Last night’s market reaction could have been the last hurrah for the US dollar bulls. If I put my sceptical hat on, seeing such a big move up on a news event that was largely anticipated, I can’t help but think as new trades were initiated, some Wiley old-timers or very astute traders sold into the exuberance. The yields tell a story of interest rate hike expectations but nothing else has fundamentally changed.
President Biden nominated Brainard for vice-chair of the Federal Reserve and extended Powell's term in the hot seat for another four years. There is no fundamental change, but the probability of monetary policy tightening speeding up is now increasing. While the Fed continues to purchase medium-term and long-term notes and bonds with its quantitative easing program, the main movers yesterday came in the short end of the rate curve. In response to a rising probability of a rate hike in the next 18 months, the 2y & 5y yields accelerated higher yesterday.
The rising yields pushed the US dollar index higher, and it is now firmly in the balance area that formed during the summer of 2020. This could slow the greenback's appreciation as there were clearly a lot of sellers building positions there before. But if these yields keep pushing higher, the US dollar will follow and $100 becomes a real contender for a Take Profit target.
The forex heatmap indicates a risk-off start to the London session, with moves into all three safe-haven currencies despite Japan being on a bank holiday today. In the wake of the European PMI's this morning, the euro is now relatively strong against its peers. The November PMI® data from IHS Markit showed a slight increase in the growth of business activity in the German private sector, although the pace of growth remained moderate due to subdued manufacturing activity. With exports also declining, the inflow of new work slowed to its slowest pace since February. Meanwhile, firms have linked the latest rises in inflation to ongoing supply issues and shortages. Flash Germany PMI Composite Output Index rose from 52.0 to 52.8 in November, indicating a slight acceleration of growth.
The EURUSD has found a little bit of support this morning at the 1.1250 area which is around a 61.8% retracement from the 2021 highs to the 2020 lows. Looking left along the chart the weekly price action is being held within a small balance zone which may be where the next buying is initiated as there were clearly buyers at this level last year.
According to the provisional flash PMI® data, business activity growth rebounded in November after dipping in October. As a result of the upturn, inflationary pressures increased significantly during the month, as both firms' costs and average selling prices soared. Despite record employment growth, optimism about the outlook slumped to a ten-month low on renewed COVID-19 concerns and lingering supply constraints as firms sought to meet rising demand.
· Flash Eurozone PMI Composite Output Index at 55.8 (54.2 in October). 2-month high.
· Flash Eurozone Services PMI Activity Index at 56.6 (54.6 in October). 3-month high.
IHS Markit's Euro Area Manufacturing PMI rose to 58.6 in November, up from 58.3 in October and above market expectations of 57.3, according to flash estimates. Despite this, the latest reading remained the second weakest in 17 months.
· Flash Eurozone Manufacturing PMI at 58.6 (58.3 in October). 2-month high.
Brent crude prices are being attacked from all sides this morning. A higher dollar is instantly a drag on the price of oil, then we have German COVID-19 rates spiking to record highs, which puts pressure on demand for the whole of Europe. Plus, the USA and other nations are likely to do a coordinated release of reserves to alleviate inflationary pressures. The $77 per barrel is very likely to get swept as the price action failed to take out the recent swing highs around $79.50. This will add some downward pressure to the CAD and MXN as those currencies are tied closely to the price of energy.