Overnight Headlines

*USD hit fresh highs on the renomination of Jay Powell to the Fed Chair

*US stocks sold off in a reversal of the rotation from Friday

*The US is poised to release oil from reserves with other nations

*Gold dropped nearly $50 as Powell’s renomination boosted USD and yields

USD rose to its highest levels since last July. The DXY made a new cycle high at 96.60 this morning. Powell’s renomination leaves room for markets to flirt with the idea of a faster taper. USD/JPY broke out of its recent range to a four-and-a-half-year top above 115. EUR/USD saw a post-pandemic low at 1.1226. GBP fell below support at 1.3411, while EUR/GBP stayed close to 0.84. Commod-$s were also weaker with USD/CAD touching 1.27.

US equities were mostly lower overnight. Wall Street reversed an initial rally on the back of the Powell announcement. Tech underperformed while banks and value stocks were back in favour. The VIX index moved higher for a fourth day. Asian markets are in the red with the Hang Seng the major laggard. The ASX200 was boosted by miners and energy stocks. Futures are pointing to a lower open.

Market Thoughts – Market expectations move up a gear

It seems more Fed officials have started discussing whether to increase the tapering pace of their bond buying. Powell’s renomination may keep the status quo, but Lael Brainard, the alternative, was seen as more dovish. Inflation is set to remain sticky and persistent next year. More policymakers are facing this challenge ahead of 2022.

The risk is clearly tilted towards the Fed tightening sooner and faster. QE is set to end in June currently. But the market is now pricing in a 25bp hike at this meeting with two more in the second half of the year. Policy divergence between the Fed and ECB is clear. Watch to see if 10-year US Treasury yields move up to 1.70% and beyond. This may in time hurt (tech) stocks.

Chart of the Day – EUR/GBP bearish consolidation?

Flash PMI data is released today out of the UK and Europe. The latter may see weaker momentum. Consensus also sees a slight moderation in both services and manufacturing in the UK. European lockdowns didn’t push this pair to new lows. But the UK does have higher vaccination rates and greater herd immunity. Time will tell if case rates move higher.

We’ve been waiting for a decisive breakdown of EUR/GBP for some time now. Prices made a new low at 0.8380 on Friday. It looks like we are in bearish consolidation mode. That means prices do break in line with the dominant long-term trend. Targets below include 0.8305/15 and then major support at 0.8275/81. Buyers need to get back above 0.8402 to slow the bearish momentum.