defensive and value names continued to outperform with the Dow up 0.3% but the tech-heavy Nasdaq fell 0.2%. Asian markets are mixed after this week’s heavy China-driven losses. Japan is mildly in the red after the ruling party chose consensus-builder Kishida as its new leader and PM. European and US futures are higher.

Market Thoughts – Month and Quarter end but dollar rampant

A lot of market focus had been on the stock slump and bond market sell-off. Yesterday it was the turn of a dominant dollar. EUR/USD fell more than a full big figure while the yen is down over 2.4% in the last 24 hours and toying with 112.

Lower global growth but a hawkish Fed, coupled with potential stagflationary dynamics means the dollar is flourishing. Evergrande is still lurking in the background amid the ongoing US debt ceiling stand-off. There is also some position adjustment which is especially notable in GBP while month/quarter end is favouring USD.

Chart of the Day – EUR/USD at 1.16

Last week’s Fed shift has well and truly been taken on board. No amount of “transitory inflation” talk from Chair Powell is providing any help. It is also clear that countries/zones who dismiss inflation developments are getting hit the hardest. Tomorrow’s September eurozone CPI data might serve as a wake up call for the ECB.

EUR/USD set a year-to-date low after giving away the August bottom at 1.1663. It is currently testing support around 1.16 in the form of the September and November 2020 lows. Levels below here include the March 2020 spike at 1.1495. The 50% retracement of the March 2020 to January 2021 rise is at 1.1493. We are oversold on the daily RSI and through the lower Keltner channel.