Headlines

*Plunging pound pauses as investors await policy response

*Fed officials stare down markets, repeat inflation top focus

*Japan’s 20-year yield rises above 1% for first time since 2015

*Gold firms on dollar pullback, rate hike jitters cap increases

USD was strong across the board as US Treasury yields continued to rise with the 10-year hitting 3.93%. The DXY spiked higher to 114.52 in the Asian session, before closing at 114.10. GBP flash crashed to 1.0356 before finishing at 1.0685. The intraday trading range was 575 pips. EUR/GBP touched 0.9278 in the early hours before closing below 0.90. EUR plummeted briefly to 0.9552 but closed above 0.96. USD/JPY rose to 144.78 near the top of the range. AUD closed sharply lower by 1.09% to 0.6459, while CAD traded above 1.38.

US equities tumbled with the Dow losing 1.11% to 29,260, fresh cycle lows. The S&P500 closed at its lowest level since late 2020. At one point, it dipped to less than eight points away from its intraday 2022 low at 3636. Growth outperformed value with the Nasdaq 100 falling 0.51%. Some gains are being seen in Asian equities. The overhang from the FX turmoil has eased. But the recovery is contained by the higher yield environment. Both European and US futures are in recovery mode and pointing higher.

Market Thoughts – “A Day for the ages part II”

Late last week, we very briefly touched upon the clash in UK policies between the government fiscal package and the go-slow monetary mode of the Bank of England. Perhaps “clash” wasn’t the correct word. But crash is certainly what has happened with the pound and in bond markets. It is the latter that are convulsing due to the plan of unfunded government tax cuts and fiscal largesse.

The shock to gilt yields over recent sessions has been epic with the biggest ever two-day rise in two-year gilts. With no cuts in spending announced so far, the UK will require the issuance of a lot more government debt and bonds. Higher supply will potentially meet weak demand and so much higher yields are needed to clear the market. Big rate hikes may not do the trick even as the market prices in a base rate at over 6% next summer from 2.25% currently.

Chart of the Day – GBP/JPY crashes through trendline support

There are a lot of moving parts in markets at the moment. It’s key to remember that no currency pair is an island as there are lots of cross flows that can guide price action. GBP/USD rebounded yesterday from the flash crash. Markets seem to be giving sterling the benefit of the doubt at the moment as the Bank of England tries to buy time. How long the markets will wait is crucial, which leaves GBP very exposed.

USD/JPY is also getting back near to 145 and possible intervention levels by Japanese authorities. GBP/JPY is in the crossfire. Resistance looks strong around 168.43. Friday and Monday’s incredible range is over 15 big figures. Prices have plunged through a long-term trendline below 161 and the 50-day SMA at 158.58 which will act as first resistance. Support is the 100-day SMA at 153.53. yesterday’s spike low was 148.63.