FX Risk Appetite Hangs By Thread as Investors Eye US Rates
This is supposed to be a week focused on data that would shed light on how the U.S. and global economy has been faring since the beginning of the year.
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This is supposed to be a week focused on data that would shed light on how the U.S. and global economy has been faring since the beginning of the year.
Never underestimate the power of short covering. We saw a lot of that today in EUR/USD and more could follow – 1.15 is an important level that we expect to be tested and broken.
Investors have also been buying euros ahead of the European Central Bank rate decision. No changes are expected from the ECB but the recent uptick in inflation has many traders pricing in a year end rate hike.
The two best performing currencies today were the Australian dollar and euro which is a bit ironic because the Reserve Bank of Australia and the European Central Bank are two of the least hawkish central banks.
Wednesday’s Federal Reserve and Bank of Canada monetary policy announcements are the most important events on this week’s calendar.
We have not seen this type of volatility in the financial markets since the beginning of the pandemic.
Currencies and equities traded sharply lower on Tuesday as Treasury yields hit pre-COVID highs. The 10-year yield rose to its highest level since January 2020 while 2 year yields rose above 1% for the first time since February 2020.
Between hawkish FOMC minutes, a strong ADP report and surge in Treasury yields the U.S. dollar should be stronger. However in the last 48 hours, the greenback pulled back against the Japanese Yen, saw modest gains versus commodity currencies and consolidated against euro and sterling.
Today’s U.S. economic reports reminded investors of the dollar’s appeal. The labor market is strong and the Federal Reserve will be actively reducing stimulus this year driving rates higher.
The greenback moved sharply higher against all of the major currencies with USDJPY closing in on a 4 year high.
The rally in currencies and equities continued on Thursday with the U.S. dollar extending lower.
The Federal Reserve took a big step in their battle with inflation today when they announced plans to taper asset purchases by $60 billion a month.