There was a slight increase in bearish pressure on the US currency on Monday as support from two key factors – rising long-term US yields and sell-off in risk assets (i.e., stock market, flagged. Equity markets posted weak upward bias, while long-term yields continue their decline that commenced last week.
The attention of market participants and the bulk of volatility has been concentrated on the commodity and cryptocurrency market in the past few weeks. Both markets saw strong ups and downs of different intensity on claims, that Chinese authorities aimed to suppress excessive speculation. The media are exaggerating a four-year-old ban on the use and mining of cryptocurrencies, for some reason presenting it as fresh restrictions. As for commodity markets, an article appeared on a website close to the PBOC that the Central Bank would allow the yuan to strengthen in response to rising commodity prices, which was subsequently removed. In general, all the latest corrections in the asset markets are in some way tied to China.
If China succeeds in cooling down commodity markets, this should have implications for the path of consumer inflation, since production costs (including commodity prices) are its one of the key sources. In this case, criticism of the Fed due to inaction in response to rising inflation should diminish, which will further pressure USD.
Despite high volatility in the commodities and cryptocurrency markets, FX and equity markets appear to be much less nervous. If central banks are currently concerned about speculation in traditional markets, it is only in their financial stability reports, which invariably contain a chapter on excessive speculation. So, nothing unusual here.
Low volatility is known to promote rotation from US assets to high-yielding ones, which is a process with a negative connotation for the American currency. Last week, the risk of early withdrawal of stimulus by the Fed suddenly increased against the background of the publication of the April Fed Minutes, in which "a number" of policymakers expressed their readiness to start discussing the reduction of QE. Contrary to expectations, this brought minimal relief to the dollar. Hence this week, the bearish trend in the USD can be expected to resume. I would consider the target for the dollar index in the area of the last support at 89.65:
ECB President Lagarde with her comments slowed down the rally of European bond yields last Friday, which offered additional support to EURUSD. The EU economic calendar is rather dull this week, the IFO report on German sentiment may increase volatility in the euro, but not for long. The key report this week is likely to be Core PCE in the US, which is slated for release on Friday.
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