Exceptionalism? US yield curve steepens and the USD rallies

The focus today is on the NFP print and the FX markets as the G10 currencies sit at key levels.  Investors will be wary of fading the USD rally here as there may be further position cutting into the NFP print and ahead of the weekend.

Yesterday the US initial jobless claims showed a strengthening labour market.  This comes after a strong employment sub index in the ISM Services and strong ADP.  This suggests a strong print from NFP today and it likely helping the USD rally.  

The Fed’s Esther George noted in a Bloomberg interview overnight that it was too soon to discuss tapering.  This completes a host of Fed speakers this week converging to Powell’s dovish stance.

The US yield curve steepening to levels not seen since 2015 on the back of rapidly improving data and a reignited reflation trade.  With US equities also outperforming, the USD is rallying in a risk on fashion which has caught market positioning the wrong way and caused those calling for a downtrend in USD to reconsider.  We may be seeing the first signs of US exceptionalism returning, or this may just be a short-term position reduction of USD shorts.

BOE encouraged banks in the UK to prepare for negative rates although it showed no signs of planning to implement them soon.  The MPC also suggested they expect a strong rebound in growth on the back of the UK’s impressive vaccination roll out. The market took this as hawkish overall as some had expected negative rates to come soon.  The upbeat outlook about the economy after the vaccine roll out was also taken positively and has allowed GBP to outperform.

At the RBA Lowe continued the dovish line this morning.  He said that they would not be raising interest rates when inflation goes above 2% as would like to see it above there for some time.  Although he did note that it is possible that they could do better than their upside scenario and then could consider adjusting rates.

EURUSD traded down to 1.1955 yesterday. Breaking the 100dayMA at 1.1967. Still feels market is inclined to buy the dip with Draghi reducing Italian political risk with the view the trend higher can resume once position cutting is over.  Feels the market is almost there although will be wary of the NFP so may wait until next week.

USDJPY there’s resistance at the 105.68 high from November but focus will be on the 106.00 level.

Our overview and outlook of the key trading pairs and indices is as follows

EURUSD – The US dollar continue to rally on strong economic data slipping below the key psychological 1.20-mark, signalling a potential trend shift or at least a short-term reversal. However, technical indicators today suggest a retest of the 1.20 level with the RSI pointing higher following an extreme oversold signal. On the flip side however, a better-than-expected US NFP data could push the greenback higher, triggering further selling on the Euro.

GBPUSD – The pound reversed more than 100 pips yesterday during the BoE press conference and is now on its way to a retest of the key important 1.37 level, despite risks of negative rates. Initially, the GPB/ USD pair dropped below 1.36 but buyers quickly rushed to buy the dip with positive sentiment also boosted by Britain's 10-million vaccination milestone. Today, the focus will be on the Quarterly Inflation Report and the speech from Governor Bailey, with a close above 1.37 to push the pair higher towards 1.3750 / 60.

USDJPY – The Japanese Yen has been moving lower since the start of the new year and yesterday it hit a 12-week low. With a stronger US Dollar, the USD/JPY is still trending up and holding above the 50-day moving average at ¥104. The main bullish trend is expected to continue, however, in the short-term, since the pair is testing the 200-Day moving average (Daily Chart) around ¥105.60 / ¥106, failure to breach this key important indicator may trigger some profit-booking today ahead of US Non-Farm Payrolls report scheduled to be released at 1330 GMT.

FTSE 100 – The FTSE100 closed almost flat yesterday after the BoE met economists’ expectations by keeping interests rates unchanged and maintaining the asset purchasing program. Stocks in London remained subdued as Sterling strengthens, after comments from the Bank of England that it will resort to negative rates only if the economic situation declines. For now, however, the economy is expected to see a rapid recovery in 2021 and thus, no change in policy is expected. From a technical perspective, the UK index of blue-chips is still trailing behind European peers, and below the 200-period moving average while also printing lower lows, which is a sign of negative momentum. A retracement in global equities will push the FTSE100 lower with 6475 as closest support target.

DOW JONES – The Dow Jones Industrial Average closed +1.1% higher yesterday after US initial jobless claims showed a strengthening labour market. This comes after a strong employment sub index in the ISM Services and strong ADP suggesting a strong print from the closely watched NFP report today. The Dow may drop slightly on profit-booking ahead of the weekend; however, we expect the bulls to remain in control especially seeing as an additional stimulus scheme is in the pipeline. Technically speaking, the closest support and resistance levels are the 31000 line on the downside and the 31225 all-time high on the upside.

DAX 30 – Germany registered 855 coronavirus deaths in the past 24 hours bringing the nation's total past 60k. The DAX30 index however is approaching record highs at 14100 as vaccines fuel normalization hopes. Moreover, corporate earnings are also helping drive markets higher with Deutsche Bank reporting profits for the first time in 6 years and other German and European companies also beating expectations and increasing forecasts. However, factory orders data from Germany, released a few minutes ago, posted the first decline in seven months as the manufacturing cycle is losing momentum globally, with an hourly close above the 14100 resistance to boost the German benchmark to 14200 and 14300 in extension.

GOLD – A daily close below 1887 is very significant for the yellow metal as it will further strengthen the case for strong upcoming bearish momentum, completing the Death Cross formation. A higher greenback alongside widening US spreads (5/10, 5/30) on the back of recovery optimism and better than expected economic data out of the US have driven gold lower with all eyes today on NFP data, with forecasts now revised higher to a median of 105K vs. a previous of -140K. Intraday, an hourly close above 1800 will favour further upside while a failure to do so will have gold continue to print lower.

USOIL – 4th consecutive daily close in the green for WTI Crude, hitting our long resistance target at $56.50 (now turned support) as better than expected US Factory Orders and a recovering labour market boosted recovery optimism which continue to drive markets, sending the black gold to more than 1-year highs. Technically, an hourly close below $56.50 will favour further pullback with $56 as the next support target.