USD stands tall as tightening gets priced in

Overnight Headlines

*USD surged to its highest level in ten months

*US stocks tumbled as US Treasury yields spiked higher

*Oil backed off the new top at $80.72, now trading near previous swing high

*US 10-year bond yields hit 1.56%, last seen in mid-June

USD rocketed higher to a new top of 93.80 and is consolidating gains this morning. The ten-month highs are tracking the rise in US Treasury yields as the market starts to price in tapering and potential rate hikes. The EUR lost 1.17 and is hovering near the lows at 1.1663. GBP was the major loser on the day, down over 1% and breaking through the cycle lows to 1.3520. Global risk sentiment and continued UK logistical problems look to be trumping BoE rate hike expectations. EUR/GBP broke out of its recent range and is nearing the 200-day SMA at 0.8644. USD/JPY jumped higher for a fifth straight day into the year-to-date highs at 111.68.

US equities sold off heavily with tech leading the way – Nasdaq dropped 2.8% to see its worst session since March. The S&P500 shed 2.0% and the Dow lost 1.63% as the Vix moved above 23. The energy sector was the only one going against the trend. Asian markets have followed Wall Street lower, down 1 to 2%. Futures in Europe are flat but US futures are pointing to a more positive open.

Market Thoughts – Risk-off mood

The spike in market volatility weighed heavily on risk, commodity and $-rate sensitive currencies yesterday. GBP was the worst hit as a plethora of factors hit sterling. The end of furlough is nigh, the UK is set to face one of the sharpest fiscal contractions in the G10 and persistent Brexit issues will continue to act as headwinds.  

Stock market declines came on the back of a rising inflation outlook and more hawkish Fed comments. The fiscal uncertainty in the US as an increase in the debt ceiling has still not passed simply added to the gloomy sentiment. That said, rising bond yields is not what is normally seen in a risk off scenario, as bonds normally would benefit from a traditional flight to quality.  

Chart of the Day – DXY trading at recent high

The market has woken up to last week’s hawkish Fed shift and been re-assessing the path for the Fed tightening cycle. We said at the time that the dollar was a buy-on-dips trade and DXY has pushed higher after trading just below previous swing highs around 93.50.

Yesterday’s burst took us to levels not seen since November last year. Last month’s spike high at 93.72 is a near-term level to keep an eye on as bulls will want to consolidate above here. The September 2020 high at 94.74 is the next upside target if we can sustain gains. Support is 93.51/2.