Talking Points
- Euro weakness is helping lift the DXY Index after ECB President Mario Draghi suggested that looser policy could be ahead, even as he issued concern over the impact of negative interest rates.
- Elsewhere, US stocks are slightly higher at the open and the US Treasury 10-year yield has hit a fresh yearly low.
- Retail traders are selling the US Dollar despite gains in recent days; both EURUSD and GBPUSD have bearish biases.
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The US Dollar (via the DXY Index) is up for the fourth time in five days, finding very little downside after the March Fed meeting thanks to markets having largely priced-in the dovish shift in tone deployed by Fed Chair Jerome Powell. But with global growth concerns persisting in recent days, US Treasury yields have continued to push lower as Crude Oil prices remain under pressure after coming into the last days of March on already-weak footing.
With European Central Bank Mario Draghi discussing the downside risks of prolonged negative interest rates while signaling a strong desire to stay on the path of looser monetary policy, the Euro has taken a turn lower (perhaps the biggest reason why the DXY Index is positive on the day).
US Treasury 10-year Yield: Daily Timeframe (June 2017 to March 2018) (Chart 1)
It’s not quite a ‘risk off day,’ as both Gold and the Japanese Yen are weaker; it feels more like a day of ‘capital attraction’ to the US, with the US Dollar up, US equities up, and US yields down (bond prices up). The US Treasury 10-year yield continues to head lower following the break of the symmetrical triangle that formed following the exit of the 2016 to 2018 uptrend; a fresh yearly low was hit today at 2.349%.
US-China Trade Talks Set to Resume
The US-China trade talks are due to restart tomorrow, with US Treasury Secretary Steve Mnuchin and US Trade Representative Robert Lighthizer in Beijing for the remainder of the week. But Lighthizer’s tone seems very non-committal to a deal coming together immediately: “We’re working on it…if there’s a great deal to be gotten, we’ll get it. If not, we’ll find another plan.” Next week, Vice Premier Liu He, China’s top negotiator on the trade deal, will head to Washington, D.C.
Where does this leave us in the trade war news cycle? As we’ve previously noted, the cycle goes: (1) Trump administration is tough on China; (2) financial markets sell off on trade war concerns; (3) Trump administration hints at US-China trade deal; (4) financial markets rally on trade deal hopes; (5) No deal materializes. It would seem that we’re straddling stages 3 and 4 right now.
Brexit Latest – UK Parliament ‘In Control’
Monday’s vote in the UK parliament stripped UK Prime Minister Theresa May and her government of negotiating power for the Brexit deal. But the EU has made clear that the deal it reached with the May government last week is still valid, and therefore, the UK parliament only has a few choices moving forward: either UK parliament passes the EU-UK Withdrawal Agreement negotiated by May in order to lock in the Article 50 extension until May; or if no passage, then the extension will only go until April 12. As some prominent Brexiteers like Jacob Rees Mogg have come to terms with, if May’s deal isn’t accepted, then there may be no Brexit at all. May’s time as PM may be dwindling, but she could very well have the last say when all is said and done.
GBPUSD Price Chart: Daily Timeframe (May 2018 to March 2019) (Chart 2)
Implied volatility remains high among the GBP-crosses but the environment has yet to produce any directional moves – par for the course, really, over the past several months. Since the bearish outside engulfing bar on June 14, 2018, GBPUSD has spent all but 16 days trading between 1.2660 and 1.3365 – that’s just over 92% of the past nine-months within the range. It’s still not worth expending the time and energy – both emotional and mental – on Brexit when Sterling has had little to show for it recently.
DXY Index Price Chart: Daily Timeframe (June 2018 to March 2019) (Chart 3)
Last week it was noted that “the DXY Index [is] on track to retake its consolidative triangle, suggesting that weakness seen earlier was a false breakdown. As such, with the range persisting, US Dollar bears may go back into hibernation for the time being.” With the rally entering its fourth day over the past five sessions, we can confirm that the bears have been sidelined for now. But that doesn’t mean bulls are back in control either; we’re sitting in the middle of a range that has been in place since October, and remain with the confines of the ascending triangle in place since November.
Read more: Why Does the US Yield Curve Inversion Matter?
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
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