The US fixed income market was closed for a holiday. The 10-year US Treasury yield hit a four-month high on Friday. It has become a benchmark for traders and investors due to expectations that the Fed will start to wind down QE and amid uncertainty over the US government
The September NFP report data flagged deceleration of US employment growth. However, the August print was upwardly revised. The unemployment rate fell to an 18- month low due to a labor shortage. The rise in yields points to a reduction of bond purchases in November.
The euro came under pressure from statements by ECB Chief Economist Philip Lane, who said on Monday that the Eurozone is experiencing an early stage of an energy shock and added that there is no reason to change monetary policy. Lane believes that the Delta variant will not be a major domestic problem for the Eurozone, while the inflation rise is ‘mostly transitory’ and will have much of a footprint in the medium-term outlook.
The BoE subscribes to a different opinion. BoE Governor Andrew Bailey warned of a potentially very damaging period of inflation for British consumers unless policymakers take action. BoE Monetary Policy Committee Member Michael Saunders agreed with investors who had bet on earlier interest rate hikes as inflation picks up.
Today’s macro agenda (GMT 3)
- 09:00 UK: claimant count change (September), unemployment rate and average earnings (August)
- 12:00 Germany: ZEW economic sentiment, current conditions (October)
Current outlook
Major currencies were showing mixed performance by the time of writing. The euro has seen mild gains and has been on the rise since the Asian opening amid a corrective move in the dollar. It remains to be seen whether buyers will be able to build on the uptrend or not, since US index futures are in decline.
The Q3 reporting season is starting. Supply chain disruptions, as well as high prices for energy and other commodities, have heightened concerns about corporate profits. The outlook is further clouded by the Chinese contagion, which has spread throughout the country’s real estate market. Evergrande missed its third round of bond coupon payments.
Technical analysis
The EURUSD pair is trading at 1.1560, up 0.08%. Buyers held the 1.1550 level (projected trendline drawn at 1.1529 and 1.1541 lows) but currently face resistance at 1.1563 (lb). Given support from EUR crosses, the odds of a breakout towards the 1.1582 level look slim.
Meanwhile, the 10-year UST yield is in decline. If yields continue to fall during European trading, risk appetite will increase, which would exert a positive impact on the EURUSD pair. Today’s macro highlights include Germany and Eurozone ZEW data. The euro will move higher if the readings do not disappoint.