Are We Still Buying the Dip? - The Macro Setup
THE MACRO SETUP OVERVIEW:
• The current economic recovery isn’t a normal business cycle recovery
• USD/JPY tracking US yields higher ahead of US CPI
• GBP/JPY breaks above descending triangle
EQUITIES LOSE MOMENTUM AS INFLATION CONCERNS RISE
Concerns are growing about the continuation on “buying the dip” as analysts are predicting less support from the Federal Reserve during this economic recovery given this is not a normal business cycle recovery, nor are inflationary pressures as we face a greatly distorted labor market amid uneven demand for goods and services.
There are also health factors involved and until those are cleared don't expect monetary and fiscal policy to have all the answers. In the face of this, the technical calls for a 15%/20% drop in stocks as the Fed has got the transitory call wrong may be starting to come into play, with the S&P 500 failing to close above a descending trendline despite breaking above it during the session.
US yields continue to pick up and the move in energy prices only seems to be adding fuel to the fire. With the 10-year treasury rates heading for 4-moht highs, USD/JPY seems to be the pair to trade the US CPI data release on Wednesday, given how it has been a rates trade for the last few months. JPY is most sensitive to widening rate differentials and it has also been hurt by demand for riskier commodity-linked currencies on the back of surging energy prices.
Another good trade against the JPY is GBP/JPY, with some recent hawkish comments from BOE Governor Bailey helping the Pound recover some of its recent losses. The technical picture for the pair is strong given it has broken above a descending triangle and bulls will likely be targeting the May 2021 highs above 156.
Finally, the path of least resistance for EUR/USD continues to be lower as it takes the opposite trade to the Dollar Basket, and with the DXY struggling to break above resistance at 94.25-94.80 then we may see some respite for EUR/USD.
CHARTS OF THE WEEK
USD/JPY vs US10Y TECHNICAL ANALYSIS: DAILY CHART (CHART 1)
GBP/JPY ANALYSIS: DAILY CHART (CHART 2)
EUR/USD TECHNICAL ANALYSIS: DAILY CHART (CHART 3)
--- Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.