Are USD bears back in business?

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Latest market moves:
The US dollar fell sharply overnight, with EURUSD zipping back above 1.1300 for the first time in almost two weeks, trading 1.1330 in late Asian hours. This is the reversal of the lower range below 1.1266 that the USD bears were looking for. GBPUSD is pushing on the cycle high, possibly set to clear the titanic 1.3500 level if the broad USD weakness persists. The April UK CPI numbers were uncomfortably hot.

Meanwhile, USDJPY continued to grind lower, though the JPY is perhaps held back at the margin by uncertainty on whether US treasury yields are set to burst higher as well as concerns about instability in the JGB market as long yields in Japan have blown higher – the 20-year JGB yield hit a fresh multi-decade high overnight and the 30-year JGB has been setting record highs this week since its introduction in the late 1990’s. Yesterday’s move was far more aggressive than what we save overnight where the new highs have been capped and yields retreated intraday in Tokyo, So there could be a lid on things, though JPY traders should have an eye on the issue. It’s almost as if Japan and the US are in a race to see who has to intervene in their sovereign bond market first. The more important 10-year JGB yield is still within the range high established back in March, by the way.

Despite the USD weakness elsewhere, the Hong Kong dollar is weak as USDHKD has pushed to the top of the permitted band, a move that began two weeks ago from the very bottom of the range and one that has been aggravated this week by Moody’s downgrade of US treasury debt as many Hong Kong pension funds hold large amounts of US treasuries, but are only allowed to hold more than 10% of any instrument not rated AAA by at least one major ratings agency. Let’s see if the Hong Kong Investment Authority changes the rules to allow US treasury holdings and the reactivity to such a move in HKD – for now, certainly an outlier among USD pairs, though USDCNH remains frozen in a tight range.

Elsewhere, a coincident indicator that perhaps encourages the fresh USD selling impulse is the big move in metals, with platinum suddenly joining the enthusiasm for gold and bursting above a long-established price range, clearing USD 1,000 per ounce in a huge move yesterday.  Silver moving above 35 per ounce would build a broader sense that interest in hard assets and inflation hedges is picking up.

Looking ahead, the next market focus has to be on the reaction function to the likely passage of Trump’s “big beautiful bill” for tax cuts and spending, particularly now the US treasury market reacts as it feels like long US treasury yields are a cat ready to pounce higher (and what will be reaction function from the US Treasury be if they do pounce, etc.) For risk sentiment it is perhaps the Nvidia earnings on May 28, with crypto suggesting animal spirits are quite strong here.

Chart: EURUSD
This latest leg higher in EURUSD looks like a solid confirmation for the USD bearish and EUR bullish case, although we’d suddenly be thrown back into near-term uncertainty if we crash back below 1.1250 today. Assuming a hold above 1.1300, however, we set our sights on a test of the 1.1573 top and an eventual break, above which the obvious next focus would be the psychological 1.2000 level, but the next major level of interest is really not until the early 2021 high of 1.2349.