The US Dollar pushed higher overnight, although not driven by the usual correlation with bond yields. The US 10 year is now down to 2.86% from its high at 2.95% less than a week ago, which caused the recent severe stock market sell-off. This move is now reversing with bond yields running out of steam and the stock market taking back most of its losses. We have seen flows back into the USD as confidence returns in equity markets.
Mario Draghi spoke last night with no real direction given on EU policy changes, however, he did claim there are no currency wars at play, after Mnuchin’s comments some weeks ago talking down the Dollar. We will see if this holds true if the Euro continues to push higher after the consolidation at 1.23 we are seeing. a push to new highs above 1.25 will become increasingly uncomfortable for Draghi and put the EU’s recovery at risk. In other European news, we heard comments on tax reform plans to introduce a tax on companies where the customer is based, rather than where the company is registered. This is one of the first major attempts we have seen from European lawmakers against the likes of Google and Facebook who enjoy the lucrative markets of Europe but move profits to the likes of Luxembourg and Northern Ireland for their low company tax rates. The Euro found some weakness off the back of these comments.
After a week of positive Brexit news last week we saw some negative news headlines after Jeremy Corbyn announced he is trying to gather support to take on Teresa May and change the direction of Brexit negotiations. We saw a sharp sell-off in the Sterling of 120 points, however not an unusual move for the cable.
Looking forward we have a raft of CPI data due around the globe. Japan kicks things off, expecting 0.6% after an uncharacteristic beat last month. Next, we have German and Spanish CPI data in the European session which will be overshadowed later by US Durable Goods Orders. We are expecting a read of 0.4%, and any surprise will affect inflation expectations which will drive bond yields and in turn the direction of US stock markets in the coming session. The market is less focused on the Feds tightening course as this year’s hikes are more or less priced in. All eyes are on inflation after some strong numbers of late.
New Fed Chair, Jerome Powell testifies in Washington for the first time tonight, however, do not be sucked into expecting surprise headlines from this talk as his speech was released to the market last week.
Traders will be keeping a keen eye on the Kiwi as the flightless bird has brushed up against a fairly well-established trendline support level several times in recent days. with no Kiwi data on the immediate horizon, traders will be looking for strong US data for a break of this key level to the downside.