23rd May 2018 - The interest outlook is still driving USD up weighing down on equities

Walid Salah Eldin

Master Trader
Feb 15, 2016
The gold is still forced to be traded below $1300, after the slide below this psychological level on rising of the interest rate outlook in US last week sent UST 10yr yield well above 3% recording its highest level since 2014 at 3.111%.

UST yield rising drove the borrowing costs higher in the secondary markets across the globe weighing down on the demand for risky assets at these levels.

The investors became more worried about the outlook of the US equities which are struggling to find lower geopolitical risks times to move up basing of the US economic fundamentals.

While the dollar is still boosted by the interest rate outlook differential with the other major currencies, as the doubts increased about the ability of their central banks to follow the Fed in this tightening path.

At this phase of the cycle, we see the inflation in EU is looking easing down, after EU CPI has shown decelerating to only 1.3% yearly in March to weigh down on the interest rate outlook in EU.

The inflation outlook in the beginning of this year could send EURUSD well above 1.20 by raising the expectations of having an interest rate hiking by the end of the year but now these expectations diminished.

But the single currency depreciation to the current level and the oil prices rising to these unprecedented levels since 2014 can be able rebuild another upside inflation wave to higher rate.

While the EUR can be undermined by increasing worries about the future of Italy in EU which is waiting now for Italian populist government leaded by League of the 5 stars which is eager to have large Italian debt write-down, after the austerity measurements weakened the Italian economy and dampened the political stability in it.

While the situation in UK is still looking weaker and worrying, after Governor Carney described to BBC that Brexit uncertainty could delay interest rate hiking which will be gradually.

The Brexit uncertainty is actually an important factor and it is still containing the market sentiment weighing down on GBP.

Carney's dovish comments came along with UK Q1 GDP barely quarterly expansion by only 0.1% has been the weakest since the last quarter of 2013 to weigh down on the British pound versus the greenback to be traded currently well below 1.35.

In the same in Japan, we have seen last week how its Q1 GDP shocked the markets by contraction by 0.2% quarterly and 0.6% yearly, while the consensus was referring to no change after expansion by 0.4% quarterly and 0.6% yearly in the last quarter of last year.

Meanwhile, It seems that we are to spend longer time, before having any sign of a tightening action, as the BOJ can be more eager in keeping its Ultra easing policy running with The Japanese PM Abe's "Abenomics" stimulating policy for propping up the economy and the inflation to reach its 2% yearly inflation target as well.

While Japan National CPI ex fresh foods which is the favorite gauge of inflation to BOJ came last Friday to show yearly decelerating to weakest rate since last September rising by only 0.7% in April, after 0.9% in March and 1% in February.

The Japanese yen could have the excuse to come down, however it is expected to find demand time to time on the risk aversion sentiment, as a low yield financing currency.

The JGB 10yr yield is now near 0.05%, while BOJ is still on its obligation of keeping this yield close to zero till reaching its 2% inflation yearly goal.

It was not also the same case of the beginning days of this year when BOJ decided on Jan. 9 to lower its purchases of long term bonds sparking speculations of watching closer monetary policy normalization or tapering of its QE ultra easing policy.

Have a good day

Kind Regards

Global Market Strategist of FX-Recommends

Walid Salah El Din