Forex Analysis

Dollar Little-Changed, US Bond Yields Extend Drop on Soft Inflation

Summary: The Dollar ended little-changed against its main rivals as US Treasuries rose and yields fell. Wall Street stocks broke their steep fall and stabilised with no further bad news on the China-US trade spat. Sterling and the Euro steadied after holding around key levels of 1.2600 and 1.1100. The Dollar Index (USD/DXY) was flat at 98.167 (98.166) after hitting a two-year high a week ago at 98.37. Antipodean cousins, Aussie and Kiwi steadied at 0.6912 (0.6917) and 0.6510 (0.6513) respectively. The Dollar finished flat against the Yen at 109.60 as risk aversion eased.
US treasury prices rose pushing bond yields lower. In late New York trading the benchmark US 10-Year note yielded 2.22% from 2.27% yesterday. The DOW closed 0.2% higher at 25,180 while the S&P 500 gained 0.34% to 2,790. (2,780 yesterday).
US Q1 GDP rose a healthy 3.1% as forecast from 3.2% in the previous quarter. However, the personal consumption expenditure (PCE), which excludes volatile food and energy prices, and is the Fed’s preferred inflation measure missed expectations, rising 1.0% against 1.3%. This was the smallest increase in 4 years. Pending Home Sales were down 1.5% versus a forecast gain of 0.9%.

CNBC US 10-Year Bond Yield Chart - 31 May 2019
CNBC US 10-Year Bond Yield Chart – 31 May 2019
  • EUR/USD – The Euro fell to 1.1116 before steadying to settle back at 1.1130, little-changed from 1.1131 yesterday. With Germany, France and Switzerland out for a bank holiday (Ascension Day), European markets were subdued.
  • GBP/USD – Sterling slumped to a 5-month low at 1.2580 before steadying to climb back and settle at 1.2610. The combination of an overall stronger Dollar, Brexit uncertainty and a lack of economic data kept the British currency on the defensive.
  • USD/JPY – The Dollar traded within its recent range between 109.10 and 109.90. Continuous Japanese corporate support for Dollars at the 109.10 level kept USD/JPY steady despite the rise in risk aversion. Lower US 10-year yields have limited the Dollar’s gains to just under 110.00

On the Lookout: With a lack of fresh negative news on the trade front, it’s a case of “no news is good news” for the currency markets. Traders prefer to keep their powder dry and wait for fresh developments. The economic calendar lights up today as traders start to look at the fundamentals in the near term.
Today sees a heavy start to Asia with Japan’s Tokyo Core CPI, Unemployment Rate (May), Annual Retail Sales, and May Preliminary Industrial Production data. Japan also reports its Consumer Confidence and Housing Starts. China follows with Manufacturing and Non-Manufacturing PMI for May. Australian Private Sector Credit round-up Asia’s economic calendar.
The Euro area sees German Preliminary CPI and Retail Sales. UK Mortgage Approvals and Net Lending to Individuals reports follow. Canadian May GDP, RMPI (Raw Material Prices) kick-off North American data. The US reports on its Core PCE Price Index, Personal Spending and Income, Chicago PMI and Revised University of Michigan Consumer Sentiment and Inflation Expectations. A big Friday feast of data.

Trading Perspective: The soft US inflation report came amidst a sharp slowdown in domestic demand and adds pressure on the Fed to cut interest rates. US bond yields extended their drop and the benchmark 10-year at 2.22% is nearing September 2017 lows. US interest rates are headed lower. Without yield support, the Dollar cannot break new highs. Market positioning, already long Dollar bets against 5 major IMM currencies, may be ripe for a correction. US Inflation and spending data will be closely watched tonight.

  1. EUR/USD The Euro continued to grind lower as the market’s bearish sentiment following the EUR parliamentary results and risk aversion from the China-US trade spat. There were no prime economic data releases yesterday due to the bank holiday in France, Germany and Switzerland. Today sees Germany’s Retail Sales and Preliminary CPI reports. Speculative short Euro bets are the biggest in 3 years. EUR/USD held just above 1.11 strong support, finishing flat at 1.1130. Immediate support remains at the 1.1100/10 level. Immediate resistance lies at 1.1160 and 1.1200. Look to buy dips. Likely range today of 1.1120-1.1170.
DAILY FX GBP USD Chart - 31 May 2019
DAILY FX GBP USD Chart – 31 May 2019
  1. GBP/USD – Sterling remains heavy despite its bounce from overnight and 5-month lows at 1.2580. GBP/USD closed at 1.2610 (1.2628 yesterday). The latest COT/CTC report saw a relatively large build in GBP shorts to -GBP 26,200 bets from -GBP 3,300. Trader’s convictions of a lower Pound are growing which makes the currency susceptible to large reversals. Today’s calendar sees the return of UK economic data. GBP/USD has immediate resistance at 1.2640 followed by 1.2680. Immediate support can be found at 1.2590 and 1.2550. Look for a range today of 1.2585-1.2685. At these levels, the Pound is a better buy.
  2. AUD/USD – The Australian Dollar was steady after weathering initial selling pressure which took it to a low of 0.68987 before steadying to 0.6912. Australian 10-year bond yields were flat and steadied at 1.53%. AUD/USD has immediate resistance at 0.6940 (overnight high 0.69367). The next resistance level can be found at 0.6980. Immediate support lies at 0.6890 and 0.68620. Look to buy dips with a likely range of 0.6900-60.
  3. USD/JPY – The Dollar rallied to close at 109.62, dead flat from yesterday’s close. USD/JPY remains constrained between 109 and 110.00 with good interests on both sides. Market positioning is short JPY bets even as shorts were trimmed in the last COT/CFTC report. With the US 10-year yield down 6 basis points to 2.22%, USD/JPY is a sell on rallies. Likely range today 109.25-109.75.

Happy Friday and trading all.