Overnight Headlines

*US futures rise as China banks cut key rate by record to boost ailing economy

*Japan consumer prices post biggest rise in seven years

*Dollar falls for first week in seven amid US bond yield retreat

*Gold poised for first weekly gain in five as greenback rally eases

US equities traded lower with the broader S&P500 falling 0.6%. The Dow and Nasdaq also dipped, losing 0.8% and 0.3%. There were no clear preferences between cyclicals and defensives. The VIX popped up above 33 before retreating below 30. Asian shares are more positive after China cut its five-year loan prime rate. The Hang Seng jumped more than 2%. Futures are higher with the Nasdaq currently showing a 1% gain.

USD’s bad week continued despite still downbeat risk sentiment. The DXY dropped below previous resistance/support at 102.99, the pandemic spike high. EUR crossed the 1.06 mark before paring back. GBP passed the 1.25 level and is trading just under here this morning. USD/JPY threatened to fall to 127.50 before buyers stepped in. AUD pushed above 0.70 again and is consolidating above here today. USD/CAD is sat on 1.28 while CHF strength continues.

Market Thoughts – Dollar weakness

USD is headed for its worst week since early February. A retreat in Treasury bond yields and general fatigue after the currency’s breathless 10%, 14-week surge have seen the world’s reserve currency pull back from 20-year highs. Even its appeal as a safe haven with stocks sliding has been eclipsed. A key index of global equities is heading for a seventh weekly decline, its longest ever.

Concerns are growing that the Fed has fallen behind the curve in fighting super-hot inflation amid increasing recession worries. More aggressive policy tightening is being seen in other major central bank as the differential between the Fed Funds rate and European rates narrows. Dollar strength has lessened but should remain underpinned with the front-loading of Fed rate hikes in the next few months.

Chart of the Day – EUR/USD fights back

The oversold euro has bounced this week. The weak dollar tone has been pivotal with support from widening yield spreads topping out. Positioning and evidence of euro bargain hunting has also favoured a squeeze higher. The minutes of the ECB meeting in April confirmed the increasingly hawkish tone of many ECB members which has been seen more recently.

The long-term low in EUR/USD remains at 1.0341. Initial support sits around 1.0459. The lower part of the long-term descending channel comes in just below 1.06. Buyers will aim for 1.0636 initially. This is the pandemic low from March 2020. Above here sits strong resistance around 1.08.