Espresso Morning Call: USD slips as US 10yr yield hits 3%

What are we looking at

• USD retains a strong trend, despite a slight unwind this morning: The US dollar (USD) is just easing back slightly this morning after renewed strength once more in recent sessions.
• AUD outperforming major forex: The larger than expected RBA rate hike has boosted the AUD this morning. It will be interesting to see how far this traction takes the AUD, considering the USD strength and general risk negative sentiment across markets.
• Indices tentatively higher: Despite a Wall Street recovery into the close last night, a lacklustre Asian session is being followed by European markets only marginally higher. FTSE 100 is playing catch up on yesterday’s European losses, whilst US futures are mixed. 
• Data trading: data trading may be slightly subdued today, with forecasts expected to be similar to previous readings. UK Manufacturing PMI (impacting GBP) and Eurozone Unemployment (impacting EUR) are unlikely to move too much. The USD may move if the JOLTS jobs data comes out with a significant surprise, but may not do much if around the forecast.

Overview

Markets are trading with a sense of caution in recovery this morning. There is a tentative rebound on indices after recent selling pressure across Wall Street threatened key downside breaks. This came as US bond yields have continued to move higher, with the 10 year Treasury yield topping 3%, its highest since December 2018. With yields higher, the USD has also regained a position of strength across major forex in recent days. Despite the consolidation today, there is a sense that further USD strength lies ahead. The FOMC meeting on Wednesday could be the catalyst for the next key break.

The Aussie is the one major currency that is managing to fight back this morning. A larger than expected rate hike from the Reserve Bank of Australia has boosted the AUD and is decisively outperforming this morning. This move comes in a kickback against the renewed USD strength, so it will be an interesting gauge to see how long it can last in the face of ongoing USD strength.  

For the economic calendar, the market is reacting to the larger than expected RBA rate hike, but elsewhere the moves may be less volatile. UK Manufacturing PMI is a final reading and is expected to be unrevised, whilst Eurozone unemployment at flat or just a tenth of a per cent lower will also not do much. The JOLTs opening and quits can move the USD but are expected to be all but flat

Today’s news

Market sentiment is tentative in recovery: There is a kickback against the USD strength and downside moves in indices this morning. The recoveries appear to be tentative ahead of some big risk events this week.

Treasury yields breaking higher: The US 10 year yield has topped 3%, with the 2-year yield at 2.77%. Both are rising, although these moves may begin to consolidate ahead of Wednesday’s FOMC meeting. 

RBA hikes more than expected: Expectations for a rate hike by the Reserve Bank of Australia have been building recently as inflation came in hot for Q1. The RBA has increased rates by +25 basis points to 0.35%. This was higher than the expected increase to 0.25%. According to Governor Lowe, “inflation has picked up more quickly… and there is also evidence that wage growth is picking up”. The RBA also signalled that further rate hikes are on the way.

EU debating Russian oil embargo: There are tensions and splits within the EU over the ban. Hungary and Slovakia are against it. Politicians are looking for a compromise to be reached to exempt those countries and still push through the embargo.

Cryptocurrency trending lower: With risk appetite negative, we see cryptocurrencies trending with lower highs. Bitcoin is now consistently below $40,000 now and consolidates around $38,500.

ECB President Lagarde to speak today: Lagarde is speaking at 1400BST. Given the number of central banks changing monetary policy recently, this adds even more pressure on what the ECB will do.

Economic Data:

• UK final Manufacturing PMI (at 0930BST) – The final reading for April is expected to be unrevised at 55.3
• Eurozone Unemployment (at 1000BST). The rate is expected to remain at 6.8% in March 
• US JOLTS jobs openings (at 1500BST). Consensus expects the rate to stay very similar at 11.27m in March (11.26m in February).
• US Factory Orders (at 1500BST). Consensus is looking for growth of +1.2% MoM in March (-0.5% in February)

Major markets outlook

Broad outlook: Market sentiment has tentatively improved, but given the number of huge risk events this week, a sense of consolidation could be setting in already.

Forex: USD is giving back some of its renewed strength. AUD is the clear outperformer after the RBA rate hike.

• EUR/USD picked up from t 1.0470 last week but has been unable to sustain a recovery before falling back again. Although the 1.0470 support is holding, this may only be consolidated in front of the FOMC on Wednesday. Initial resistance is around 1.0590 under the overhead supply of the old key low at 1.0635. 
• GBP/USD has rebounded from 1.2410 in recent sessions, but a sustained recovery is still looking questionable at this stage. Initial resistance is at 1.2615. Reaction around 1.2570/1.2600 resistance will be the initial gauge today. Moving through this would engage more considerable recovery momentum and open 1.2700/1.2770 as the from Friday’s high. There is plenty of downside move to unwind in a technical rally, but the shackles are on for now. Initial support is at 1.2472.
• AUD/USD has been coming through with several false dawns in the past week, so the rebound from 0.7030 needs to be treated with caution. It is coming on the RBA rate hike, so there might be some near term traction. Technically the market needs to rally above 0.7180 to engage in a serious recovery. Already the market is showing a lack of conviction in the European session. Initial support at 0.7075. 

Commodities: Precious metals have swung into recovery mode, with oil also eyeing another resistance in recovery.

• Gold has once more reversed a sense of recovery and near term, strength is now seen as a chance to sell. Breaking decisively below $1878/$1890 support brings the primary uptrend of c. $1820 back into play. Initially today the market is testing the $1844/$1854 support. The old support of $1890/$1915 is a growing basis of resistance on a medium-term outlook.

• Silver has now posted nine negative days in the past ten as the market has fallen sharply back towards the key support band $21.40/$22.00. There are signs of a little hope for the bulls though, as the market closed well off session lows on Friday and the RSI is oversold (at 26). A technical rally is possible, but resistance is at $22.90/$23.55 overhead.
• Brent Crude oil has recovered in recent sessions and is beginning to develop an air of consolidation again. The market is broadly in the middle of the one-month trading range c. $99/$116 and with the RSI settling around 50 this is a market looking for a catalyst.

Indices: Tentative recovery momentum is building on Wall Street once more, however, rallies have been a chance to sell in recent weeks.

• S&P 500 futures rebounded off a low at 4055 yesterday to form a positive recovery candlestick (almost a bull hammer) on the daily chart. A tentative move higher has taken hold this morning too. However, rallies have consistently failed in recent weeks. There is growing resistance between 4200/4300 and unless this is breached it is difficult to suggest any sustaining recovery momentum will hold.
• DAX has been choppy in recent weeks, but the net move has been posting lower highs and lower lows. The falling 21 & 55-day moving averages reflect this, whilst the key four-month downtrend is still a barrier to recovery (this morning at 14,410). There is an early tick higher today, but the market needs to hold above 14,190 initial resistance to improve the outlook for a test of these negative trend indicators. Below 13,805 turns negative again.
• FTSE 100 has seen increased volatility amidst choppy trading in recent sessions. A swing back higher this morning is testing resistance around 7530/7585 again. A move above 7585 re-opens the key highs again around 7660/7695.