Overnight Headlines

*USD fell back with its biggest daily percentage drop in month

*US stocks climbed for a second day as Evergrande watched

*The Vix fell below 20 on improved risk sentiment

*US 10-year bond yields broke higher towards 1.45%

USD sold off after hitting resistance around the March high at 93.43. This wiped out gains from the previous session after the Fed’s hawkish tilt. The DXY is now trading around support at 93. Ten-month highs made in August sit at 93.72. EUR climbed up near to 1.1750 with the week’s high at 1.1755. GBP rebounded sharply off 1.36 on BoE rate hike expectations. USD/JPY also advanced strongly towards 110.50 on higher US bond yields.

US equities rose for a second day with the S&P500 getting back above its 50-day SMA, up +1.2%. The Dow enjoyed its best daily performance since mid-July closing higher by +1.5%. Energy led the market with financials hot on its heels on rising interest rates. Defensives were the laggards. Asian markets are mixed this morning with US futures pointing to a flat open.

Market Thoughts – BoE follows hawkish Fed

The pound got a lift yesterday after the Bank of England stuck with the status quo for the most part but offered up a few hawkish elements to encourage the bulls. It changed its forward guidance by adding that “some developments” have strengthened the case for “modest tightening” The MPC signalled that it was ready to intervene in case inflation threatens to surge higher. They would be comfortable tightening monetary policy even before the end of the existing QE programme.

Dave Ramsden joined Saunders in dissenting and preferring to reduce the pace of bond buying. Numerous investment banks brought forward their timing of rate hikes, mostly to the first quarter of next year. But it is clear the MPC is divided on how much of an issue rising inflation poses. We also highlighted several headwinds yesterday facing the economy this winter.

Chart of the Day – GBP/JPY up to trendline resistance

With risk on sentiment and hawkish hints from the BoE, GBP/JPY rocketed higher yesterday making back its losses after Monday’s plunge. Support around 149 was strong with the March and July low untouched. The 200-day SMA at 149.80 also acted a solid support.

Prices are now back above the 50-day SMA and closing in on trendline resistance from the late May highs. This has capped upside for the pair on several occasions. If the bullish momentum continues, the September high at 152.85 sits above, near to the 100-day SMA. We note the MACD has not yet turned bullish.