Overnight Headlines

*USD surges higher for a third day, up 0.8% to the highest since mid-April

*US equities very mixed with a tech rally trumping the broader S&P 500

*Gold heading for its worst week in 15 months

USD continues to power ahead driven by expectations of interest rate hikes and bond tapering coming sooner than the consensus had thought. The market is really having to change its fundamental positioning, and fast. EUR/USD was down 0.7% yesterday, so extending its 1.1% loss from Wednesday, GBP/USD has hit fresh six-week lows while AUD sits on its 200-day SMA and NZD has broken down through it.

US equities had an interesting day,with growth underperforming initially before the FAANGs led an outright tech rally which saw the Nasdaq up 0.9%. Banks, energy and materials all struggled which pushed the Dow down 0.6% and the small cap Russell down 1.2%. The S&P500 finished flat and futures are pointing to a similar quiet open.

Market Thoughts – Dollar re-positioning

“King dollar” is back with the buck headed for its best week in nearly nine months after the surprise shift in tone from the Fed continues to reverberate around markets. Short sellers are suffering and have scrambled to close positions with a near 2% gain versus the euro and more than 2% surge versus the aussie. The DXY has scythed through the 200-day SMA and is on track for its biggest weekly gain since last September.

Price action is showing all the hallmarks of real money capitulating. Short dollar positions put on over the past several months based on the unending liquidity tap from the Fed are being unwound in dramatic fashion. This should see the greenback outperform as the Fed moves up the rankings in policy normalisation. Low yielding currencies like EUR and CHF will be most vulnerable.

Chart of the Day – EUR/GBP moving lower?

Just-released UK retail sales disappointed printing -1.4% versus +1.5% expected so sterling has come under some minor selling pressure. But EUR/GBP has benefitted over the past few sessions from spillover tightening bets with the pair edging further south of 0.86 and closing in on the next reference at 0.8539.

The long-term downtrend is still in play with multiple attempts to take out 0.87 failing over the last two months. The pair needs a sustained break below 0.8560/65 to improve the technical picture so the weekly close is important. This would then see a move to the cycle low at 0.8472.