Markets experienced some turbulence last week as freefalling bond yields concerned investors and fueled an unwind of the reflation trade. The ten-year Treasury yield, for example, plunged as much as 20-basis points to a low of 1.25%. This corresponded with a sharp pullback in risk appetite that sent the Dow Jones spiraling -1.8% lower mid-week.
Crude oil prices similarly came under pressure with the commodity sinking -5.9% at its weekly low. Fear surrounding the delta covid variant – and its potential to weigh negatively on global growth prospects – stood out as one key driver of the move. Nevertheless, trader sentiment improved considerably later in the week with the Dow, S&P 500, and Nasdaq all closing at record highs on Friday. That appeared to follow NIAID Director Dr. Fauci announcing how FDA-approved covid vaccines are effective against the delta variant.
Gold gained 1.5% to close above the $1,810-price level largely thanks to recent bond market volatility. The drop in sovereign interest rates helped drag USD/JPY price action lower as lower real yields benefited the Japanese Yen across the board of major FX peers. EUR/USD whipsawed to finish 13-pips higher on balance after weakening to its lowest level since 05 April with Euro bulls deterred little by the ECB shifting its inflation mandate to allow for overshoots of the symmetric 2% target.
MAJOR CURRENCIES AND GOLD PERFORAMCNE AGAINST US DOLLAR
Looking to the week ahead, markets will need to weather an economic calendar jam-packed with high-impact event risk. The release of US inflation data will likely be front-and-center with the monthly CPI report due Tuesday, 13 July at 12:30 GMT. Inflation readings are expected out of the UK, Euro-area, and New Zealand as well next week. Upcoming interest rate decisions from the Bank of Canada, Bank of Japan, and Reserve Bank of New Zealand are also on tap. This brings USD/CAD and NZD/USD into focus in particular considering market expectations for the BoC and RBNZ to signal more tapering.
Other noteworthy event risk for the week ahead includes data releases on Australia employment, China GDP, US retail sales, US consumer sentiment. Equity earnings are also set for kickoff with quarterly results due from big banks like JPMorgan, Goldman Sachs, Bank of America, and Wells Fargo. Not to mention, Fed Chair Powell is scheduled for a congressional testimony, which could provide insight on the central bank’s latest leaning and weigh on the direction of the US Dollar in turn. What else are traders watching out for in the week ahead?
The US Dollar (via the DXY Index) has dropped back as the calendar moved into mid-July on the back of declining Fed rate hike expectations and collapsing US Treasury yields. But with a potent catalyst due over the coming days – the June US inflation (CPI) report on Tuesday – a shift in the recent narrative may be around the corner.
Gold prices may have some short-term upside potential, supported by depressed real yields in the U.S., concerns about the Covid-19 delta variant and China’s slowing economy.
Fresh record highs for the S&P 500 as falling bond yields prompt growth stocks to outperform. FTSE 100 consolidates.
Fresh data prints coming out of the UK are likely to sway the near-term outlook for GBP/USD as BoE Governor Bailey insists that the “economy is bouncing back rapidly.”
The Australian Dollar faces a tough short-term outlook, with the risk-sensitive currency facing a questionable economic recovery as the Delta variant continues to rip through the world.
The Dow Jones index saw a “Triple Top” pattern emerging on the daily chart, hinting at a deeper pullback. Bearish MACD divergence suggests that near-term upward momentum may be weakening.
Gold rallied for a third consecutive week with XAU/USD up nearly 4% off trend support- just a rebound or a broader reversal? Levels that matter on the technical chart.