Currency and Stock Markets. Daily Insights

[stoch]

ECB takes the mantle in policy tightening, opening door for Euro’s rise



The European Central Bank (ECB) managed to meet the market's hawkish expectations at yesterday's meeting. Like the Federal Reserve (Fed), the European regulator attempted to convey the message that interest rates will remain high for an extended period, opening the door for short-term yields to rise. However, whether central banks will stick to this narrative depends on incoming data.

Perhaps the main argument for the ECB to raise rates one more time before announcing a pause lies in the updated inflation and GDP forecasts:

The growth forecast for aggregate output has been revised down from 1.0% to 0.9% in 2023 and increased from 1.5% to 1.6% compared to the March meeting. At the same time, the ECB expects higher inflation in 2023 than before: 5.4% compared to the previous 5.3%. In 2024 and 2025, the inflation forecast has increased by 0.1% compared to March.

The need to respond to the intensified inflation challenge amid flagging growth prospects leads to a higher risk of a downturn priced in long-term bonds and a risk of a more aggressive stance from the central bank priced in short-term bonds. As a result, we witnessed a further inversion of the German bond yield curve yesterday, with the yield spread between the two-year and ten-year bonds narrowing by another 5 basis points, approaching the March 2023 low:

Overall, the ECB has taken the lead in terms of policy tightening ahead of the Fed, as the FOMC did not provide enough confidence at the meeting that the Fed was committed to a rate increase in July. At the same time, Christine Lagarde tried to convey the message that the ECB is confident that at least one more rate hike will be necessary. This is supported by the revised inflation forecasts.

From a technical perspective, the US dollar index chart indicates an increasing likelihood of a correction for the American currency next week, as the price has reached the lower boundary of the correctional corridor:

Expectations for the Fed have undergone a significant shift after the release of yesterday's data on export-import prices for May, as well as initial jobless claims. Export prices declined by 1.9% month-on-month (forecast 0%), and more significantly, import prices, which are important for consumer inflation, fell by 0.6% in a month (forecast -0.5%). Initial jobless claims increased by 262K (forecast 249K). It is worth noting that this indicator has been disappointing for several consecutive weeks.

The Bank of Japan once again disappointed the hawks today by leaving its policy unchanged and ignoring market expectations that the range of long-term bond yields would be expanded (in which case the central bank would allow for a stronger sell-off before intervening). The USDJPY pair rose from 140 to 141.35 on the central bank's decision before retracing. On the daily chart, this corresponded to a retest of the upper boundary of the ascending corridor:

In the absence of news from the Fed and the Bank of Japan, the only catalyst for a decline could be a correction in the US stock markets. If the price breaks the line, the next target will be the November 2022 high at the level of 142.50.

The key events of the following week will be the Bank of England's meeting and Powell's testimony in Congress.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Yen left adrift as Bank of Japan’s dovish position holds steady


The dollar is gradually recovering after major losses last week:

The plunge occurred on Thursday following the release of US import price data. In May, import prices declined by 0.6% for the month, allowing market participants to reassess the level of expected US inflation and consequently the likelihood of a July tightening by the Federal Reserve (Fed). Previously, during the FOMC meeting, Fed Chair Powell stated that the central bank would increasingly rely on incoming data to make decisions. Such statements are typically made when the central bank anticipates an approaching turning point in the business cycle, in this case, a definitive shift to lower inflation trends. In other cases, central banks often resort to implicit guarantees (forward guidance) that they may continue to lower or raise rates for some time. Approaching a turning point consequently increases market sensitivity to the incoming data points, which often go unnoticed. In this case, it was import prices and initial jobless claims, which once again exceeded expectations.

From a technical analysis perspective, the dollar index is trading within a downward corridor. Last week, during the decline, the price confirmed the lower boundary of this corridor (at the level of 102 on the DXY) and entered into a bullish correction on Monday. The magnitude of movements is insignificant, reflecting the fact that the major events that could have influenced market expectations occurred last week.

The analysis of the Bank of Japan meeting, which took place last Friday, is also noteworthy as it may have serious consequences for the yen. The market was not expecting a rate hike since the central bank continues to use a more powerful easing tool by controlling the yield of long-term government bonds. When it approaches a certain upper boundary (in this case, 0.5%), the Bank of Japan begins to buy bonds, thereby preventing the yield from rising further. Thus, the cost of long-term borrowing in the economy is maintained at a very low level given the current circumstances. It looks like this:

The central bank was expected to allow for wider yield movements (declare an upper boundary above 0.5%), but it did not even do that. This further widens the policy gap between the Bank of Japan and other central banks that are raising rates, and the Japanese yen weakened against the dollar even during its steep decline last week. On the USD/JPY technical chart, it can be seen that the price tested the upper boundary of the channel multiple times and broke out of it last week. It is worth noting the flag pattern (rise + consolidation) before the breakout, which suggests that the decline of the yen will likely continue. Some resistance is likely to emerge near the November 2022 high (at the level of 142.50):

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Bank of England's Underestimated Inflation Forecasts Expose Insufficient Policy Tightening


The surprise in UK consumer inflation for May was incredibly strong, raising concerns that the Bank of England's may go into overdrive with the policy tightening. GBPUSD initially tried to gain strength, but it quickly became clear that additional tightening measures could hurt UK’s growth prospects, resulting in the Pound sell-off.

In May, UK consumer inflation reached 8.7%, surpassing the forecast of 8.4% (previously 8.7%). More importantly, core inflation continued to accelerate, hitting 7.1% in July, surpassing the projected 6.8% (previously 6.8%). This marks the second consecutive month of core inflation acceleration, jumping from 6.2% to 6.8% in April. Inflation in the services sector, known for its less volatile trends, exceeded the central bank's forecast by 0.3%, significantly increasing the pressure on the Bank of England. If the bank's response is perceived as too lenient, concerns may arise about their control over the situation. The market not only dismissed doubts about a 25 basis point rate hike at tomorrow's meeting but also factored in a potential 50 basis point increase. Market participants may also expect the central bank to forecast a prolonged period of high interest rates.

From a technical analysis perspective, GBPUSD is likely to continue its decline, with sellers eyeing the 1.258-1.262 range. This area is significant as it intersects an ascending trendline and a former resistance line that could now act as support:

The decline in the GBPUSD pair may also be influenced by a stronger dollar. Market participants are increasingly betting on the dollar rebound ahead of Powell's two-day testimony in Congress, starting today. Based on comments from Federal Reserve officials last week, Powell might take this opportunity to adjust market expectations, specifically addressing unwarranted expectations of rate cuts this year and emphasizing that the fight against inflation is far from over. Furthermore, the recent update to the Dot Plot indicated that officials anticipate two more rate hikes. However, the adjustment of derivative contracts sensitive to interest rates, particularly overnight interest rate swaps, did not reflect these expectations. The implied terminal rate is only 24 basis points higher than the current rate, which is well below two 25 basis point increases. This circumstance increases the likelihood of Powell engaging in hawkish verbal intervention today.

A crucial factor for a potential dollar rally will be breaking out of the bearish channel and establishing a foothold above the upper boundary, corresponding to a breakthrough of the 102.75 level on the dollar index.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

The flow of US data dashes hopes of a pause in the Federal Reserve's tightening



Gold investors appear to have become weary of waiting for low interest rates (as central banks show no indication of halting their current tightening course), developments in the US banking stress narrative or geopolitical tensions that would ultimately validate their optimistic outlook for gold's growth potential. On Wednesday, gold accelerated its decline, and the test of the $1900 per troy ounce level loomed on the horizon:

In early May, the price of gold rebounded from its historical peak, forming a double top. In mid-June, after a tense struggle between sellers and buyers, it exited the medium-term ascending channel (white parallel lines). Currently, a short-term bearish corridor is taking shape (red lines). The chart also reveals a broader ascending channel (orange parallel lines). Its lower boundary, intersecting with the lower boundary of the short-term bearish channel, which corresponds to approximately the $1880 per troy ounce area, may form an interesting support zone where the price could reverse and move upward again. Clearly, one of the three drivers mentioned earlier must come into play: stress in the banking sector due to growing interest rate disparity between banks’ assets and liabilities, signals of easing core inflation, or a new wave of geopolitical tensions.

Yesterday's comments from ECB officials in Sintra showed that hoping for soft rhetoric today from the heads of the US, EU, and Japanese central banks is unlikely. The wording contained a very clear hint at a rate hike: signals of slowing core inflation in the EU are unconvincing, so a pause in July is unlikely. Based on this, one can assume that Lagarde, Powell, and the head of the Bank of Japan, Kuroda, will develop this idea today since core inflation is indeed currently holding at a relatively high level and receding slowly:

Incoming data from the US effectively quells the market's concerns that central banks are making policy mistakes. Durable goods orders in the US (a strong indicator of household income expectations) rose by 1.7% in the month, surpassing the forecast of -1%. Consumer confidence was directly confirmed by the Conference Board's index, which reached 109.7 points in June, surpassing the forecast of 104 points. Concerns about inflation were amplified by real estate market data: the price index increased by 0.7% in the month, exceeding the forecast of 0.3%. Additionally, API data showed strong demand for fuel as crude oil inventories declined by 2.4 million barrels, compared to a forecast of 1.467 million.

The dollar has turned higher against major currencies ahead of Powell's speech in Sintra. On the technical chart, it can be seen that the dollar index exited the bearish channel, rebounded after reaching its upper boundary, and continued to rise. The medium-term resistance is located in the range of 103.50-103.70, where the corresponding trendline was previously formed by the price:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

US June CPI strips dollar of any support as odds of hawkish Fed outcome plummet


The US June CPI report left the dollar entirely defenseless, causing the US currency index to plummet to nearly 100 level:

As seen in the chart, this is the lowest level since April 2022, meaning the dollar index has not been in this area for over a year. Dropping below the 101 level, the dollar index broke through a support area that was formed by a double bottom in February and May 2023, so we are likely to see further downward movement as an important support level has been breached. To assess the potential decline of the dollar, it's worth looking at the EURUSD chart, which provides more informative insights. There are two areas where dollar buyers may make their presence felt - 1.12500 and 1.15. The first level coincides with the upper boundary of the current ascending channel, while the second level aligns with a long-term resistance trendline that price tested in 2011, 2012, 2014, and 2021:

It should be noted that the US currency had been already in a downbeat mood before the CPI was released. The DXY had been on a slippery slope for the fifth consecutive day yesterday, largely influenced by the unexpectedly dovish rhetoric of two top Federal Reserve (Fed) officials, Daly and Bostic. They notably deviated from the central line of communication between the regulator and the markets by stating on Tuesday that monetary policy is already restrictive enough and that the Fed may need to take time to observe how the economy responds to policy tightening. Of course, such comments contradict Powell's statements at the ECB Sintra symposium, where he said that no officials anticipate a rate cut this year and that the vast majority of FOMC members believe that the interest rate should be even higher.

Yesterday's inflation report clearly shifted the balance of power in favor of the doves within the FOMC. Overall inflation declined to 3% (forecast was 3.1%), while core inflation, which excludes goods and services with volatile prices, slowed from 5.3% to 4.8% (forecast was 5%). The significant progress in core inflation, which FOMC officials referred to as the key variable determining short-term Fed policy, allowed the markets to reassess the likelihood of two rate hikes this year to the downside. If a week ago the probability of the Fed raising rates twice by the end of the year was 36%, it has now decreased to 13%. Consequently, the outcome with one rate hike has become the baseline, with the probability rising to 64%:

Today, the US producer inflation index for June is also due, and the markets are likely to pay some attention to it, considering that it is a leading indicator for consumer inflation. The indicator is expected to be at 0.2% MoM. The market may also pay attention to the data on initial and continuing jobless claims, the importance of which has significantly increased since the June NFP indicated the first signs of weakness in the labor market. The key report for tomorrow is the University of Michigan Consumer Sentiment Index for July, which is expected to be slightly higher than the previous month at 65.5 points.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Is the Global Disinflation Wave Gaining Momentum? UK and US Inflation Data Suggest Yes


GBPUSD experienced a rapid decline on Wednesday after the release of British consumer price data, revealing an unexpected drop in core inflation from 7.1% to 6.9%. It became evident that disinflation is slowly spreading beyond the USA. The pound plummeted by nearly 1% against the dollar, breaking through the 1.30 level. From a technical analysis perspective, the price is still holding above the uptrend line, indicating potential for further upward movement. However, to confirm this, it would be beneficial to assess the buying initiative with a corresponding correction to the trend line. Based on the chart below, the target level for this correction could be around 1.282 (marked by the yellow circle). The main target within the upward trend since October last year is the level of 1.3450/1.35, where the major resistance trend line, formed by price extremes in 2015 and 2021, is located:

The British data did not go unnoticed in European trading, as market participants rushed to price in the risk of the rising wave of disinflation affecting the EU economy in the near future (or possibly already). Consequently, the ECB will likely have to temper its ambitions and hint at a pause after the July rate hike. This led to a temporary breakthrough of the EURUSD level of 1.12 and increased investor interest in short-term EU bonds at the start of the session, with 2-year German bond yields falling by approximately 12 basis points today:

Later on, the Euro and bond yields slightly recovered as the revised core inflation assessment for the EU in June showed a slight increase from 5.3% to 5.5%. Of course, compared to the US and UK data, the EU price data currently does not show any hint of disinflation. If this trend continues into July, the Euro would have a significant chance of strengthening its position against major rivals.

The retail sales data in the US for June added some intrigue to the upcoming Federal Reserve meeting in July. A consensus is rapidly forming that after the July rate hike, there will be an uncertain pause (or the end of the tightening cycle). The key indicator for the central bank's policy, the core retail sales, exceeded expectations, increasing by 0.3% month-on-month (forecast was 0%). However, the overall retail sales figure was below the forecast, but this was due to demand fluctuations that do not reflect the main trend (as seen from the behavior of the core retail sales indicator). The dollar responded positively overall yesterday, even attempting to test the 100 level on the DXY index, which it succeeded in achieving today after the release of British inflation data. The DXY dollar index is reaching towards 100.50 and briefly touched 100.30 at the start of the European session.

Market participants also paid attention to the US construction data today, but it did not show any significant deviations. The number of building permits issued in June almost matched the forecast (1.44 million vs. forecast of 1.49 million). The pace of new housing construction slowed by 8% month-on-month.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Dollar Rebounds on Positive US Data, EURUSD and GBPUSD Charts Show Potential Resistance



Labor market and consumer confidence data in the US, released yesterday, beat estimates, allowing the dollar to stage a comeback. EURUSD retreated into the range of 1.11-1.1150 in line with expectations, GBPUSD also extended its correction, driven by a weak inflation report, dropping to 1.2850.

Monthly charts of EURUSD and GBPUSD deserve attention:

It's easy to spot potential resistance levels for the current upward trends. The resistance area for EURUSD is in the range of 1.15-1.16, while for GBPUSD it lies between 1.3450-1.355. It’s pretty easy to spot those areas, and in my view, the likelihood of self-fulfilling prophecy to play out (the key idea behind technical analysis) is high. Buyers will likely prefer to take profits upon reaching those levels, fearing a backlash, while sellers will jump in expecting buyers to temporarily stay out of the market. For this scenario to unfold, prices must at least reach these areas. Therefore, the current dollar rebound should be considered intermediate – it must return to a downward trajectory for a while so that we can observe how classic patterns of technical analysis work out. As I mentioned earlier, on hourly charts for EURUSD and GPBUSD, the areas where the downward correction is likely to peter out are 1.11-1.1120 and 1.28-1.2820.

Yesterday, the Philly Fed report also provided some support for the dollar. Despite a "red" value for the overall manufacturing activity index (-13.5 against a forecast of -10 points), the leading components of the index performed well – the expected overall activity index jumped from -10.3 to 12.7 in June, and expectations for future orders reached 38.2 points. Price pressure indicators in the sector also showed positive dynamics, maintaining their values below long-term averages.

Today's inflation report in Japan caused the yen to plummet, with USDJPY surging more than 1%. Despite efforts by the Bank of Japan to curb borrowing costs to boost inflation through investments and a cheaper yen, consumer prices grew at a slower pace than expected in June – 3.3% versus a forecast of 3.5%. The last yen downward rebound occurred at the 145 level, which was also the point where the Japanese central bank announced currency intervention last time. It's also the upper boundary of the current upward channel. The next target could be at the same level where the ascending corridor line intersects – at 146.80, as shown in the chart below:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.


High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Elektra-Greene]

The overcover of two charts( 5y inflation and Core PCE) is truly amazing. I would enter long after any bullish trigger.

 

[stoch]

The Fed and Inflation: A Longer Road to Policy Shift


So, the FOMC day has arrived. The market has already priced in one rate hike (according to futures, with a 99% chance), and judging by the recent bullish rebound of the dollar, it doubts that the regulator will consider the June deceleration of core inflation as a starting point in its communication. The Fed could either discount the positive inflation developments or announce that future policy will be entirely data-dependent, which would be a strong bearish signal. In the first case, the dollar may not only sustain its growth at the beginning of this week but also gain some more ground (EURUSD may drop below 1.10). In the second case, it is expected that sellers will target levels below 100 in the DXY index, and EURUSD will return to considering a rally towards the multi-year resistance at 1.15.

Here's one of the technical setups for the Dollar index:

The movements of major currencies in relation to each other in recent days exposed several intriguing trends. Optimism about China's economy has strengthened, which also manifested in the successful resistance of export-dependent currencies (CAD, AUD, NOK) to the moderate dollar recovery. The Brazilian real and the South African rand also appreciated due to the strengthening of the Chinese currency, which have a significant positive correlation with renminbi. A slight negative reassessment of growth prospects for the EU (after the ECB's bank lending survey and PMI activity indices) resulted in a 1.3% correction of the European currency against the dollar, which had a very steep ascent last week. The British pound is also struggling with growth ideas due to the shock caused by inflation figures for June.

The main short-term drivers in the currency market will be the Fed communication today, the ECB meeting on Thursday, as well as the story with fiscal and monetary stimulus in China, which urgently needs to return the economy to its targeted growth trajectory. As for the Fed, despite significant inflation progress, the regulator is unlikely to shed the mantra in its accompanying statement that further policy tightening "may be appropriate." It is also worth paying attention to the potential reaction of the regulator regarding market expectations for the rate next year, which currently account for a 100 basis point rate cut. Overall, in my view, the Fed meeting will have positive consequences for the American currency, especially if we assume that the market showed an excessive reaction to the CPI report, after which the greenback depreciated by nearly 3%.

It is also worth noting the positive release of the Consumer Confidence report by the Conference Board yesterday. The index surged from 110 to 117 points, the highest level since July 2021:

Against the backdrop of solid labor market statistics, still healthy rate of US consumer spending, and optimism among American households, one cannot ignore the risk of a repeat acceleration of inflation or "sticking" near current levels, and the regulator is likely to take this risk into account in today's decision.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Why US Treasury Yields Are Rising at Different Rates Based on Maturity - Understanding the Reasons Behind This Trend



On Friday, major currency pairs experienced limited price movements, with slight gains observed in commodity dollars such as the Australian Dollar (AUD) and Canadian Dollar (CAD), owing to moderate positive developments in the commodity market. US equities showed signs of weakness yesterday, as the S&P 500 index drifted towards 4500 points. However, today, index futures are attempting to rise, albeit with modest growth not exceeding half a percent. In contrast, European markets are witnessing a purely technical bullish rebound following a decline in the first half of the week, and European stock indices continue to consolidate near historical highs:

The US Treasury market remains highly volatile, with yields rising across the entire maturity spectrum, frequently setting new local highs and approaching the peak levels recorded this year. Not since 2007 has the market witnessed such levels. Investors are selling bonds, though the intensity of selling varies depending on the maturity period. For instance, comparing the yields of 2-year and 10-year Treasury bonds:

Since the third week of July, when robust data on the American economy began to emerge, yields across all maturity periods have been on the rise. However, long-term bonds have experienced more significant selling pressure, leading to faster growth in yields. In other words, the attractiveness of short-term bonds has increased relative to long-term bonds. Most investors had anticipated that a strategy of sequentially investing in a series of short-term bonds (lending for short terms and continually rolling over the investment) would generate higher overall returns than a strategy of purchasing long-term bonds (borrowing for a single long-term period).

When investors believe that the Federal Reserve is planning to excessively tighten its monetary policy, they sell short-term bonds (expecting interest rate hikes) and instead buy long-term bonds, anticipating that the Fed's actions will prove to be a mistake and lead to an economic downturn or recession, along with corresponding fall in inflation rates. In such a scenario, buying long-term bonds becomes more advantageous compared to investing in a series of short-term bonds, as short-term interest rates are expected to decline in the future. Conversely, if investors believe that the Fed's will undershoot with policy tightening due to the strong economy's potential, they sell long-term bonds, expecting that the restrictive effect of high rates will be insufficient, leading to economy and inflation staying hot longer. In this scenario, a series of investments in short-term bonds appears more appealing, given the expectation that short-term rates will remain stable or potentially even increase.

In the first case, the spread between long and short-term bonds will go lower, while in the second case, it will increase. Currently, investors seem convinced that the Federal Reserve's current policy outlook is insufficient to push inflation to its target level.

Signs that inflation is likely to persist emerged yesterday after the release of ISM data in the services sector. Although the overall index roughly met expectations (52.7 points, with a forecast of 53 points), the input price index surged from 54.1 to 56.8 points (the first time in several months):

This is indeed a very concerning signal that the Federal Reserve may once again be underestimating the potential for inflation.

Today, the market braces for volatility related to the release of Nonfarm Payrolls (NFP) report, with expectations of modest job growth of around 200К and a 0.3% increase in wages on a monthly basis. In my opinion, the current rally in yields likely already factors in a strong NFP report, leading to a potential asymmetric reaction: a robust report may have minimal impact on the market, while weak job growth, especially with modest wage increases, could trigger a retracement in the recent bond market trend. Consequently, the U.S. dollar is also expected to experience a tangible downward correction in case of a dovish report.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.