Headlines

* USD declines as rate hike fears recede, China reopening boosts optimism

* Fed to size up next move with eye on Thursday’s inflation release

* Global equities trade mixed on Fed comments

* Tokyo inflation exceeds BoJ target for seventh month in a row

FX: USD tumbled for a second day. The DXY is down nearly 2% in two days. It now sits on long-term support at 102.99 after making a fresh cycle low yesterday at 102.94. Treasury yields fell again. The 10-year yield trades below the 100-day SMA. It is nearing the psychological 3.50% level.

EUR rose strongly for a second consecutive session. It made a new cycle high at 1.0760 before closing at 1.0727. GBP also traded higher above 1.22 before finishing at 1.2183. BoE’s Pill noted the potential for inflation to prove more persistent. USD/JPY printed a doji after selling off from above 134 on Friday’s US data. Price action has been choppy in the aftermath of mixed releases from Japan.

AUD popped higher to 0.6949 and currently trades around 0.69. USD/CAD sunk for a second day near to the 50% level of the August rally at 1.3352. Key support below is the November low at 1.3225.

Stocks: US equities finished mixed despite initially extending their post-NFP gains. Advances through the session faded after hawkish comments from Fed officials. The blue-chip S&P 500 which had been up as much as 1.4% closed 0.1% lower. The tech-laden Nasdaq finished 0.6% higher after being up nearly 2.3% at one point. Tesla and chipmaker Nvidia rose more than 5%. The Dow finished lower 0.34%.

Asian stocks traded mostly lower as risk appetite stalled.  The HSI was indecisive as the border reopening euphoria faded. There are reports that the China will cut VAT for small businesses.

US futures are subdued and modestly lower. Futures in Europe are pointing to a softer open -0.8%.  The cash market closed higher, up 1.3% yesterday.

Gold is trading sideways this morning after making a new high at $1881 on Monday. Markets are looking to Fed Chair Powell’s speech later today and US CPI data for further clues on Fed policy.

Day Ahead– Choppy markets, peak rate above or below 5%?

Markets have been trading in a rather skittish fashion so far this year. Last week, worries about a strong labour market were eased by softening in wage growth in the NFP data. The sub-50 print in the ISM Services number also put pressure on the dollar. Price action focused on the increased chances for an upcoming US recession which would rein in a hawkish Fed.

This week has seen markets initially continue to trade on the optimism from the end of last week. But a decisive break lower in the dollar will only be confirmed by much weaker than expected CPI data on Thursday. Meanwhile, Fed officials remain relatively hawkish with two members saying overnight that they expect the peak rate to surpass 5% this year. This has curbed investors’ hopes for less restrictive monetary policy and “soft landing” chatter. The risk rally has stalled though the peak Fed funds rate remains below 5%. rate cuts are priced in for the tihrd quarter of this year. The Fed versus the market battle rumbles on.

Chart of the Day – Dax makes new cycle high  

European stocks continue to outperform US markets handily. The warmer weather, lower energy prices and China reopening have boosted sentiment in the region. Attractive returns have also maintained the pull in unhedged investor inflows which has buoyed the single currency too.  

The German Dax hit new highs at 14824, a level not seen since last March. The index is up close to 25% from the October lows. Strong support is seen around 14,000. Initally buyers may appear at the Fib level (61.8%) of last year’s drop at 14,581. The March 2022 high is at 14,942.