Consolidation In FX May Be Welcome Given Volatility Elsewhere

10 and 20 us dollar bill

The reluctance of the Federal Reserve officials to signal a recalibration of policy given the booming economy, rising inflation expectations, and strong demand as the vaccine rollout allows for a broader economic re-opening, continues to cap the dollar. The jump in rates following the CPI surprise earlier in May and (misreading) of the FOMC minutes saw a quick rise in yields and the dollar, which was quickly unwound. Yet, broadly speaking, the technicals seem to favor consolidation with a modest upside bias. 

The market seems to be looking past next month's FOMC meeting. While the economic forecasts will be updated, the earliest that a signal on tapering the Jackson Hole confab in late August or the September FOMC meeting. The strength of recent economic data, including the preliminary May PMI, will give the hawks at the ECB some solid arguments. Still, even if they can force a slowing in the PEPP bond-buying, it is hardly tapering in the sense of a gradual move toward ending the purchases. ECB President Lagarde has been clear about this.  

Benchmark 10-year yields were softer this past week. Only in Germany and Switzerland are 10-year yields still below zero. Despite concern that the formal emergency in Japan, which is covering the area that accounts for around 40% of the GDP of the world's third-largest economy, may be extended through most of June and the preliminary May PMI, which warns that the Q1 contraction carried into Q2, Japan's 10-year yield is around seven basis points. The dollar value of the negative-yielding bonds in the world has fallen by a third this year to a little more than $12 trillion.

Dollar Index 

The Dollar Index recorded three-month lows ahead of the weekend around 89.65. The old support at 90.00 now provides the nearby cap.  The momentum indicators are stretched, and it seems like it faded in recent days, during which the Dollar Index has carved out a shelf in the 89.65-89.75 area.  Above 90.30 would stabilize the tone. It needs to get above the 20-day moving average (and the middle of the Bollinger Band (~99.50) to suggest a low is in place. The year's low was set in early January by 89.20, and below there, the last important low was set in 2018, close to 88.20.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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