The US dollar (USD) has picked up notably in the past couple of sessions. A rebound in Treasury yields on slightly more hawkish FOMC member comments has helped USD rebound. However, we do not see this as a trend changing move.
- USD has rallied on a few slightly more hawkish comments from FOMC members
- Real yields have picked up but unless Treasury yields break their ranges, USD will remain an underperformer
- Still looking to play EUR/USD long and GBP/USD long
- USD/JPY is the only pair USD is not underperforming against
Fed speak behind the USD rebound
A succession of FOMC members have come out this week and talked about when the Fed should begin talking about tapering.
- On Tuesday, Vice Fed chair Richard Clarida (voter, very mild dove) said there will be a time at upcoming meetings to discuss tapering.
- Also on Tuesday, Mary Daly (2021 voter) said that policy is in a very good place.
- On Wednesday, Randall Quarles (voter) said that more communication is needed over what “substantial further progress” means.
- On Thursday, Robert Kaplan (not a voter until 2023) suggested the taper discussion needed to be sooner rather than later, and the Fed needs to telegraph intentions well in advance.
- To sum this all up, there is a move towards talking about the taper in the coming meetings, but there is nothing overly groundbreaking here. We do not believe that this changes the path for policy change. We still expect to be guided for tapering in the September FOMC meeting before beginning to reduce asset purchases in December.
Markets have just had a bit of a knee jerk move on this (USD higher, Treasury yields higher), but nothing that changes any trends.
USD has rallied as yields ticked higher
So what are these trends? USD has picked up this week because not only have Treasury yields bounced but also market-based inflation measures have slipped. This is deemed to be USD positive.
The chart below shows “real yields” have picked up in recent sessions, which is now beginning to help support USD near term.
This move has come because 10 year yields have ticked up slightly. However, there is a significant barrier overhead around 1.645/1.71% preventing any trending move. We expect the multi-month range to continue.
So whilst USD has picked up near term and threatened the downtrend, the Dollar Index is now into a key area of overhead resistance 90.00/90.42. There may be room for a near term rebound, but we would still see this as another chance to sell. The Dollar Index would need to move above 90.91 to suggest a serious rebound.
EUR/USD and GBP/USD still on track for gains
On EUR/USD there has been a moderation back towards the uptrend. Despite this, the support band 1.2150/1.2200 is still intact and we still see weakness as a chance to buy for upside towards 1.21350 in due course. A move below 1.2050 would be needed for a decisive change of outlook.
As for GBP/USD, hawkish comments from Bank of England member Vlieghe helped to drive GBP higher yesterday. The outlook for Cable is still strong and we position for a move above 1.4240. Any USD rebound (which would pull GBP/USD lower) into 1.4000/1.4100 should be seen as a chance to buy.
USD/JPY has rallied but do not expect this to last
With Treasury yields ticking up, USD/JPY has also moved higher. However, we expect Treasury yields to continue to the range, and given the tight correlation with USD/JPY, we expect the forex pair to move sideways too.
The yen may be the only major currency that is not outstripping the dollar right now, but even then this may not be enough to see a trend that is positive for USD.
There is a barrier around 110.00 on USD/JPY and perhaps this can be overcome for a drift towards 110.95 resistance. However, we favour a continuation of a ranging move on USD/JPY, selling between 110/111 and buying 107.50/108.50.