FX Update: Risk sentiment rebounds despite hefty yield pressure. FX Update: Risk sentiment rebounds despite hefty yield pressure. FX Update: Risk sentiment rebounds despite hefty yield pressure.

FX Update: Risk sentiment rebounds despite hefty yield pressure.

Forex
John Hardy

Head of FX Strategy

Summary:  The US January PCE inflation data came in far hotter than expected at the core, which took US treasury yields and Fed tightening expectations higher still and prompted a USD rally extension, particularly against the yield-sensitive JPY. But risk sentiment held the line in late trading last week on Friday and has sprung back strongly in today’s European session. It will be tough to sustain both higher yields and resilient sentiment for much longer.


Today's Saxo Market Call podcast
Today's Market Quick Take from the Saxo Strategy Team

FX Trading focus: Higher yields clearly JPY-negative, but USD reaction is muted on resilient risk sentiment. Sterling focus on post-Brexit settlement on Northern Ireland border, AUD focus on commodities and China re-opening narrative.

The hot core US PCE inflation data excited a fresh USD rally extension as US yields spiked to new highs at the short end of the US treasury yield curve. The Fed is now marked for three-plus 25-bp rate increases and a peak Fed funds rate of over 5.40%, with about 25% probability that the Fed will have to “re-accelerate” the pace of rate increases with a 50-basis point hike at the March 22 FOMC meeting. The rally was felt heaviest against the JPY after Kazuo Ueda’s nomination hearing on Friday suggested a cautious stance on normalizing the Bank of Japan’s monetary policy. The USD rally has since faded slightly, most likely because risk sentiment has managed to absorb these developments and hasn’t broken down. If sentiment can continue to hold the line despite higher yields, the US dollar might even weaken further for a spell – but I have a hard time believing that sentiment can hold up if yields continue to pull higher, and particularly if longer yields join in and the 10-year yield threatens the cycle high above 4.25%.

Next tests for how the markets treat incoming data are the US Feb. ISM Services survey not up until this Friday, the March 10 (very late!) jobs report, the February CPI up on Tuesday March 14 and the FOMC on the 22nd. And then there is the geopolitical backdrop – a huge concern, but one that could downshift to a slow burn rather than providing headlines in coming days. All in all, it’s a tough environment for tactical direction calling after Friday failed to trigger a sentiment capitulation.

Chart: GBPUSD
GBPUSD and many other USD pairs have dipped of late on the persistent shift higher in Fed expectations, but most have yet to take out the supports established around the beginning of this year, important pivot points for USD traders. In GBPUSD’s case, that early January pivot low is down at 1.1842, and the tactical drama has been the cat-and-mouse testing of the 200-day moving average over the last three weeks, with today offering the latest of those tests. The zone from here down to 1.1840 is critical for the near term outlook, with risk sentiment likely an important coincident driver of what happens next. A special twist here as well on the incoming announcement on the shape of the post-Brexit settlement on the Northern Ireland border – hard to see much pent-up anticipation on this issue in financial markets or for sterling, but let’s see if it sparks a reaction. EURGBP is also pivotal after a recent sell-off on a strong UK Services PMI for February, but with no follow-on momentum yet. For GBPUSD, sterling bears need risk-off and a close below 1.1840, while bulls will watch for an impulsive rally bar or two that takes the action back above 1.2150-1.2200, although the massive overhead resistance line and range high is the well-defined 1.2450 area etched out by the tops in December and January.

Source: Saxo Group

The Asian session overnight continued to show the stumbling of the China re-opening narrative, or at least the evidence that the market is enthusing to that narrative, fading. Metals prices have rolled over badly and AUDUSD tested the waters south of 0.6700 briefly this morning, finding support so far just ahead of the early 2023 low of 0.6688. The next level there is perhaps the 0.6547 area, which is the 61.8% retracement of the entire rally sequence from 0.6170 to 0.7158.

Table: FX Board of G10 and CNH trend evolution and strength.
The USD rally still in the driver’s seat, and the misfiring China reopening narrative evident in AUD-, silver and even in CNH-weakness (particularly relative to the USD when most regimes of last 10 years had the CNH showing directional beta to the USD.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
AUD weakness showing up in more and more pairs here. The most extended trend is the USDCNH rally at a strength rating of +6.9.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1000 – Eurozone Feb. Confidence Surveys
  • 1330 – US Jan. Preliminary Durable Goods Orders
  • 1530 – US Feb. Dallas Fed Manufacturing Activity
  • 1530 – US Fed’s Jefferson (Voter) to speak
  • 1700 – ECB Chief Economist Lane to speak
  • 2350 – Japan Jan. Industrial Production
  • 0000 – New Zealand Feb. ANZ Business Confidence
  • 0030 – Australia Jan. Retail Sales

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.